The Midas touch

The price of gold has soared in global markets as wary investors seek to protect their savings against a possible “second wave” of the economic crisis. Some Russian banks have now reverted to the strategy of offering deposits in gold.

Leading Russian commercial bank UralSib has revived a strategy which aims to profit from mounting fear of a second wave to the global financial crisis. As the euro loses its value against the dollar, and the rouble is jeopardised by falling oil prices, the bank is offering customers the option of opening accounts denominated in gold.

The price of gold has soared to record highs of more than $1,200 per ounce as investors flock to this traditional safe haven. At the end of May, UralSib Bank is launching new accounts for individuals where cash is automatically converted into precious metals, including gold and silver.

Punters have to deposit a minimum of 100g 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,” said Ilya Filatov, deputy chairman of the board, in a recent interview. “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.

The price of gold has been rising steadily, from a low of about $900 in July 2009 to reach a peak of $1,210 in the first week of May. That leaves it at almost double its price of $650 before the crisis in 2007. Some analysts believe that the gold market is in danger of developing a bubble, but with both the euro and the dollar both under threat from massive sovereign debt and high deficits in most of the world's leading economies, no currency seems especially safe at the moment.

Likewise, the rouble remains vulnerable to changes in the oil price. During the worst of the crisis, oil fell from previous highs of more than $140 per barrel to less than $40 in a matter of months, forcing the Russian government to spend more than $200bn in a controlled devaluation that wiped some 30pc off the rouble’s value. Oil prices have since recovered to stabilise above $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 last autumn [during the crisis],” 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 euros as the panic struck.”

Standard & Poor’s depository receipts gold trust reported that gold holdings have surging to a new record high of 1,188.498 tonnes as of May 7, with the world’s largest gold ETF provider adding more than 18 tonnes since the start of this month.

As one of the world’s major producers, this flight to gold is benefiting Russia more than most. 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 Mr Hambro, who is also the Petropavlovsk chairman.

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