Market Report: Russian bullion flows dominate

Apr 8, 2022·Alasdair Macleod

Gold and silver showed little change on the week, with gold trading at $1932 in Europe this morning, up $8 from last Friday, and silver at $24.66, up 5 cents. In the first week of the new quarter, Comex turnover for gold was low, though it picked up for silver as the week progressed. The price action is reflected in our headline chart with moves tapering off to gains of 5.5% for both metals on the year so far.

Gold’s Open Interest on Comex has also pulled back, as shown in our next chart.

This is important for the bullion banks, indicating that their short positions have reduced somewhat, but undoubtedly, they would like to see Open Interest lower still. But the Swaps (mainly bullion bank trading desks) are still net short of $45bn in Comex gold contracts. This is next up.

While there has been a reduction in the Swaps’ shorts, the position remains intractably high historically. In short, the bullion banks are still badly exposed to further rises in the gold price.

That is unless Comex shorts are simply hedging long positions in London’s forward market. While that could be true in isolated cases, generally LBMA member banks are also short to their customers’ unallocated accounts. But there is limited liquidity in London, and the suspension of Russian refiners from LBMA membership does not help, as pointed out in an online LBMA webinar this week.

In 2021, 28% of the UK’s gross gold imports were from Russian sources, in 2020 20%, and in 2019 only 7.5%. Not only had London become increasingly dependent on Russian gold imports for market liquidity, but that has suddenly ceased. That is bound to have repercussions for global paper market liquidity, and if other developments turn against the shorts a significant squeeze is in prospect

Russia must be viewed by the shorts with apprehension. Russia’s central bank stands ready to buy gold from its domestic banks at 5,000 roubles per gramme, which converts into a dollar price that depends on the rouble exchange rate. The table below shows how this translates.

At the time of writing, the rouble/dollar rate stands at 79.2, implying the Russian central bank is paying Russian banks the equivalent of $1964, a premium of $32 over the price in Europe this morning.

The key is the exchange rate. If the rouble strengthens, there can be little doubt that Russian banks will find ways of buying gold on other markets, perhaps through the Chinese banks or directly from Dubai, taking delivery and selling to the RCB. Therefore, the situation where Russia supplied 28% of the gross imports into London last year is likely to reverse with Russia becoming a net importer of gold bullion.

At current exchange rates, this is a marginal argument, which probably justifies gold’s sideways price movements in a narrow range. But if we reasonably assume that oil price rises from current levels will strengthen the rouble, then the gold price will run with it.

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