The backstopping of the Ruble with gold can come in many forms and doesn’t have to be a direct peg from the Ruble to gold – it can include accepting payment for oil in gold.

by Quoth the Raven

Now that Russia has come right out and said it will only transact in Rubles when selling oil to “unfriendly” nations, I’m expecting gold to be the next safe haven for the nation to fall back on, as it desperately tries to backstop both its currency and its economy.

The backstopping of the Ruble with gold can come in many forms and doesn’t have to be a direct peg from the Ruble to gold – it can also include the far more likely scenario of accepting payment for oil, the country’s most ubiquitous and valuable resource, in gold.

A new directive from President Vladimir Putin saw the Russian leader say in a televised government meeting yesterday:

“I have decided to implement … a series of measures to switch payments — we’ll start with that — for our natural gas supplies to so-called unfriendly countries into Russian rubles.”

I have been arguing for nearly a month now that Russia would use its biggest commodity, oil, to help backstop its currency.

I said last month that Putin would push back on economic sanctions by “allying himself further with China, and even discussing with China the prospects of a monetary system outside of the current global monetary system.”

Tying the Ruble directly to oil makes it “sound money” of sorts, because it is tied to a commodity with demand which ostensibly will help buoy demand for the currency.

In fact, OPEC’s agreeance to price oil in dollars for the last 4 decades has been a contributor in helping support the U.S. dollar as the world’s reserve currency in the exact same way that Russia plans on using oil to support the Ruble. And as Russia is working to tie the Ruble to oil, the decades-old petrodollar agreement with Saudi Arabia appears to also be at risk.

The report about Russia accepting Rubles for oil, published by NPR, ends by saying:

Russian leaders have also hinted at more severe consequences as members of the EU bloc have sought — thus far unsuccessfully — to impose an outright embargo on Russian imports.

I can’t help but think that if economic constraints on Russia continue to tighten, or if the country’s plan to salvage the Ruble doesn’t work as intended, the next step lower in the global monetary safe-haven fortress then becomes gold.

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I’ve noted that in the past decade, Russia and China have steadily built up their gold reserves (in my opinion, in preparation for an event like this, where they will be forced to de-dollarize).

Russia’s Gold Reserves

Demand for gold in Russia could continue to be voracious, especially now that the West is considering sanctions on Russia’s gold, including preventing the country from selling gold on international markets.

Hilariously, the New York Times reported that U.S. Senators consider Russia’s gold to be a “loophole” in sanctions against the country:

The senators suggested that Russia’s $130 billion worth of gold reserves were a loophole in the sanctions that were imposed on Russia’s central bank. They said that Russia was laundering money through gold by buying and selling it for high-value currency.

But it isn’t a loophole: this is the reason gold is a safe haven. There’s almost always going to be a bid for it somewhere – that’s part of what makes it sound money.

And so preventing Russia from selling their gold actually does them a favor, of sorts, and encourages them to continue to build their stockpile. In fact, removing supply from the market may only serve to help gold’s price in dollars rise, potentially.

If the country’s plan to backstop the Ruble with oil doesn’t work, Russia can also choose to set a price per barrel for oil, in gold, and accept gold for its oil. This would help stockpile more gold, which in turn would backstop the Ruble further, and would help the country build a firmer foundation to try and rebuild its economy off of, when the time comes for Russia to re-open and re-boot its economy without the help of the Western world.

This isn’t some complex monetary policy analysis, it just seems to be the next step for Russia, based on common sense. I stand by what I wrote in a March 10 article about why I like gold miners:

Not only are people flocking to gold as a safe haven, but people are likely taking note of the fact that Russia seems to think it can defend the ruble – which has tanked against other fiat currencies – with its commodities and its hundreds of billions of dollars in gold reserves.

Talk about leading a f*#* horse to water for gold investors.

The bull case for gold, as I see it, remains strong on three different fronts.

  1. Russia could potentially want to start transacting in gold and could peg it to the price of a barrel of oil. There is always going to be a bid for gold somewhere in the world. Caught off guard, when Western nations realize that gold isn’t a “loophole” but is the main tool Russia (and likely China) will use to challenge the dollar, demand for the safe haven will continue to increase.
  2. Inflation globally, especially in energy, will likely increase for as long as global pressure on Russia’s economy continues. “…additional sanctions on Russian energy could fuel inflation expectations, which would be favorable for gold,” Stephen Innes, managing partner at SPI Asset Management Pte., told Bloomberg yesterday.
  3. Inflation in the U.S. continues to be a “problem underneath the problem” of the geopolitical conflict, and I’m still not convinced we have a solution that isn’t going to result in the Fed eventually, once again, implementing more QE and the price of gold responding by moving significantly higher.

It was just a couple of weeks ago that I wrote an article arguing that the economic sanctions we have cast upon in Russia, due to its invasion of Ukraine, likely mark the beginning of a period where China and Russia would bifurcate the global monetary system, leading them to eventually challenge the U.S. dollar’s reserve status.

No matter how this bifurcation happens, I expect that gold will serve as the foundation for what will ultimately become the soundest monetary system going forward.

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