Banking on gold

By bne IntelliNews June 7, 2010

Tim Gosling in Moscow -

Russian bank Uralsib has come up with a new strategy that aims to profit from mounting fear of a second wave to the global crisis. As the euro loses its value against the dollar and the ruble stutters from falling oil prices, the bank is offering customers the option of abandoning money altogether and opening accounts denominated in gold.

At the end of May, UralSib Bank launched new accounts for individuals where cash is automatically converted into precious metals, including gold and silver. Punters have to deposit a minimum of 100 grams of gold, or 10,000g of silver, worth $3,885 and $5,893 respectively. The interest rate depends on the term of the deposit, with options ranging from 181 to 732 days. "A time deposit in precious metals is interesting to depositors who prefer to diversify their savings," says Ilya Filatov, deputy chairman of the board at Uralsib. "We made sure of this when we launched the product in Moscow, Ufa and St Petersburg. That pilot product proved a success. A deposit in precious metals doesn't depend on exchange fluctuations and protects funds from inflation."

Golden bubble

The price of gold has risen steadily from a low of about $900 in July 2009 to trade around $1,200 on June 4 - almost double the price of $650 before the financial crisis exploded in the autumn of 2008. And some analysts worry that the gold market is in danger of developing a bubble.

With both the euro and the dollar under threat from massive sovereign debt levels and high deficits hurting most of the world's leading economies, no currency seems especially safe at the moment. And the ruble remains vulnerable to changes in the oil price. During the worst of the crisis, oil fell from its record high of over $140 per barrel to just under $40 in a matter of months, forcing the Russian government to spend over $200bn in a controlled devaluation that wiped some 30% off the ruble's value. Oil prices have since recovered to stabilize around $70, but if the Eurozone does break apart triggered by economic problems in Greece, then investors fear that the resulting economic slowdown will pull oil prices down again. "Investors have rushed back into gold in a move that resembles the scramble for bullion we witnessed [when the crisis struck]," says Andrey Kryuchenkov, a commodities analyst with VTB Capital in Moscow. "Global risk aversion has triggered heavy losses across most commodity and equity markets. But euro-denominated gold reached a fresh all-time high above €962 as the panic struck."

As one of the world's major producers, this flight to gold is benefiting Russia more than most. In 2009, Russian gold refineries increased their output by 11.25% to about 205.24 tonnes of gold. The country's biggest producer, Polyus Gold, has been steadily increasing production, and recently expanded into Central Asia by purchasing Kazakhgold. Likewise, Petropavlovsk, Russia's third-largest gold mine - part owned by British entrepreneur Peter Hambro - raised $50m in February to fund further expansion. "Gold is a counter-cyclical commodity, so when things are most uncertain the future of gold producers is the most secure," says Peter Hambro, chairman of Petropavlovsk, one of Russia's largest gold producers.

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