The Russian central bank's decision on gold is about buying, not selling, gold.
Basically, the Russian central bank will buy gold from Russian banks at a fixed rate of 5000 rubles per gram, which in terms of ounces and dollars, at the current exchange rate of 80 rubles per dollar, corresponds to 1940 dollars per ounce.
In this article we will review all the possible consequences of this decision.
The short-term reason for this decision
I believe that the deliberate immediate and automatic effect of this measure is that from now on, any fall of the ruble will be compensated by a cheaper purchase price of gold by the central bank. The latter will thus be able to automatically replace in its balance sheet a higher countervalue of gold every time it has a lower countervalue of rubles.
In this sense, it can be said that indeed the central bank has started to use gold as collateral for the ruble, but only for the purpose of stabilizing its balance sheet.
This is an emergency measure, which does not automatically lead to the transformation of the ruble into a reserve currency, for the reasons we listed in the previous article posted on Monday.
Consequences on the official price of gold
Regarding the consequences of this decision of the Russian central bank on the official price of gold, I believe that the problem posed by this fixed exchange rate concerns first of all the way this price is determined today.
As we know, the official price of gold is established every day by averaging the trades that take place in the LBMA and COMEX derivatives markets.
With a 100 to 1 prevalence of derivative contracts over the actual physical gold that exists, derivative platforms have a good deal of leverage in setting a lower gold price than would be the case if only actual physical gold transactions were considered.
In addition, as evidenced by numerous U.S. Department of Justice rulings, the banks operating these platforms also actively and recurrently manipulate the official price downward.
This fixed exchange rate determined in Russia should make sure that whenever the derivatives markets attempt too obvious a manipulation, it will come to light, either because it will trigger a series of very large and conspicuous arbitrages in the various markets, or because it would cause an unusually large difference between derivatives prices and physical gold prices (such differences started to appear as early as last year and still persist, and would widen further).
Time will tell if this hypothesis will really come true.
Consequences on the ruble-dollar exchange rate
On the influence of this fixed purchase price on the ruble-dollar exchange rate, a very close temporal coincidence was observed between the announcement of the Russian central bank (March 25) and the beginning of the ruble's rise against the dollar.
The other coincidence is that the price at which this exchange rate is currently set is about 80 rubles to 1 dollar, which incidentally is precisely the ruble value of the price of a gram of gold in dollars.
Basically: 1 gram of gold is worth about $62. So, 5000 rubles/62 = 80.5.
Looking at it this way, it would therefore appear that the foreign exchange markets have been arbitraging the ruble-dollar exchange rate according to this fixed ruble gold purchase price.
In my article of yesterday I provided many other reasons for this ruble's rise against the dollar, but we do not rule out that this hypothesis could also be included in the range of possibilities.
Time will tell which of these hypotheses will prove more plausible.
Consequences on commodity prices
A theory that is spreading is that the obligation imposed on European countries to pay for gas and oil (and perhaps in the future other commodities) in rubles, may end up persuading some countries to pay directly in gold, given the willingness of the Russian central bank to buy this metal at a fixed price.
If this were to happen, a reciprocal fixed exchange rate between gold, ruble and oil or gas would be established.
In reality, as we explained in Monday's article, European countries will pay for oil in such a way that the Russian central bank will receive euros, while the rubles spent will go to the producer and the raw material to the country that bought it.
So one could hypothesize, if anything, a fixed exchange rate between euro, gold and oil, at least within the Russian central bank's balance sheet.
This fixed exchange rate would be an additional aid in stabilizing the balance sheet of this bank.
In practice, in the first paragraph we saw that the central bank would benefit from a greater countervalue in gold with each fall in the countervalue in rubles. To this would be added the countervalue of the Euros collected through the sale of gas and oil. This countervalue will therefore also be able to compensate (always within the bank's balance sheet) for any fall in the ruble countervalue.
All these measures serve, as mentioned, to stabilize the balance sheet of the Russian central bank (which in turn stabilizes the value of the ruble), but do not have an immediate and necessary effect on global currency balances, nor on the strength of the dollar.
Since March 25 (black circle on the chart) - date on which there was the announcement of the Russian central bank on the purchase of gold at fixed rate - the yellow metal has fallen in tandem with the revaluation of the ruble.
Since the ruble has stabilized, gold has been trending sideways.
This could just be coincidence.
Only by observing the evolution over time and therefore a constant establishment of this pattern (i.e. the inverse exchange rate between gold and ruble), we will be able to confirm our hypothesis.
Conclusions
Regarding the price of gold, some time needs to pass to see if this new situation will actually succeed in cornering derivatives manipulation.
Some speculate that this fixed exchange rate within the central bank may even trigger increases in the yellow metal's prices every time the ruble appreciates against the dollar.
This hypothesis would be strengthened if indeed some countries start buying oil and gas in gold, or if it is Russia that offers payments directly in gold; which does not seem possible at the moment.
Also in this case, only time will be able to highlight possible correlations between gold and the ruble-dollar exchange rate, which at the moment are difficult to highlight.
Further readings
Action Forex - How Ruble Might Put a Floor in Gold and Vice Versa
Bloomberg - Russians Buy Up Gold to Salvage Savings After Ruble Collapse