Gold is money, everything else is credit.
JP Morgan
The US sanctioned Russia in March 2022 by removing her from the SWIFT international payment system. In so doing the US effectively weaponised the world’s currency system. However, we need to ask what will be the consequences for the Western fiat currencies if Russia and their allies adopt a gold backing of their currencies as now seems highly likely?
Well, it could very well lead to the destruction of the global fiat currency system.
The destruction of fiat currencies has been in the pipeline for a while but this has accelerated due to the war against Russia. Russia’s move to put a new trade settlement currency, as well as the rouble, onto a new gold standard is steadily becoming a definite. This move to a dependable and faithful gold standard has powerful advantages for not only Russia, but the Shanghai Cooperation Organisation (SCO), the Eurasian Economic Union (EAEU) and the BRICS+.
Last year at the St Petersburg International Economic Forum Putin said;
According to the IMF, today’s global foreign reserves contain 7.1 trillion dollars and 2.5 trillion euros. And this money is depreciating at an annual rate of about 8%. [as of last June] Moreover, it can be confiscated or stolen at the whim of the US if it disapproves of something in a country’s policy.
According to objective expert analysis, in the coming years a conversion process of global reserves will get under way. Reserves will be converted from weakening currencies into tangible resources like food, energy, commodities, and other raw materials. Clearly, this process will fuel further global dollar inflation.
Whilst gold wasn’t mentioned specifically, dumping dollars and euros will undoubtedly lead to a pivot back to gold and what many call sound money. Internationally this year has seen a steady increase in central banks globally buying gold. Indeed, it has hit a 55 year high in 2022. Primarily it has been emerging markets who are buying. They are essentially moving their assets away from dollars and into tangible assets.
In August last year Mexico’s central bank was debating whether to decouple from the US Federal Reserve and indeed in September they raised their interest rates higher then the Fed did. This is because they fear that as interest rate differentials narrow it could trigger a destabilising outflow of capital. It is a clear indication that a breakdown of the currency peg is underway.
Russia's next move
In the background of the war Sergey Glazyez, Putin’s senior economics advisor, has been working behind the scenes on a new trade settlement currency for use between EAEU members. An initiative they hope to extend to both the SCO and the rapidly expanding BRICS+.
The proposal for an expanded Moscow gold exchange is being headed up by Glazyez. Meanwhile Sber, Russia’s largest bank, has announced the launching of a gold-backed digital financial fund. This is incredibly significant.
The implication is that the rouble and the yuan will probably either link their national currencies to the new trade settlement currency in an Asian Bretton-Woods style arrangement, or by going onto individual gold standards.
China, who is in the business of doing business, is heavily reliant on exports to the US and Europe. However, they have long been working to create a domestic middle class and refocus their energies towards Asia and the One Belt One Road initiative.
Russia, as the world’s largest exporter of energy, as well as a wide range of raw materials and industrial commodities would stand to benefit enormously if there is a shift away from the fiat dollar.
Oil
Back in 1950 the West Texas Intermediate (WTI) benchmark price for oil was $2.57 and gold was fixed at $35 to the ounce. This was the equivalent of 2.361 grammes of gold to the barrel. Until Bretton Woods was suspended, the price of oil had remained dependably stable. The end of the Bretton Woods agreement came due to a run on the golds reserves of the US and Nixon had to shut the gold window.
Indeed, the reason gold is considered sound money is that over long historical periods it has been an exceedingly stabilising factor in the economy.
Since 1971 (when Bretton Woods ended) measured in dollars WTI oil has been as high as $140, and even fluctuated to below zero and into negative territory due to Covid lockdown policy. Since 1971 we have lived in an environment where gold has been demonetised, suppressed in dollar terms, and basically rigged.
Today the gold price of oil is 1.32 grammes per barrel, down 42% from the 1950 level mentioned earlier. As a major exporter of oil this has hurt Russia’s economy.
Of course Russia is not the only supplier of oil. It stands alongside the Middle East as a major oil exporter. From being a firm US ally we have seen in the last year the Saudi’s have shifted much closer to Russia in efforts to create the price of oil.
As such an important oil producing nation both Russia and China have sought to give the Saudi’s promises about the stability of the rouble and the yuan. It is highly unlikely that Middle East exporters wouldn’t seek assurances about future payment values relative to the existing petro-dollar.
Friendly relations leaving long term ally US in the cold
We’ve witnessed geo-politically the shift in relations that has taken place between the Saudis and the US as they have become friendlier to Russia. However, relations between Saudi Arabia and Iran have a long way to go. Still, if they can unite to price oil, that may trump religious differences? The last year has seen a definite reproachment across the Middle East between Shia and Sunni nations.
Further benefits accrue to Russia of adopting a gold backed digital currency. Due to gold’s stabilising properties Russia could expect to see interest rates, price inflation and bond yields come down.
International Capital
On the flip side is that this will be perceived as a direct attack on the Western fiat nations. International capital will leave these fiat currencies like rats on a sinking ship. Nations that have abandoned the dollar in favour of rebuilding stockpiles of energy, metals and other raw materials will be favoured. Those with handsome gold reserves will be favoured.
Measured in fiat currencies, commodities will be driven to new heights. Meanwhile fiat nations will highly likely see price inflation increases coupled with rising bond yields.
Furthermore, the US has relied on inward foreign investment and huge trade imbalances to run budget deficits. This looks likely to reverse in this new period we have entered. As central banks reach a critical juncture of selling US dollar holdings in order to buy gold and other commodities, the US will face significant financing hurdles.
The US Treasury will have to become the lender and borrower of last resort
In Europe we can already see the pressure Germany is under due to the war in Ukraine and the removal of cheap Russian gas. Will Germany flip East? As it stands the poorer nations of Europe will diverge further from the more prosperous northern nations. The tensions which have always been present will exacerbate.
As it is, I have heard from a number of sources that both the US and the European (and the Japanese) banks are technically bankrupt.
Not to forget Japan.
The Japanese economy is highly dependent on imported commodities and raw materials. Inflation is raising it’s ugly head there too, whilst the Bank of Japan is well behind the curve on raising interest rates. Indeed, having held them so low for so long it is very susceptible to rising bond yields. Here the government to debt ratio stands at over 250%.
The road is about to split where a decision will have to be taken – or one will be forced upon them.
Will central banks continue to suppress interest rates to save the financial markets and the broader economy or will they act to save their fiat currencies?
The latter will bring acute pain to a nation’s people and political consequences. Which politician wants to be responsible for that? The latter would also be an admission of failure.
The financial markets are already betting that the Fed will pivot and choose option one, warning of the dangers of higher interest rates. However, the consequences of a rapidly deteriorating currency relative to commodities and other input costs will sooner or later lead to economic activity being hampered.
Expect to see unemployment rising rapidly. Again, sooner or later the printing press just won’t work any more.
Whilst everyone was singing from the same fiat hymn sheet, the pretence that everything was fair sailing could be perpetuated. Be that as it may, the situation has changed because Russia, whether the West like it or not, feels backed into a corner and is decoupling rapidly from the petro dollar. As Russia’s allies follow suit, the holes in the current system will become plain to see.
The growing trend towards gold backed digital currencies will only pick up speed from here on out. We have reached a tipping point and a complete reversal of the casino like conditions under which corporate capitalism has been operating for decades now. The reversal of capital flows will hit the dollar hard.
Since the suspension of Bretton Woods the dollar has lost 98% of its value relative to real money (ie gold). In fact the dollar has lost 99% of its purchasing power since 1900. We are now entering its final days.
What can the little person do?
Have as little in the banks as possible. Diversify your assets away from fiat backed paper assets. Buy and hold your own commodities. Whether that’s silver, gold, copper, wood – whatever suits you. I believe cryptos will have their day, but they are unproven so don’t put all your eggs in one basket. Traders Choice Gregory Mannarino says the central banks are purposively killing their currencies, his mantra;
Be your own central bank