“Sanctions-Proof” Gold Could Be Key to Its Demand Resilience

Analysts credit gold with helping Russia avoid sanctions impacts with the “Sanctions-proof” property of gold being a key reason for its current popularity among central banks

Bullion.Directory precious metals analysis 31 May, 2024
By Isaac Nuriani
CEO at Augusta Precious Metals

In spite of inflation numbers that keep confirming relentless price pressures, precious metals continue to demonstrate great resilience. Gold climbed slightly more than 15% in the last two months, to roughly $2,350 per ounce. And while the metal recently reached above $2,400 when it seemed the chances of imminent rate cuts might be greater, its retreat in the face of subsequent rate-outlook disappointment was not all that great.[1]

As I said: resilient.

Analysts have been crediting unprecedented gold demand among central banks for much of gold’s tremendous durability right now.[2]

Although central banks have been net buyers of gold for the last decade and a half, their purchases have gone into overdrive in the last two years. Central banks set a calendar-year record for demand in 2022, and nearly matched it in 2023.[3]

As for why they’re buying all this gold currently, central banks told the World Gold Council last year that among the most prominent reasons are “gold’s performance during times of crisis”; its potential as a “long-term store of value”; and its perceived usefulness as an “effective portfolio diversifier.”[4]

And while few would have little trouble taking those reasons at face value – particularly in an era experts say is characterized by broad-based global economic uncertainty – there is no shortage of observers who say another reason is particularly prominent: reducing exposure to the dollar, so as to reduce exposure to the risk of sanctions imposed by the U.S. and the West.[5]

Some of those observers can be found at the Wall Street Journal, which recently published a piece suggesting that gold’s imperviousness to sanctions is now so important to so many central banks that this factor alone could be enough to ensure strong gold demand for the foreseeable future.

The U.S. has used the dollar to enforce sanctions against geopolitical adversaries for years.[6] However, it seems the implementation of sanctions against Russia following that country’s invasion of Ukraine in 2022 may have heightened sanctions “awareness” on the part of central banks and nations that see themselves as potentially vulnerable to the draconian initiatives. And a key part of the plan to dodge sanctions may include gold.

Whether or not we’ve entered a new sanctions era, it does seem we at least have entered a new era of sanctions avoidance. That is, it appears central banks around the world have an interest in taking steps to reduce their vulnerability to the potential impacts of dollar-based sanctions…and one of those steps may involve stocking up on gold.

This week, we take a closer at the role gold can play in helping nations defend against sanctions…and what that could mean for gold demand, going forward.

Professor: Gold Is the Reason 16,000 Sanctions Have “Failed to Derail Putin”

Net gold purchases by central banks account now account for more than 20% of overall global gold demand.[7] And in the view of the Wall Street Journal, a big reason for that sizable percentage is concern on the part of some central banks that countries unwilling to toe the Western line could find themselves in a sanctions predicament similar to that which befell Russia on the heels of its invasion of Ukraine.

It’s hardly unreasonable speculation. Russia formally invaded Ukraine in February 2022, and quickly saw roughly half of its central bank foreign exchange reserves – $300 billion – frozen by the West.[8] Adding insult to injury (from the perspective of Russia), there are serious discussions among G7 (Group of Seven) nations about using the income generated by the assets to defend Ukraine or help it rebuild.[9]

As I referenced earlier, central banks, collectively, bought more gold in 2022 than they did any other year in history, nearly equaling that demand in 2023.

Coincidence?

And if you think all that buying in the previous two calendar years means central banks are due to take their collective foot off the gold-purchasing gas pedal, think again; according to recent World Gold Council data, central banks purchased more gold in the first quarter of 2024 than they did any other first quarter that’s come before.[10]

In the assessment of the Wall Street Journal, what’s going on seems clear: Gold’s “latest allure,” as the Journal says, is that “it’s sanctions-proof,” and the metal’s usefulness in helping sovereign nations sidestep sanctions is a key reason why central banks have been consuming gold so vigorously.[11]

Sanctions-proof? Is that possible?

Absolutely, says Professor Robert Huish of Dalhousie University. In a recent essay, Huish refers to the fact that the Russian economy grew by 3.6% last year and is projected to grow by another 2.6% this year, and asks:

“How have 16,000 strategic sanctions issued by some of the most powerful economies in the world failed to derail Putin?”[12]

The answer, he says, is gold.

Huish notes that in spite of the reality that the United Kingdom, the United States and Canada will no longer have anything to do with Russian gold, plenty of other countries will. In 2022, as Western nations were pounding Russia with sanctions, the United Arab Emirates imported 15 times more gold from Russia than it did the year before.[13]

“Billions upon billions of dollars of Russian gold is being freely traded at top dollar while avoiding every one of those 16,000 sanctions,” Huish writes.[14]

A big help to Russia in its use of gold to help evade sanctions is its status as the world’s second-largest producer of gold. And unsurprisingly, Moscow is looking to boost its national gold production in the years to come.[15]

As for what, specifically, makes gold “sanctions-proof,” it’s not difficult to understand. Most significantly, the value and associated transactability of gold – a physical asset seen around the world as a naturally occurring store of value – exists entirely outside the purview, authority and control of any sovereign nation or bloc of nations. By definition, that also means gold has no counterparty risk, which refers to the risk that an asset can lose some or all of its value based on the inability or unwillingness of a party on one side or the other of the asset to perform as expected.

In other words, gold requires nothing more than to exist in order to realize its full market value and for those who possess it to be rewarded on that basis.

If Sanctions Loom, Converting Dollars to an “Anonymous Counter Like Gold Becomes Extremely Attractive”

“If a government perceives international sanctions as a real threat,” says Maxwell Gold of State Street Global Advisors, “then switching from U.S. dollar assets to an anonymous counter like gold becomes extremely attractive, particularly in scenarios of multi-lateral sanctions by several reserve currency nations.”[16]

There are two ways, fundamentally, for nations to settle transactions using the metal. One is directly, of course – exchanging gold for goods and services. Although uncommon, it has been done between sovereign states.

Daniel McDowell, professor of political science at the Maxwell School of Citizenship and Public Affairs at Syracuse University, reminds us that, in 2020, Iran was paid in gold for its help in repairing oil refineries in sanctions-laden Venezuela. McDowell also says there’s reason to believe Russia accepted physical gold from Venezuela as payment for debts back in 2017.[17]

McDowell notes another way gold can be used to settle transactions is by swapping it for liquid foreign exchange – some generally accepted fiat currency, in other words – and then swapping it back when the given deal is consummated. Of course, there also is the option of simply liquidating the gold at market.

But those options are more limited if a nation’s central bank is forced to operate under sanctions. It’s not that the same mechanisms aren’t available at all under those circumstances…but they tend not to be available through mainstream outlets. In such cases, sanctioned countries wishing to rely on their gold to remain economically viable are forced to be cleverer – like Venezuela was in 2019.

In 2011, Venezuelan President Hugo Chavez had the foresight to repatriate 160 tons of the country’s gold reserves from Europe – perhaps in anticipation of the wave of U.S. sanctions to come.[18]

Beginning in 2014, the U.S. government began hitting Venezuela with a series of sanctions over its alleged record of mounting human rights abuses, corruption and antidemocratic actions.[19]

By 2019, Chavez’s successor, Nicolas Maduro, was ready to turn to ally and fellow U.S. adversary Russia for help in using Venezuela gold to circumvent Uncle Sam’s sanctions.[20]

According to Professor McDowell, Russia dispatched charter planes to fly Venezuela’s monetary gold to Uganda, the United Arab Emirates, Turkey and a number of other unknown locations – shadow markets, basically – where the metal was then swapped for cash Euros. The cash Euros were then flown back to Venezuela, where they were passed around to Venezuelan banks and eventually used to secure badly needed imports.[21]

As these examples demonstrate, gold’s utility as a “lifeline” monetary asset for nations that find themselves on the wrong end of U.S. sanctions may depend on the availability of sympathetic countries to lend a helping hand. But in a world where divisions between the West and the rest of the world grow wider and deeper, it’s reasonable to speculate that a shortage of like-minded anti-Western allies may be a diminishing obstacle.

Referring to the volume of Western sanctions levied against Russia in 2022, the Congressional Research Service emphasized in December of that year, “Current sanctions on Russia are multilateral but not global,” and noted that Russia’s exports to Brazil, China, India and Turkey had all increased by 50% year over year.[22]

The point is that in order for gold to succeed as a sanctions-busting asset, targeted nations need allies to help…just as Venezuela needed Russia, in the example outlined above. But in what is becoming an ever-more-deglobalized world, it seems as though there will be no scarcity of countries – even powerful, economically well-heeled countries – willing to unite with each other against the West.

Growing Anti-Western BRICS Alliance Could Help Facilitate Gold-Based Sanctions-Evasion Strategies

The growth of the BRICS bloc qualifies as an “Exhibit A” example. The bloc – acronymically named for charter members Brazil, Russia, India, China and South Africa – was created to bring together the most economically powerful and dynamic developing countries, with an eye to challenging the global influence of the U.S. and the West.[23]

China’s representation in such a bloc is wholly unsurprising, of course, but also especially notable in the context of this discussion. China’s central bank has been a net buyer of gold for 18 consecutive months and was the single-largest buyer of gold among central banks in 2023.[24]

India, another original BRICS member, has seen its central bank act as a voracious gold consumer recently, as well, ranking as the sixth-largest consumer of gold among central banks in 2023, and the third-largest through the first quarter of 2024.[25]

At the beginning of this year, the BRICS alliance doubled in size with the addition of Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates. With this expansion, the group now represents nearly half of the world’s population; 36% of global gross domestic product; and 25% of world trade (measured as exports). And at last check, roughly 30 other countries are interested in joining the bloc.[26]

In other words, there appears to be no shortage of countries willing to assert their independence from the Western worldview, both politically and economically. And to the Wall Street Journal’s point, their size and influence, both individually and collectively, could make easier the enaction of a gold-based sanctions-avoidance strategy such as those illustrated earlier. Which, in turn, could continue to encourage those central banks to buy gold as a defense against Western sanctions.

And that could bode well for non-central-bank gold investors – including individual retirement savers, who not only aren’t forced to resort to creative means to transact their gold but actually have the option of acquiring it through a tax-advantaged gold IRA if they so choose (consult with your tax advisor for more on the tax implications of IRAs).

The degree to which sanctions avoidance, specifically, proves to be a driver of central bank gold consumption remains to be seen, of course. But the larger point, as expressed by State Street’s Maxwell Gold, is that “the reasons driving central bank gold purchases — to diversify their reserves, improve their balance sheets, and gain liquidity from an asset without credit risk — likely won’t change given today’s increasing economic and geopolitical risks.”[27]

And the upshot of that, according to Gold?

“This should support the outlook for global gold demand beyond traditional consumer and investor demand sectors,” he says, “and provide further diversified support for gold’s long-term price outlook.”[28]

[1] CNBC.com, “Gold COMEX (Jun′24)” (accessed 5/24/24).
[2] Jeff Cox, CNBC.com, “Federal Reserve minutes indicate worries over lack of progress on inflation” (May 22, 2024, accessed 5/24/24).
[3] World Gold Council, “Geopolitical and economic uncertainty bolster gold demand and prices in 2023” (January 31, 2024, accessed 5/24/24).
[4] Lee Ying Shan, CNBC.com, “Gold at $3,000 and oil at $100 by 2025? Citi analysts don’t rule it out” (February 20, 2024, accessed 5/24/24).
[5] Michelle Fox, CNBC.com, “The U.S. national debt is rising by $1 trillion about every 100 days” (March 4, 2024, accessed 5/24/24).
[6] Ashitha Shivaprasad, Reuters.com, “Gold retreats as dimming rate cut expectations overshadow safe haven demand” (April 17, 2024, accessed 5/24/24).
[7] Sabrina Jardim, Mining Weekly, “Economic and geopolitical uncertainty supporting strong gold demand and prices” (March 15, 2024, accessed 5/24/24).
[8] Ibid.
[9] Investment News, “Gold continues to shine as a hedge against uncertainty” (August 23, 2023, accessed 5/24/24).
[10] Yun Li, CNBC.com, “The biggest money managers are flocking to gold as inflation fears intensify” (April 18, 2024, accessed 5/24/24).
[11] Ibid.
[12] Ibid.
[13] Ibid.
[14] Ibid.
[15] Michelle Lodge, Investopedia, “Who Is Michael Burry?” (February 16, 2024, accessed 5/24/24); Ernest Werlin, Herald-Tribune, “Man who bet against bubble in housing is revealed in book” (January 11, 2010, accessed 5/24/24).
[16] Theron Mohamed, Yahoo Finance, “Michael Burry and John Paulson hit the jackpot when they called the housing crash. Now they’re betting on gold.” (May 19, 2024, accessed 5/24/24).
[17] Ibid.
[18] SEC.gov, “Form 13F” (accessed 5/24/24); WhaleWisdom, “Paulson & Co., Inc.” (accessed 5/24/24).
[19] Alain Elkann Interviews, “John Paulson” (February 12, 2023, accessed 5/24/24).
[20] Nicole Goodkind, CNN.com, “Michael Burry, of ‘Big Short’ fame, just bet $1.6 billion on a stock market crash” (August 16, 2023, accessed 5/24/24); Theron Mohamed, Yahoo Finance, “‘Big Short’ investor Michael Burry warned inflation would spike again. Prices just jumped.” (April 11, 2024, accessed 5/24/24); Thomas Barrabi, New York Post, “‘Big Short’ investor Michael Burry warns of consumer debt crisis: ‘Winter coming’” (August 12, 2022, accessed 5/24/24).
[21] Portfolio Visualizer, “Asset Class Correlations” (accessed 5/24/24).
[22] Will Daniel, Yahoo Finance, “BlackRock says throw out your old investment playbook, we’re headed for a ‘new regime of greater macro and market volatility’” (December 9, 2022, accessed 5/24/24).

This article was originally published here

 Previous Post

India Repatriates Over 100 Tons of Gold From UK

Next Post  

Investing in a World of Uncertainty