Hey There Income Hunter,
The Russian central bank announced it will pay a fixed price of 5,000 roubles for one gram of gold for at least the next three months. (That’s about $66.50 as of this writing.)
Russia had gone on a buying spree in March to protect its savings as the ruble collapsed due to US sanctions and the freezing of its foreign reserves.
Sberbank, Russia’s largest financial institution, reported that demand for gold and palladium has quadrupled in the last few weeks.
Meanwhile, Russia’s Ministry of Finance also referred to gold as an “ideal alternative” to the US dollar.
I exposed this plan more than a year ago in Power Income as China and Russia formed an alliance aimed at trading and managing finances outside the US system. More recently, I wrote about the topic here.
Today, I’ll run through the immediate impact on the markets and longer-term ramifications.
Taking a Page From the 1930s US Playbook
Setting a fixed price for gold against any currency means you have moved to a gold standard. A gold-backed currency stabilizes your currency and gives your trading partners much more confidence in trading with you.
The period between 1879 and 1914 is known as the classical gold standard era, during which one ounce of gold represented $21.
Then in the 1930s, the U.S. brought up as much gold as it could and even confiscated gold from its citizens in preparation to take over as the reserve currency of the world.
Russia’s intention is for the value of the ruble to be linked directly to the value of gold to seek funding and manage its central bank financing outside of the U.S. dollar system.
Implications for the Market
– A proof of concept for Russia could reopen its economy to all trading partners while avoiding US sanctions
– This could lessen the impact of supply chain disruptions and calm the commodity price spikes in products that Russia exports.
– For the US, adoption of a Russian ruble-gold peg could be very damaging to the dollar’s share in global trade (currentlt 41%) and for a west-led monetary system “great reset”.
– Notice how much the ruble has already significantly increased in value to the dollar.
Once the ruble rises to under 75 rubles is where it gets really interesting and here is why …
Under 75 rubles/dollars, the USD price of gold rises and this would change the current structure of how the bullion banks in London set the price of gold by manipulating the paper gold market.
A collapse of the financial system based on a manipulated futures gold market would create a purely neutral currency market backed by physical gold that would be free to trade at a market generated price.
Trade Ideas
– This is longer-term bearish for the US dollar as trade counterparts diversify away from dollars into other currencies that may also move to a gold backing.
– Obviously gold-backed currencies are bullish for gold as additional trade counterparts follow Russia’s lead and sell dollars to buy gold. This would strengthen their trading power and national security by having an alternative to the dollar.
– It may also fuel a continued correction in oil as Russian oil becomes more accessible … This would provide a great opportunity to buy oil producers and servicers for the long-term bull market in crude.
Bring It Home
Global macro forces continue to drive money flows but you need to avoid “sticker shock,” which means ignoring each headline that comes out and focus on your game plan.
My game plan is to be patient and let the bear market rally play out. Growth in the global economy is slowing due to the demand destruction impact of higher rates and higher oil prices.
This combination will send the US, and maybe the global economy, into a serious slowdown and while inflation will remain way above the central bank targets.
This combination, known as stagflation, is bearish for the financial sector, industrials and tech. It is bullish for gold, consumer staples and utilities.
Live and Trade With Passion My Friend,
Griff