Public domain photo (CC0 1.0) courtesy of Agnico-Eagle Mines Limited
This week, Your News to Know rounds up the latest top stories involving gold and the overall economy. Stories include: Demystifying Russia’s plans for gold, gold in-between inflation and geopolitical tensions, and gold emerges as real money once again.
Here’s what Russia is doing with its gold
When it comes to other commodities that Russia produces, the main question for most is how supply will affect price. In the case of gold, questions extend towards the metal’s status itself. While Russia is the second-biggest gold producer in the world, accounting for 9.5% of annually mined gold on average, the statistic has limited relevance. A perpetually massive buyer of gold, Russia is known to scrounge up virtually all the gold mined domestically, one way or the other.
Now that private banks in Russia have been sanctioned against buying the nation’s gold, as has virtually every other entity, the plot is taking interesting turns. As everyone wonders how the nation will sell its gold, Russia announced last week that its central bank will resume purchases with a fixed price of 5,000 rubles per gram ($52) compared to the current market price of $61.99 per gram – a 19% discount. It has, as some speculated, brought forward a gold standard of sorts by tying the ruble’s price to gold.
According to sources, this somewhat discounted guarantee of purchase is meant to support local miners in the wake of sanctions. It’s also meant to allow the Russian central bank to buy gold at a discounted, fixed price. And, not the least important, support the ruble was in free-fall.
However, those are merely the internal implications of this move. Comments made by Russian officials have made a few things clear:
- Russia wants to establish gold as a hard currency
- Russia considers only the ruble and a few other “friendly” sovereign currencies as real money
It’s just like we reported two weeks back:
And it’s possible Russia might decide to hang onto their gold after all… Some analysts believe that Russia intends to simply sell their central bank gold stockpile domestically, in exchange for rubles. The nation could revitalize their beleaguered currency by implementing a gold standard in exactly this way…
Imagine the global response to the first national currency of the 21st Century backed by physical gold! At a stroke, Russia could reposition itself as a globally relevant economy, virtually guarantee international investor interest, and re-establish its currency as a store of value. And it could do all this without violating sanctions.
The battered ruble hit a one-month high last week on these announcements.
Exports to Asia and the Middle East will probably do away with the notion that Russian gold is hard to sell, and quickly too. “We are seeing a significant increase in demand for gold in retail,” said a spokesman for Polymetal International, a Russia-based mining company. “Banks are ready to pay for it using international benchmark price, and not at 5,000 rubles.”
The fixed purchase price is nearly 20% below the international market’s spot price of gold. Standard Chartered Plc analyst Suki Cooper thinks the offering will decrease, rather than increase, the available gold supply. She expects Russia’s banks, corporations and citizens to begin buying up gold from outside the country wherever it’s available.
Essentially, Russia has done exactly what we predicted and created a gold-backed currency. What this will mean for international trade involving Russia, let alone gold’s role in it, will undoubtedly become incredibly influential on future efforts to return to a gold standard.
Gold’s current bullish cycle is both unique and on familiar ground
Franklin Equity Group portfolio manager Steve Land discussed reasons that gold’s current bull run is a unique one, despite all the familiar drivers in place. An especially noteworthy aspect of this current run is that gold is outperforming and diminishing interest in “conservative” investments including Treasury bonds, the yen and the franc. Safe-haven investments were already few and far between in 2019, even before the U.S. government bond market saw its worst quarter in the last 50 years.
But now, with the inflation rate in U.S. rising to a forty-year high, things are swiftly changing in the favor of gold. The greenback itself was considered a robust safe haven not too long ago. But who can trust a currency when inflation is over three times higher than 10-year bond yields? Certainly not the prudent investor, nor those who can’t remember the 1970s without feeling queasy. So we’ve seen record demand for gold coins and bars here in the U.S. (and nearly everywhere else).
While gold’s price can be somewhat volatile, its mere introduction in a portfolio reduces the portfolio’s overall volatility. Greater gold allocations can lead to lower overall risk (due to the lack of correlation with traditional assets like stocks and bonds). And right now, risk is high. Years of lockdowns and restrictions that persist in all corners of the world have placed an unprecedented strain on the global economy. When we factor in the largest European military action since World War II, high domestic inflation, a stock market about 100% overvalued based on historic levels and the Fed’s miserly rate hikes, risk goes off the charts.
Governments have tried to bail themselves out by both printing money and taking on debt. We know that the first is a euphemism for currency debasement (though it’s arguable whether this term is even relevant, considering that currency is backed by nothing but a promise). And we also know that inflation is every government’s preferred method of paying off its debts. The flickers of economic strength we’ve seen over the past years has been powered by stimulus, which is now gone. Even worse, the Federal Reserve is planning to “take away the punchbowl,” just when the party was winding down on its own.
Hearing people talk about “inflationary concerns” when prices of food, gas and just about everything have risen by 30%-50% already makes us wonder how bad things can really get on that front. As uncertainty becomes the theme, the only certain store of value will become one, too.
A harsh reminder of why gold is the only reliable money
Globalization is rarely used with a positive connotation. Certainly, we’ve had more than our share of it over the past few years. Neils Christensen notes that some economists believe we are approaching the end of globalization, and that it has been expedited by the Russian invasion of Ukraine.
The impact of the invasion on the global economy ties into the kind of supply chain “reimagining” we’ve seen over the past few years, though perhaps on another level. These days, we’re talking about currencies and commodities being weaponized. How this will play out is exemplified in Europe’s demand for Russian oil and gas.
Europe is already on the brink of recession. It could go over the edge if Russia withholds 40% of Europe’s supply of oil and gas. As in other places of the world, Europe has had gas prices explode in a manner that is getting people interested in using bicycles. It’s trying to lessen dependence on Russian gas and oil, but that won’t happen within this decade.
The same holds true of other commodities, which have been extremely volatile as nations attempt to establish their own supply chains. Among many other things, Russia now represents a forbidden counterparty and is exposing a major issue with globalization. Russia driving the point across by establishing a gold standard of sorts laid out the groundwork.
Pavel Zavalny, chair of Russia’s Duma Committee on energy, puts it this way:
If they want to buy, let them pay either in hard currency, and this is gold for us, or pay as it is convenient for us; this is the national currency.
In other words, pay us in rubles or pay us in gold. Otherwise, get a bicycle. Meanwhile, Russia’s Ministry of Finance also referred to gold as an “ideal alternative” to the U.S. dollar.
Governments are perhaps realizing that their neighbors’ currencies and debt can’t be trusted, and are stockpiling gold instead. Russia’s state-controlled VTB Bank sold one ton of gold to citizens in March, showing that citizens of any financial standing don’t trust the government. Gold, it appears, is the one thing everyone accepts and nobody rejects. As Ray Dalio reminds us:
When countries were at war and there was not trust in the intentions or abilities to pay, they could still pay in gold. So gold (and to a lesser extent silver) could be used as both a safe medium of exchange and a safe storehold of wealth.
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