Last week Russia’s central bank announced a major change. It will now purchase gold from local banks at a fixed price. What are the implications on the gold price of this move?
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…the Russian central bank will pay a fixed price of 5,000 roubles ($52) per gram between March 28 and June 30, the bank said on Friday. This is below the current market value of around $68.
The central bank added that the resumption in buying will ensure supply and uninterrupted production of local gold.
Two weeks ago, Russia’s central bank announced that it was halting its official gold purchases from local banks due to a surge in demand from regular consumers.
This is because Russians went on a gold buying spree in March to protect their savings as the ruble collapsed. Major banks in Russia reported a rush of consumers investing in bullion and coins.Source.
What is the Rationale Behind Russia’s Fixed Gold Price?
An on to it reader Gary, comments and asks:
Russia has made two earth shattering statements,
1. Pay for gas etc in rubles.
2. Their Central Bank is buying gold at a discount rate of 5000 Roubles to the gramme. No one is going to sell for less if they have a choice of selling at higher prices. Those living in Russia may not have a choice.
My question is…
Is this an attempt to drag the value of the Rouble up to a fixed peg against the price of gold, and will this have an effect on gold prices here in the west?
The Rouble has since this announcement gained value back to its original level prior to the Ukrainian invasion, for possibly many reasons. We will have to wait and see if the Russian Central Bank will alter its gold buying price relative to the Roubles value.
So let’s take a look at a few opinions on this move by Russia to buy gold at a discount from its banks. But also importantly the requirement to buy gas in roubles or gold…
A Reminder of the U.S. Response to the Great Depression
Gainesville Coins Everett Millman says it reminds him of what the U.S. did during the “gold standard” years:
“I am reminded of what the U.S. did in the middle of the Great Depression. For the next 40 years, gold’s price was pegged to the U.S. dollar at $35. There is a precedent for this. It leads me to believe that Russia’s intention would be for the value of the ruble to be linked directly to the value of gold,” Gainesville Coins precious metals expert Everett Millman told Kitco News. “Setting a fixed price for rubles per gram of gold seems to be the intention. That’s pretty important when it comes to how Russia could seek funding and manage its central bank financing outside of the U.S. dollar system.”
Gold is one of the most logical international currencies to use when you are trying to get around sanctions, Millman added.Source.
However western nations have also banned gold transactions with Russia.
So at first glance this would seem to put a big hole in any plan Russia might have.
However, our secret investment advisor points out quite rightly:
“Remember, gold is fungible: one ounce looks like another. So even if Europe and North America are still not allowed to buy or sell gold to Russia, there are lots of neighboring nations to Russia’s south that will: Iran, India, and China spring to mind. Western gold could flow into these nations for further trade with Russia.”Learn more about our secret investment advisor here.
Ronan Manly in ZeroHedge Calls This Move “A Paradigm Shift Western Media Hasn’t Grasped Yet”
“Ronan Manly has written an excellent piece winding the threads together. He believes this move by Russia may have put a floor under gold of around $1940. About where the price sits right now.
By offering to buy gold from Russian banks at a fixed price of 5000 rubles per gram, the Bank of Russia has both linked the ruble to gold and, since gold trades in US dollars, set a floor price for the ruble in terms of the US dollar.
We can see this linkage in action since Friday 25 March when the Bank of Russia made the fixed price announcement. The ruble was trading at around 100 to the US dollar at that time, but has since strengthened and is nearing 80 to the US dollar. Why? Because gold has been trading on international markets at about US$ 62 per gram which is equivalent to (5000 / 62) = about 80.5, and markets and arbitrage traders have now taken note, driving the RUB / USD exchange rate higher.
So the ruble now has a floor to the US dollars, in terms of gold. But gold also has a floor, so to speak, because 5000 rubles per gram is 155,500 rubles per troy ounce of gold, and with a RUB / USD floor of about 80, that’s a gold price of around $1940. And if the Western paper gold markets of LBMA / COMEX try to drive the US dollar gold price lower, they will have to try to weaken the ruble as well or else the paper manipulations will be out in the open.
Additionally, with the new gold to ruble linkage, if the ruble continues to strengthen (for example due to demand created by obligatory energy payments in rubles), this will also be reflected in a stronger gold price.Source.
He concludes by saying:
“The Bank of Russia’s move to link the ruble to gold and link commodity payments to the ruble is a paradigm shift that the western media has not really yet been grasped. As the dominos fall, these events could reverberate in different ways. Increased demand for physical gold. Blowups in the paper gold markets. A revalued gold price. A shift away from the US dollar. Increased bilateral trade in commodities among non-Western countries in currencies other than the US dollar.”
What Will Happen on June 30?
So we’ll watch with interest for the 30th June to see if Russia sets a new “fix” for gold then. Until then we’d probably side with our secret investment advisor. That being, it is probably too early to make any definite predictions on what this move by Russia will result in. These are the questions that will remain unanswered until then…
“And what happens after this Russian ‘exchange window’ closes on June 30? Will it be extended? Will Russia announce a new money based at least on part in gold? Will there be a new official exchange rate between the RUB and gold?
All of these questions are very much up in the air.”
But the one thing that does seem certain, is that this is another nail in the coffin of the USD global reserve currency system. Its slow death may just have been sped up a little. As other countries come to realise the risks to them of being beholden to the whims of the US leaders.
We will likely see other countries also step up their purchases of gold. Do you have enough gold reserves of your own? Check out the range of gold available here.