I’m sure you’ve heard the news by now…
The U.S., the United Kingdom, Japan, and Canada will ban new imports of Russian gold. It’s part of the West’s sanctions in response to Russia’s invasion of Ukraine.
The move severs the link between Russia and the world’s top gold-trading centers, London and New York.
The announcement was made as President Biden and other G7 leaders gathered for meetings last week in Germany. It builds on steps already taken to cut Russia off from the international financial system.
Western powers had already banned most trade with Russia and frozen hundreds of billions of dollars of its assets. They had also blocked Russian banks from using the SWIFT messaging system that underpins international payments.
Now, I’m sure those of you who hold gold in your portfolios will want to know how this latest ban will affect your investment…
So today, I want to talk about what this ban means.
Why Ban Russian Gold?
Russia is the second-largest producer of gold. According to a report by S&P Global Commodity Insights, it produced 333 metric tons of gold in 2021. This was 11% of the world’s total output.
And recently, it has been cranking up the mining of new gold to compensate for some of its paralyzed assets.
The Russian government uses its gold reserves to support its currency, the ruble.
Wealthy Russians have also been buying bullion to reduce the financial impact of Western sanctions.
The West wants to crack down on all that.
U.K. Prime Minister Boris Johnson underscored the point, saying the ban would “strike at the heart of Putin’s war machine” and “directly hit Russian oligarchs.”
Boon for the Gold Market?
So, how has this announcement affected your gold portfolio?
Typically, cutting off 11% of the world’s gold supply would have a big impact on the gold price. And it did initially climb marginally on the news.
But Russia’s gold exports had already been shunned by some key market players since its invasion of Ukraine.
For instance, on March 7, the London Bullion Market Association (LBMA) suspended dealing by Russian gold miners and refineries. LBMA is the world’s largest and oldest market for trading physical gold and silver.
In other words, Western sanctions had already largely closed off European and U.S. markets to gold from Russia after its forces crossed the border with Ukraine. So the price bump on the announcement of the recent ban was minor and temporary.
Also, the import ban will only apply to newly mined or refined gold. So gold that’s already sitting in Russian vaults remains unaffected. And the ban doesn’t apply to gold previously mined and exported from the country.
Finally, not all the major Western countries are on board.
The leaders of the other G7 nations, France, Italy, and Germany, said they wanted further discussions with European Union partners before making a decision.
In sum, I view the decision by the U.S., the United Kingdom, Canada, and Japan to ban new gold imports from Russia as mainly symbolic.
Russian gold had already been restricted by sanctions. And markets had already priced that in.
So I don’t see this – or any further ban by, say, France or Germany – having a major impact on the gold price in the weeks and months ahead.
Why Gold Still Has a Place in My Portfolio
But there are important reasons why I still like gold.
As I told you earlier this year, throughout history, gold has been a proven hedge against inflation.
You can see the correlation between the gold price and the Consumer Price Index (CPI), the U.S. government’s inflation benchmark, in this chart.
The gold price and inflation moved largely in lockstep in the 1970s and 1980s. And while the relationship has become less defined in more recent years, it has still held.
Now, as we all know, inflation has taken off in the last 12 months. At over 8%, we’re living with a level of price inflation we haven’t seen in four decades.
So, why hasn’t gold followed suit? Since July 2021, it’s up less than 1% on the LBMA.
It’s an important question.
And as I explained recently in response to a reader’s question, the gold price faces some major headwinds from the strong U.S. dollar and the Federal Reserve’s 1.5% interest rate hike so far this year.
Now, I do think the dollar will stay strong relative to gold. And that might weigh on gold in the very near term.
But let’s compare gold’s performance with the performance of the major stock market indexes.
The Dow is down about 10% over the last twelve months. The S&P 500 is down roughly 12%. And the Nasdaq has fallen nearly 23%.
So in comparison, gold has held up pretty well amid the market turbulence of the last year and rising inflation.
And right now, playing defense in your portfolio is an important strategy.
What This Means for You and Your Money
Gold has a long, proven track record as a store of wealth. So, whatever happens next in the West’s standoff with Russia, I recommend holding gold in your long-term investment portfolio.
One of the simplest ways to do this is to buy physical gold.
You could start by buying the most popular gold bullion coins. These include American Eagles and Canadian Maple Leafs. Just keep in mind, coins are typically priced at a premium to the gold spot price.
Gold bars are another great option. They have lower premiums than coins.
Now, the main drawback of investing in physical gold is that coins and bars need to be stored. Doing it safely could mean an additional cost.
So, if you’re new to investing in gold, another way to get exposure to the metal is through a gold exchange-traded fund (ETF).
A gold ETF invests primarily in hard gold assets. And you can buy it through your brokerage account.
Consider the SPDR Gold Shares ETF (GLD). It closely tracks the price of the metal. It offers convenient exposure, without the worry or extra cost of storage and security.
The fund is listed on the New York Stock Exchange. So you can buy it through your brokerage account.
Editor, Inside Wall Street with Nomi Prins
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