Investors may feel hesitant about this paradox: even though Western inflation rates remain alarmingly high and the USA economy is experiencing strong growth, spot Gold continues to rise historically. Typically, as major global economies heat up, investor interest in Precious Metals cools down, as the latter are not income-generating assets, although they can at least preserve some important value.

Gold is traditionally seen as a safe haven when Bonds or Stocks are weak. So, against the backdrop of a strong USA economy, why has the price of Gold continued to rise over the past two years, reaching a historical high of $2790.07 per ounce in October this year? On March 20, 2020, one ounce of Gold was $1488.

On Tuesday, the spot Gold price hit $2695.57 at one point, and as these timestamps suggest, the Russia-Ukraine conflict is a good starting point for finding answers.

Firstly, when geopolitical tensions escalate, investors usually rush to Gold. Clearly, this was the case last month when Russian President Putin suggested the possibility of nuclear strikes. Peter Grant, Vice President and Senior Metal strategist at Zaner Metals, stated to Reuters at the end of November, "Clearly, this has sparked safe-haven sentiment."

The Kremlin is also buying up Gold.

A wake-up call for Global central banks.

Last month, the Russian Ministry of Finance announced a 35.5% increase in its daily purchases of currency and Gold. Russia's Gold reserves exceeded $200 billion for the first time in October, reaching a record $207.7 billion. "Since 2022, despite rising USA interest rates, Gold prices have still increased by 40%," noted Goldman Sachs commodity strategist Lina Thomas.

This is very strange. Typically, higher interest rates make Gold less attractive because Gold does not pay interest like Bonds.

However, this logic was turned on its head after the USA and other Western countries began freezing the central bank assets of Russia in these countries' Financial Institutions. "This sounded alarm bells for central banks globally," Thomas continued.

"They started diversifying their reserves, moving away from the dollar and turning to an asset that cannot be frozen by anyone— that is Gold."

Thomas predicts that by the end of next year, Gold prices will rise to 3000 dollars per ounce.

Where does Russia's Gold come from?

In 2022, Russia was the second-largest Gold producer in the world, tied with Australia, extracting 320 tons per year, accounting for 10.3% of the global output. They are second to China, which has an annual output of 330 tons, accounting for 10.6% of the global share. The USA ranks fourth, behind Canada, accounting for 5.5%, while South Africa has fallen to seventh place, accounting for 3.3%.

According to Statista data from 2021, the largest gold mining companies in Russia include: Polyus, one of the largest gold mining companies in the world, with an annual production of approximately 85 tons of Gold, followed by Polymetal International (35 tons), and then Kinross Gold, Petropavlovsk, Nord Gold, Uzuralzloto, and others. Polyus had an operating profit of 1.58 billion dollars in the first half of this year.

These companies mainly sell Gold to Russian commercial Banks such as VTB Bank, MDM Bank, the Russian Savings Bank (Sberbank), and Gazprombank, the financial arm of the state-owned energy company Gazprom.

These Banks then sell the Gold to the Central Bank of Russia, which owns and manages all of the country's Gold reserves. It stores two-thirds of the Gold in a vault on Ulitsa Pravdy in Moscow, while the rest is kept in a building in St. Petersburg.

The new 'Gold Trade Route'.

One of the biggest problems facing Russia's economy under sanctions is the depreciation of the Ruble, and the inability to legally obtain USD or EUR.

According to an analysis by the RAND Corporation, Russia seems to be 'exchanging Gold for hard currency, Weapons, and foreign Commodities, forming a new Gold trade route connecting Russia, Africa, the Middle East, and other countries.' John Kennedy, the head of RAND's research, pointed out:

'As of February 2022, when the Russia-Ukraine conflict broke out, Russia had acquired Gold at a faster rate than any other country in the past decade.'

Since the outbreak of the Russia-Ukraine conflict, Executive Order E.O. 14024 issued by the U.S. President's Office has been in effect, stating that 'those found to be responsible or complicit in circumventing U.S. sanctions, or directly or indirectly participating in or attempting to engage in fraudulent or structured transactions, including through the use of Gold or other Precious Metals as Assets' will be punished.

Nevertheless, 'Moscow is leveraging Gold to support its wartime economy and enhance its ability to acquire key Commodities, while maintaining considerable influence in Gold production in Central Asia and Africa.' Kennedy wrote.