What would a decision to remove VAT on gold investment bars mean for Russian savers and investors?

Gold’s unique properties make it a valuable diversifier in any portfolio. Gold protects investors against inflation, currency fluctuations and financial crises, and it is also a source of long-term returns.

After cash and deposits in Russian roubles, savers frequently turn to foreign currencies – mainly US dollar and euro. Lifting VAT on gold investment bars will encourage Russian savers and investors to invest in gold, which hasn’t been a prime asset for them previously.

How can people invest in gold - what products can they choose from?

There are many ways to invest in gold. The various products have slightly different characteristics:

  • Buying physical gold bars and coins: Globally, small bars and coins account for about 2/3 of annual investment gold demand.
  • Buying gold-backed ETFs and similar: Physically-backed gold exchange-traded funds and similar products account for approximately 1/3 of investment gold demand.
  • Buying into allocated or unallocated gold accounts: Bullion banks offer their customers gold accounts consisting of gold deposits and resembling currency accounts.
  • Buying gold derivatives- futures, forwards and options: Derivatives trade OTC and on exchanges.
  • Buying gold mining stocks: Investors can invest in shares of gold mining companies.

How much of their savings should people invest in gold?

Portfolio analysis indicates that investors who hold between 2% and 10% of their portfolio in gold can significantly improve performance. Even assuming that the average return on gold is a modest 2%-4% - which is a conservative assumption, below gold’s actual historical performance - adding gold to a portfolio will improve risk-adjusted returns.

The government has recently raised the retirement age. Why should easier access to gold help pensioners?

Gold is an asset that helps to diversify savings and is a long-term store of wealth. This is particularly important since older people make up a growing share of the population in virtually every country.

In Japan, where the impact of ageing has been most pronounced, gold is already well embedded in the pension system. Approximately 380 Japanese pension plans currently offer gold as an investment option. Gold is an asset that can provide protection and financial safety for the old age.

Should people replace their US dollar savings with Russian gold?

Data shows that Russian savers frequently turn to foreign currencies (foreign deposits account for around 30% of total deposits), especially during times of crises. This trend resembles the behaviour of international investors, many of whom turn to safe haven assets during market turmoil. Gold is one of the leading safe haven assets among international investors, it is a solid investment that will help make Russian investors more resilient to global shocks and sharp currency movements. With the international monetary system gradually shifting from a unipolar, USD-based, towards a multi-polar one – with USD, EUR and RMB playing the role of the major currencies – holding gold as part of a portfolio will help to mitigate some of the risks arising from this global transition.

It is also worth mentioning that over the long run - the last 100 years - all currencies have depreciated in gold terms, and this trend is not expected to reverse.

Will the VAT removal in Russia have any impact on the international gold market?

At 20% Russia had one of the highest VAT rates on bullion bars in the world. As a result, private investment demand in Russia was very low. In 2018 Russia’s bar and coin demand was about 3 tonnes, less than 0.3% of the world total. By comparison, bar and coin demand was 308 tonnes in China, 162 tonnes in India, 97 tonnes in Germany, 28 tonnes in the US.

Survey results show that Russian citizens are highly interested in gold as an investment asset and independent analysis suggests that the abolition of VAT should boost retail demand for gold by around 50 tonnes per year in the long run.

Russia plays a prominent role in the global gold market. It is one the largest gold producers and the largest official buyer of gold in the world. Lifting VAT on gold investment and making gold accessible to private investors opens the world’s gold investment market’s last frontier.