Russia Has Changed the Way Gold Trades by Setting a New Floor for Gold
Ever since the 24th of February when Putin invaded Ukraine, the Russian leader has been engaged in an intense chess match against the other major leaders of the western world. Western leaders, particularly the US have grappled for economic control over the situation unraveling in Russia and Ukraine. On the US’s first turn, the Biden Administration imposed strict economic sanctions against Russian businesses and exports. Russia swiftly replied by tying natural gas to the ruble. As the number one natural gas exporter around the globe, they made it clear that the ruble was the only accepted form of payment. Then on March 24th, President Biden answers with a new round of sanctions that targeted 300 members of Russian Parliament and dozens of defense companies and made moves to restrict Russia’s ability to use gold reserves to prop up its currency. However, Putin didn’t bat an eye at these new sanctions. On March 25th, he moved his queen and declared “check” on the US when he tied gold inextricably to the ruble. He declared a flat rate for trade for gold at 5000 rubles/gram, essentially creating a floor for the trading price of gold and bolstering the ruble.
What Does This Mean for Gold Moving Forward?
Prior to this move by Russia, gold prices have been heavily manipulated by the paper gold and ETF market. These paper markets have been suppressing gold (and especially silver) prices for quite some time, however with this new move by Russia, which ties the gold to the ruble, Russia has imposed a floor to the price of gold. 5000 rubles/gram is roughly 155,500 rubles per troy ounce of gold. With the current RUB/USD exchange rate of 80, that is a gold price of $1,940/oz. The only way to lower the gold price is to further weaken the ruble. Assuming that, however, the ruble continues to strengthen, which is likely due to mandatory natural gas prices in rubles, it will reflect in higher gold prices globally.
How Will This Impact Oil Prices/Exports?
Russia has a corner on the energy market. As the world’s largest natural gas exporter and the world’s third largest oil exporter, Putin is using his position to strengthen the ruble and the Russian economy by requiring all natural gas payments to be in rubles. Ultimately, this ties natural gas to the gold price since both are being linked to the ruble. Depending on how Russia moves its next chess piece, this same scenario could apply to Russian oil. If Russia soon demands payment for Russian oil in rubles only, it ties Russian oil to the ruble and indirectly to gold.
The Energy to Gold Link
One scenario that would be significantly impactful for gold prices is if Russia starts asking for oil to be paid for in physical gold. Whenever they list the price per barrel slightly less than the other oil exporting companies, buyers around the globe would be scrambling to buy up physical gold to exchange for Russian oil. This scenario would significantly affect the paper gold market, where the gold price is decided by fractionally backed cash settled gold and gold price derivatives.
Regarding the ruble, tying the ruble to gold and energy was brilliant. It has placed a new floor under the RUB/USD rate and as a result has strengthened the ruble. If the majority of the trading system begins using the ruble in exchange for commodities, it could actually position the ruble to become a major global currency. When Russia begins accepting physical gold for oil exports it also will strengthen the Russian balance sheets and propel the ruble upwards.
What Does This Mean for the USD?
As Russia changes the landscape of energy payments, you can be sure other countries will take notice and could even follow suit. Assuming that other BRICS countries begin accepting gold in payment for oil it could have a devastating impact on the dollar as it is unseated in its position as the Petro-dollar.
How Will This Play Out?
While there is still a lot of speculation on how this will play out in its entirety, there are some very likely scenarios. We already are seeing significant increase in demand for physical gold and physical silver. As demand increases the price explodes. When this occurs, the paper gold market could implode or become completely disconnected from the physical price (we are already seeing that now). It is also highly likely to see a shift away from the USD as non-western countries trade in currencies other than the USD.
Now is the time to position yourself for this changing global paradigm. A portfolio with significant physical gold and silver presence is essential for not only weathering but also thriving in this constantly shifting global economy.
Give our office a call at (435)773-9444 to schedule a time to sit down and see if physical gold and silver are right for you.
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