While Dubai may typically be Russia’s top gold-trading partner, tides have shifted following the recently high gold demand rates in China. With Hong Kong taking over the prime position for gold imports from Russia, analysts suspect the greater gold market could see a drive-in prices from the increased demand. According to Refinitiv Liva, Hong Kong imported $2.3 billion worth of gold from Russia during the first eight months of the year, breaking all previous records between the trading partners.
Hong Kong’s trading patterns with Russia during the first eight months of 2023 reflect a $1.9 billion increase when compared to the same period last year. China’s tariff-free zone has increased its gold purchases from Russia since 2022 by 527.1%. When looking back on January of this year, Hong Kong has steadily increased its gold import rates each month, with levels peaking in August at 14 tons.
During the full eight-month period of January through August, Hong Kong’s gold imports from Russia totaled 68 tons. When compared to the same period last year, this total is more than quadruple the level of 2022’s shipments.
So, why is Hong Kong suddenly importing so much gold from Russia?
To start, reporters from Bloomberg believe that the recent Western restrictions on Russia led to an increased desire for exports. This factor, coupled with the new regulations imposed on the United Arab Emirates gold refineries, shifted trading patterns between Russia and Dubai. The new regulations on the UAE began in January.
Another theory on the recent shift in Russia’s trading partners is the recent strength of the Hong Kong dollar. The Hong Kong dollar achieved a trading range of 7.75 to 7.85 against the U.S. dollar, making it the more appealing currency option for Russian gold dealers when compared to the UAE dirham.
Hong Kong’s gold market has been developing for quite some time now. The gold hub has a strong financial system and a robust trading history with Russia, making the two forces fair trading partners.
As Russia continues struggling under the imposed Western sanctions, trade with Hong Kong could benefit the Russian economy with the currency boost. This trade option also adds a new challenge for Western nations hoping to impose future sanctions.
“Hong Kong’s status as a transshipment port has contributed to volumes of dual-use items getting into Russian hands,” Jeffrey A. Sonnenfeld and Michal Wyrebkowski explained in an article on the loophole in Russia’s sanctions. “It is notoriously hard to detect from high-level trade data because it requires visibility throughout multiple stages of the supply chain. Given China’s open defiance of Western sanctions, it is hard for export control officials to conduct pre-shipment screenings of said items.”
Clearly, various factors are contributing to Hong Kong’s rise in gold purchases from Russia. Whether or not this trading pattern will continue is not certain, but we do know that the shift will likely impact the greater gold market.
Hong Kong’s sudden uptick in gold imports could increase international gold demand rates, which would ultimately spike prices. This theory is the most obvious, though it likely would only pan out in short-term performance rates.
Another potential outcome would be the trading pattern’s effect on market volatility. Some analysts believe that Hong Kong’s increase in imports could create a more volatile gold market as prices respond to geopolitical events. We are already seeing this theory play out, as prices have dramatically risen since October 7 when the Israel-Palestine war broke out, sparking safe-haven demand for gold.
The gold market could also become more opaque as Hong Kong rises in the import ranks. Both China and Russia have a history of unreported gold trading, meaning the combined forces could create a severe lack of transparency in the market. Given Russia’s current sanctions, it wouldn’t be a huge jump to assume the nation wants to make its gold harder to track.
With Russian gold exports to Hong Kong soaring by 527.1% compared to last year, one thing is certain: the global financial system has certainly shifted. How this shift will impact the greater industry may not be clear yet, though traders can continue monitoring import patterns for a better clue on future performance rates.
Gold futures have spent the last seven days trading healthily above key $2,000-per-ounce lines as tensions in the Middle East continued heightening. On November 24, gold futures closed at $2,023.50 per ounce.
As always, investors should consult their financial advisors before making any portfolio decisions.