Why is Russia buying so much gold?

Why is Russia buying so much gold?
In 2022, central banks purchased the most gold since 1967, a total of 1,135 tons. In 1967, European banks were purchasing gold because of currency devaluation and US deficit spending which eroded the link between the dollar and gold. The price of gold ran up and resulted in the collapse of the London Gold Pool of reserves. This was a group of eight central banks consisting of the US and seven European countries that cooperated to maintain the Breton Wood System of fixed rate convertible currencies. Foreign currencies had fixed exchange rates, and all these currencies were required to be convertible for physical gold. The US Dollar would be the designated anchor currency of the Bretton Woods system pegged at $35 US dollars per ounce of gold. The US Dollar was the world’s reserve currency. Foreign banks were willing to hold US dollars because they were readily convertible into gold upon demand.
Back in 1967, all of these frenzied gold buying hastened the eventual demise of the Bretton Woods System that tied the value of the US dollar to gold.
The similarity between 1967 and now is concerns regarding the US dollar, but the nature of those concerns are different these days.
Countries are diversifying away from the US dollar due to ongoing geopolitical tensions. The US dollar is perceived as risky given the United States inclination to sanction nations that are not aligned with its interests. I do not think it is much of a stretch to say the United States “weaponizes” the dollar and arguably abuses its dominant position in the financial system to further its interests. Early into the invasion of Ukraine, the United States and its allies froze Russia dollar reserves.
The flight of central banks to gold suggests a geopolitical environment characterized by mistrust, doubt, and uncertainty. These elements have often characterized the market conditions in which gold has done well in.
Gold purchases by central banks suggest the dollar’s dominance is eroding, however slowly that may be.
Russia bought a record amount of gold in 2022.
Russia is encouraging citizens to purchase gold by providing incentives. Moscow eliminated its 20% VAT on physical gold for individuals to redirect citizens away from US dollars towards precious metals. People were also exempted from paying income tax on profits from selling gold.
A significant proportion of gold sold was large bars suggesting that rich Russians are the ones doing most of the purchasing of precious metals.
Gold does not generate passive income like investments in stocks and bonds do. Gold, instead, represents a store of value and a way to save money. It is essentially a defensive play.
The more countries can reduce their reliance on the dollar, the less effective sanctions by the United States and Europe will be in the future.
Gold also has industrial uses beyond its financial utility. The three major uses of gold are 1) jewelry 2) as a currency hedge, 3) industrial applications. Gold is an excellent conductor of heat and electricity. It is also highly resistant to corrosion. It is used extensively in electronics like printed circuits and transistors. Applications of electronics that use gold include aviation and medical devices.
Works Cited:
https://www.numismaticnews.net/coin-market/the-failure-of-the-1960s-london-gold-pool
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