Posted on 04/03/2022 4:56:06 AM PDT by blam
With Russia’s central bank having just profoundly altered the international trade and monetary system by linking the Russian ruble to both gold and commodities, journalists in Moscow asked me to write a Q and A article on what these developments mean, and the ramifications of these changes on the Russian ruble, the US dollar, the gold price and the global system of currencies. This article has been published on the RT.com website here.
Since RT.com is now blocked and censored in many Western locations such as the EU, UK, US and Canada, and since many readers may not be able to access the RT.com website (unless using a VPN), my Questions and Answers that are in the new RT.com article are now published here in their entirety.
Who would have thought that citizens of ‘free speech’ Western countries would need a VPN to read a Russian news site?
Why is setting a Fixed Price for Gold in Rubles significant?
By offering to buy gold from Russian banks at a fixed price of 5000 rubles per gram, the Bank of Russia has both linked the ruble to gold and, since gold trades in US dollars, set a floor price for the ruble in terms of the US dollar.
We can see this linkage in action since Friday 25 March when the Bank of Russia made the fixed price announcement. The ruble was trading at around 100 to the US dollar at that time, but has since strengthened and is nearing 80 to the US dollar. Why? Because gold has been trading on international markets at about US$ 62 per gram which is equivalent to (5000 / 62) = about 80.5, and markets and arbitrage traders have now taken note, driving the RUB / USD exchange rate higher.
So the ruble now has a floor to the US dollars, in terms of gold. But gold also has a floor, so to speak, because 5000 rubles per gram is 155,500 rubles per troy ounce of gold, and with a RUB / USD floor of about 80, that’s a gold price of around $1940. And if the Western paper gold markets of LBMA / COMEX try to drive the US dollar gold price lower, they will have to try to weaken the ruble as well or else the paper manipulations will be out in the open.
Additionally, with the new gold to ruble linkage, if the ruble continues to strengthen (for example due to demand created by obligatory energy payments in rubles), this will also be reflected in a stronger gold price.
What does this mean for Oil?
Russia is the world’s largest natural gas exporter and the world’s third largest oil exporter. We are seeing right now that Putin is demanding that foreign buyers (importers of Russian gas) must pay for this natural gas using rubles. This immediately links the price of natural gas to rubles and (because of the fixed link to gold) to the gold price. So Russian natural gas is now linked via the ruble to gold.
The same can now be done with Russian oil. If Russia begins to demand payment for oil exports with rubles, there will be an immediate indirect peg to gold (via the fixed price ruble – gold connection). Then Russia could begin accepting gold directly in payment for its oil exports. In fact, this can be applied to any commodities, not just oil and natural gas.
What does this mean for the Price of Gold?
By playing both sides of the equation, i.e. linking the ruble to gold and then linking energy payments to the ruble, the Bank of Russia and the Kremlin are fundamentally altering the entire working assumptions of the global trade system while accelerating change in the global monetary system. This wall of buyers in search of physical gold to pay for real commodities could certainly torpedo and blow up the paper gold markets of the LBMA and COMEX.
The fixed peg between the ruble and gold puts a floor on the RUB / USD rate but also a quasi-floor on the US dollar gold price. But beyond this, the linking of gold to energy payments is the main event. While increased demand for rubles should continue to strengthen the RUB / USD rate and show up as a higher gold price, due to the fixed ruble – gold linkage, if Russia begins to accept gold directly as a payment for oil, then this would be a new paradigm shift for the gold price as it would link the oil price directly to the gold price.
For example, Russia could start by specifying that it will now accept 1 gram of gold per barrel of oil. It doesn’t have to be 1 gram but would have to be a discounted offer to the current crude benchmark price so as to promote take up, e.g. 1.2 grams per barrel. Buyers would then scramble to buy physical gold to pay for Russian oil exports, which in turn would create huge strains in the paper gold markets of London and New York where the entire ‘gold price’ discovery is based on synthetic and fractionally-backed cash-settled unallocated ‘gold’ and gold price ‘derivatives.
Russian gold bars stored in wooden boxes in the Gokhran vaults, Moscow
What does this mean for the Ruble?
Linking the ruble to gold via the Bank of Russia’s fixed price has now put a floor under the RUB/ USD rate, and thereby stabilized and strengthened the ruble. Demanding that natural gas exports are paid for in rubles (and possibly oil and other commodities down the line) will again act as stabilization and support. If a majority of the international trading system begins accepting these rubles for commodity payments arrangements, this could propel the Russian ruble to becoming a major global currency. At the same time, any move by Russia to accept direct gold for oil payments will cause more international gold to flow into Russian reserves, which would also strengthen the balance sheet of the Bank of Russia and in turn strengthen the ruble.
Talk of a formal gold standard for the ruble might be premature, but a gold-backed ruble must be something the Bank of Russia has considered.
What does this mean for Other Currencies?
The global monetary landscape is changing rapidly and central banks around the world are obviously taking note. Western sanctions such as the freezing of the majority of Russia’s foreign exchange reserves while trying to sanction Russian gold have now made it obvious that property rights on FX reserves held abroad may not be respected, and likewise, that foreign central bank gold held in vault locations such as at the Bank of England and the New York Fed, is not beyond confiscation.
Other non-Western governments and central banks will therefore be taking a keen interest in Russia linking the ruble to gold and linking commodity export payments to the ruble. In other words, if Russia begins to accept payment for oil in gold, then other countries may feel the need to follow suit.
Look at who, apart from the US, are the world’s largest oil and natural gas producers – Iran, China, Saudi Arabia, UAE, Qatar. Obviously, all of the BRICS countries and Eurasian countries are also following all of this very closely. If the demise of the US dollar is nearing, all of these countries will want their currencies to be beneficiaries of a new multi-lateral monetary order.
“It was once said that ‘gold and oil can never flow in the same direction’.”
What does this mean for the US Dollar?
Since 1971, the global reserve status of the US dollar has been underpinned by oil, and the petrodollar era has only been possible due to both the world’s continued use of US dollars to trade oil and the USA’s ability to prevent any competitor to the US dollar.
But what we are seeing right now looks like the beginning of the end of that 50-year system and the birth of a new gold and commodity backed multi-lateral monetary system. The freezing of Russia’s foreign exchange reserves has been the trigger. The giant commodity strong countries of the world such as China and the oil exporting nations may now feel that now is the time to move to a new more equitable monetary system. It’s not a surprise, they have been discussing it for years.
While it’s still too early to say how the US dollar will be affected, it will come out of this period weaker and less influential than before.
What are the Consequences of these Developments?
The Bank of Russia’s move to link the ruble to gold and link commodity payments to the ruble is a paradigm shift that the western media has not really yet been grasped. As the dominos fall, these events could reverberate in different ways. Increased demand for physical gold. Blowups in the paper gold markets. A revalued gold price. A shift away from the US dollar. Increased bilateral trade in commodities among non-Western counties in currencies other than the US dollar.
btt
Their failure in the Ukraine, coupled With the sanctions and that decline will likely increase substantially. Is there any other country in the world that is a having a population decline?
The other side of this equation is dopey joe's insistence on destroying the fossil fuel industry upon which the dollar is boursed. Hypothetically, let's say there's a magic wand that makes dependence on oil go away, and we all drive electric cars powered by happy thoughts - what is the basis of the dollar's valuation then? Nothing. It's worthless scrip.
I believe most if not all of Western Europe.
The population of the UK and western Europe increases every yearly.
“if the ruble continues to strengthen (for example due to demand created by obligatory energy payments in rubles), this will also be reflected in a stronger gold price.”
As soon as I read something like that, I know the author is an idiot. A tiny tail does not wag a huge dog.
I’m not an economist, but I play one on FR. I’ve thought one of the best things that could happen to American citizens is if the US dollar’s value was “pegged” to something like a fractional barrel of oil or perhaps a basket of products. The upside is that the government could only issue as many dollars as there was oil or commodities. The downside is that government can’t just wish dollars into existence to fund bridges to nowhere or free money for their private hobbyhorse. (That’s a two-edged sword.) But I feel we need protection from a government with zero fiscal responsibility.
Government used to target two percent inflation which was thought to be a vehicle for growth while protecting to some degree (not a great degree) people who must save for their old age. I think real inflation is much, much higher. But since people who are in government or work for the government aren’t affected by their actions it will never come down again.
Only outside existential challenges, like Russia or China, have any hope of reigning in our “illiberal” (in the original sense) government.
Explain how 1 percent of all trading in the US dollar (oil) going away, makes it worthless.
You're right and that's why we're hearing all the chatter of a US based cryptocurrency. The PTB won't hesitate to sink the dollar along with bitcoin and replace it with a new currency, one I'm sure is already developed with the help of the usual suspects. Unimaginable pain is coming for the Deplorables.
Immigration.
I have always found this fixation on gold to be peculiar.
What is it about gold, that causes humanity to seek it, hoard it, and value it?
As a metal, it’s not particularly useful, but for it’s resistance to oxidation. It’s tensile strength, is poor, it’s shear strength is poor, and as an alloying material there are few positive underlying properties. It’s electrical conductivity is lower than other metals.
Certainly can’t eat it, derive energy from it, or most anything else.
It will all get fixed with digital currency /s
Nope!
Why do you think rich people favor mass immigration?
what exactly does “linking” a currency to gold mean? that you can walk into any bank in that nation and use their worthless currency to buy gold at a fixed rate? if so,they’d run out of gold reserves in a day or two ...
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.
