Vladimir Putin made a grave mistake if he thought his troops would waltz into Ukraine and be welcomed with open arms. Ukraine appears to have pushed this game into a stalemate, a war of attrition that may last until one side runs out of either weapons or soldiers. But regardless of which side comes out on top, Gold could be the big winner in the aftermath of the conflict.
Russia’s actions have shaken the entire world order politically, militarily, and monetarily. No one expected an all-out invasion by one state against a non-belligerent state. And consequently, the US and Europe are struggling with how to respond to a situation that very few thought would happen.
The first actions taken against Russia were sanctions, arguable of little consequence. After all, Russia has been under sanctions since 2014, when it took over Crimea, so it has had years to prepare for even more comprehensive sanction measures.
But the scale and scope of the recent round of sanctions did harm the lives of ordinary Russians. So it looked as though sanctions might have a significant bite for a while. But Russia and the ruble have bounced back from the initial shock and could be largely unaffected once things are said and done.
However, the big winner in all this could be Gold. Here’s why.
Russia’s Gold Standard Could Beat Sanctions
Policymakers in Washington and Brussels thought that sanctions against Russia would be enough to send the Russian economy into a tailspin and loosen Putin’s grip on power. Instead, we were told that Russia didn’t have much to offer the West aside from oil and natural gas, so the effects of sanctioning Russian industry and cutting off Russian banks from the West would be inconsequential to the West.
However, we found out that that couldn’t have been further from the truth. Russian production of industrial materials such as nickel, palladium, and aluminum makes it a country that’s, if not indispensable, at least a significant player in the production and sale of metals for use in industry. Global nickel markets were thrown into complete disarray and brought to their knees due to Russian sanctions, as a major Chinese steel producer with enormous short positions in nickel was on the verge of bankruptcy.
Russia is also a significant producer of fertilizer, so the prospect of sanctions on fertilizers has driven up fertilizer costs. As a result, it will have a substantial impact on causing food prices to rise this year. However, the prospect of shortages can’t be ruled out either. Many farmers may choose not to produce food if they can’t get their hands on fertilizer or if fertilizer costs make it uneconomical to grow food.
To add insult to injury, sanctions on Russian oil and natural gas haven’t had much of an impact, as China and India have been too willing to purchase these products from Russia, which is offering them at a steep discount. Moreover, Europe is still incredibly reliant on Russian gas and can’t cut off its imports without sending its economies into a tailspin and causing its citizens to freeze.
Now Putin has decided to take the upper hand and demand that henceforth, only rubles would be accepted in payment for its oil and natural gas. With Russian banks shut off from doing business with the West, this ultimatum is intended to squeeze the West, mainly Europe. Payments can still be made in USD and Euros through a designated bank, where prices will be instantly converted into rubles.
Russia is one of the world’s biggest producers of Gold, responsible for up to 10% of world production. The central bank’s actions have essentially monetized Gold, which has domestic and international ramifications.
The Russian central bank also took a crucial step by pegging the ruble to Gold. The central bank has declared that it will buy Gold for 5,000 rubles per gram of Gold. That would mean each ounce of Gold would cost about 155,505 rubles at current exchange rates, which would equate to a gold price of just under $1,850 an ounce. This does three important things.
- Sets a Gold Price Floor – First, it establishes a price floor for Gold. If the price of Gold were to drop significantly under $1,850 an ounce (which is unlikely), Gold could very well start flowing into Russia to take advantage of the fixed price there.
- Puts Russia on a De Facto Gold Standard – Second, it has moved Russia one step closer to an official gold standard. By promising to buy Gold at a fixed price, Russia has officially defined the ruble monetary unit as 1/5000 of a gram of Gold. That’s big, and the consequences for the international economic system could be profound in the coming years.
- Allows for Monetary Security – And third, it ensures that Russia will have a ready supply of money. Russia is one of the world’s biggest producers of Gold, responsible for up to 10% of world production. The central bank’s actions have essentially monetized Gold, which has domestic and international ramifications.
Domestically, gold demand has increased significantly as everyday Russians seek to protect themselves and their households from the effects of sanctions and the potential for any weakness of the ruble. As a result, the central bank even suspended gold purchases, so strong was demand from Russian households.
There’s no denying that sanctions have impacted Russia’s economy. But the country was somewhat prepared for that to happen and had the option of pivoting to Gold, which it decided to do.
Sanctions Could Destroy the Dollar
Rather than striking a decisive blow against Russia, the sanctions may end up boomeranging and harming the dollar. On the other hand, with China and India thus far unwilling to play ball, this round of sanctions may demonstrate that being cut off from the dollar or cut off from the Western financial system may not be the death blow that the US thought it would be. And it could spur closer ties between Russia, China, and India that could result in a gold-backed or gold-based financial system that could rival the dollar.
It’s too early to state that this is the nail in the dollar’s coffin, but it certainly could be the beginning of the end. At the very least, we’ll see just how successful Russia will be with its experiment at tying its currency to Gold.
These are heady times we are living indeed, we could be seeing the beginning of a return to a world monetary order in which Gold plays a defining role. After over 50 years of a system of floating fiat paper currencies, perhaps it’s only natural that we’re seeing a return to the safety and stability of Gold.
Indeed, Russian households’ actions demonstrate the effectiveness and popularity of Gold as a safe-haven asset. And they should serve as a warning to American families and investors.
Gold Reasserts Itself as a Safe Haven
When it comes to economic crises and currency troubles, Gold is often the asset most people choose to protect their wealth. Its ability to defend against inflation, currency devaluation, and economic turmoil is why so many flocks to it during times of crisis. And if US sanctions and Russia’s move to embrace Gold end up toppling the US dollar, it could be US consumers and investors who flock to Gold in the future.
The dollar being dethroned as the world’s reserve currency won’t happen overnight, but it could happen sooner than we think, even within our lifetimes. Even mainstream see the sanctions as a potential blunder that could destroy the dollar and usher in a new monetary system.
Those changes could come within your lifetime, possibly in ten years, or just as soon as tomorrow night. Are you prepared? Will you wait for the dollar to continue crashing before protecting everything you cried, bled, and sweated over? For many American, the answer will be yes, Because unfortunately, history isn’t something taught in schools or on the news. However, the future is what politicians are always painting a picture of, but it doesn’t seem to be working in our favor so far. So right now, with the special, we have to go on, make sure to take an opportunity and protect your future by going off what’s always worked in the past; as My Grandfather used to say, “If it ain’t broke, no need to fix it.”
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