Hey There Income Hunter,
The G7 leaders may be pounding the table on plans to eliminate Russian energy use, but the truth is Germany and Italy are buying gas in rubles.
Even German Chancellor Scholtz says he is against cutting off gas imports from Russia as he was quoted in a Bloomberg article saying, “It helps nobody if the lights go out here”.
The tables have really turned on the West as Germany’s economy minister complained that Russia is using energy as a weapon … as opposed to all the talk initially that the US using the dollar as a weapon.
The fact is Russian oil revenues are up 50% this year despite the ban on imports!
Today, we’ll look at even more shocking news as Russia appears to have greater leverage over the West than we may think.
Russian Ruble Stronger Than Before the Invasion
As strong as the dollar has been, it would be hard to believe the Ruble is even stronger …
But it is!
Check out the incredible recovery after reaching one dollar-to-120 rubles on March 10 …
The tide turned when there were plenty of takers for Russian oil even after Russia demanded either gold or rubles as payment.
Here is where the story gets very interesting.
When the US froze Russian assets held outside the country, the ruble got destroyed … but Putin was prepared and raised interest rates to 20% to strengthen it.
Putin knew it would be difficult for Europe to completely turn away $200 billion a year in oil from Russia, so he set demands on payment.
Putin demanded either buying oil with ruble’s or gold and set the deal at 5,000 rubles per gram.
So, today with the rubles trading at 62, you would divide 5,000 by 62, which is 80.64 – and multiply that by 28.35 (grams per ounce) …
That would put the price of gold in dollars at $2,362 per ounce.
Now, this is not an official peg, and at 120 rubles to the dollar, the equivalent price of gold was $1,200 …
However Putin pulled this off by betting Western countries would have to buy his oil …
Now, Western policymakers have a difficult decision to make and are faced with a couple of bad choices:
- Completely cut off Russian energy … but with debt/GDP so high, this would cause a deep recession and energy price inflation. That would then spark a debt crisis and force central banks to step in with more QE to prevent western sovereign defaults.
- Go back to QE and put a cap on interest rates to keep economies growing and governments well funded to fight against Putin … but this would also inflate energy prices, which in the end helps Putin.
Specific to the Eurozone, if they are cut off from Russian oil supplies completely, energy shortages will lead to nationalizations in the EU.
This would be very negative for the Euro and positive for commodities and gold – but not for financial assets.
In my opinion, this is the largest macro driver of real asset prices – and it is also WAY under the radar.
Bring It Home
So you can see why I am so bullish on the metals and commodities longer-term.
We are in a new world, where natural resources are faced with a supply/demand imbalance and this will ultimately fuel much more of a move out of financial assets into real hard assets.
The Fed will fight it until they can’t … and the government will lose its desire to fight inflation as economic growth continues to fall.
Live and Trade With Passion My Friend,
Griff