Even though it’s still too premature to predict how the US dollar will fare during this economic shift, it is almost certain that it will emerge weaker and less dominant than before. This comes as a result of the gold backed ruble which is the new paradigm shift for the global economy.
The Bank of Russia resumed gold acquisitions this week, but even more significantly, between March 28 and June 30, the regulator will do this at a set price of 5,000 rubles ($59) per 1 gram, increasing the prospect of Russia reverting to the golden standard for perhaps the first time in almost a century.
If the country adopts the next measure, as suggested this week, of selling its ruble-denominated commodities, the ruble, the US dollar, and the world economy might be severely impacted, reports Russia Today.
The media chatted with Ronan Manly, a rare metals expert at BullionStar Singapore, to obtain some insight.
Why is setting a fixed price for gold in rubles significant?
The Bank of Russia has tied the ruble to gold and established a base rate for the ruble in regards of the US dollar by proposing to purchase gold from Russian banks at a predetermined fee of 5,000 rubles per gram.
This connection has been in effect since the Bank of Russia announced the set price notification on Friday, March 25. At the time, the ruble was dealing at over 100 to the dollar, but it has since risen and is now going at about 80 to the dollar. Why? Because gold has now been selling at around US$62 per gram on foreign markets, which would be equal to (5,000 / 62) = around 80.5, markets and arbitrage traders have taken notice, pushing the RUB/USD rate of exchange further.
In terms of gold, the ruble currently has a foundation against the dollar. Gold, on the other hand, has a floor, because 5,000 rubles per gram equals 155,500 rubles per troy ounce of gold, which, with an RUB/USD floor of roughly 80, translates to around $1,940. And if the LBMA/COMEX Western paper gold markets attempt to decrease the US dollar gold price, they will have to undermine the ruble as well, or the paper manipulations will be exposed.
Furthermore, with the new gold-ruble correlation, if the ruble strengthens (for example, due to demand generated by mandatory energy payments in rubles), the gold price will increase as well.
What does it mean for oil?
Russia is the world’s biggest exporter of natural gas and the world’s third largest exporter of oil. We can see right now that Putin is asking that overseas buyers (Russian gas importers) compensate in rubles for their natural gas. The price of natural gas is directly linked to the cost of rubles, and (because to the constant connection to gold) to the price of gold. As a result, Russian natural gas is now tied to gold through the currency.
Russian oil can now be used in the same way. If Russia starts demanding ruble payments for oil exports, there will be an instant indirect linkage to gold (because to the fixed-price ruble-gold relationship). Then Russia might start taking gold as compensation for its oil exports outright. In fact, this principle may be extended to any commodity, not simply oil and gas.
What does that mean for the price of gold?
The Bank of Russia and the Kremlin are substantially rewriting the whole functioning principles of the international commerce system while expediting change in the global monetary system by manipulating both ends of the equation, i.e. connecting the ruble to gold and then attaching energy payments to the ruble. The LBMA and COMEX’s paper gold markets could be torpedoed and blown apart by this wall of buyers looking for physical gold to exchange for genuine goods.
The established link between the ruble and gold provides a foundation for the RUB/USD exchange as well as a quasi-floor for the price of gold in US dollars. The primary event, though, is the linkage of gold to energy payments. Due to the fixed ruble-gold linkage, elevated demand for rubles should proceed to reinforce the RUB/USD rate, resulting in a greater gold price. However, if Russia starts to receive gold straight as a reimbursement for oil, it would be a new paradigm shift for the gold price, as it would directly connect the oil price to the gold price.
Russia, for example, may begin by stating that 1 gram of gold per barrel of oil will now be accepted. It does not have to be 1 gram, but it should be a lower price than the present crude benchmark price to encourage participation, such as 1.2 grams a barrel. Buyers would rush to purchase physical gold to finance Russian oil exports, putting significant pressure on the London and New York paper gold markets, where the whole ‘gold price’ discovery is predicated on synthetic and fractionally-backed cash-settled unassigned ‘gold’ and gold price ‘derivatives.’
What does it mean for the ruble?
The RUB/USD rate has now been steadied and reinforced as a result of connecting the ruble to gold through the Bank of Russia’s set price. Demanding that natural gas exports be paid in rubles (and, in the future, oil and other commodities) will help to stabilize and maintain the market. If a large portion of the international trading system accepts these rubles for commodity payments, the Russian ruble might quickly become a significant international currency. At the very same time, any effort by Russia to accept direct gold payments for oil will lead additional international gold to come into Russian holdings, bolstering the Bank of Russia’s balance sheet and, in turn, the currency.
While discussions of a formalized gold standard for the ruble might well be excessive, the Bank of Russia must have pondered a gold-backed currency.
What does it mean for other currencies?
The global monetary landscape is rapidly shifting, and central banks all around the world are clearly paying attention. Western sanctions, like the freezing of the vast bulk of Russia’s foreign exchange reserves while attempting to sanction Russian gold, have now demonstrated that property privileges on FX reserves held abroad may not be respected, and that foreign central bank gold retained in vault locations like the Bank of England and the New York Fed may be seized.
Other non-Western countries and central banks will be watching Russia closely if the ruble is linked to gold and commodities export payments are linked to the ruble. In other terms, if Russia starts accepting gold as payment for oil, other countries might feel compelled to follow suit.
Consider who, aside from the United States, produces the most oil and natural gas: Iran, China, Saudi Arabia, the United Arab Emirates, and Qatar. Obviously, all of the BRICS and Eurasian countries are keeping a careful eye on the situation. If the US dollar’s downfall is on the horizon, all of these nations would want their currencies to benefit from a new global financial order.
What does this mean for the US dollar?
Oil has supported the US dollar’s worldwide reserve status since 1971, and the petrodollar age has only been feasible because of the world’s ongoing usage of US dollars to trade oil and the United States’ ability to prohibit any competitor to the US dollar.
But what we are witnessing today appears to be the dawn of the demise of that 50-year system and the emergence of a new gold and commodity-backed multilateral monetary system. The catalyst was the freeze of Russia’s foreign exchange reserves. The world’s large commodity-producing countries, such as China and the oil-exporting nations, may now believe that the time has come to transition to a new, more egalitarian financial system. It is hardly surprising; they have been talking about it for years.
Whilst it’s still too premature to predict how the US dollar will fare during this period, it will emerge weaker and less dominant than before.
What are the ramifications?
The Russian Central Bank’s decision to connect the ruble to gold and commodity payments to the ruble represents a paradigm leap that the Western media has yet to comprehend. These incidents could resonate in various ways when the dominos drop. Physical gold is in more demand. In the paper gold markets, there have been a number of implosions. The price of gold has been reevaluated. There is a move away from the US dollar. Growing bilateral commodity trading between non-Western countries in non-dollar currencies.