The Russo-Ukrainian crisis may bring about- even faster than expected- a new system for international payments.
In fact, faced with the blocking of its reserves at the Fed and the ECB, the Central Bank of Russia has decided that all countries hostile to Russia should not only pay for their imports in rubles, but also that it would buy all gold presented to it at a fixed price of 5,000 rubles per gram.
Let's do some calculations:
The CBR buys gold at 5,000 rubles per gram.
The same gram of gold outside Russia, on the world markets, is traded at $62.
This means that we have two different prices for the same gram of gold. This opens the door to arbitrage opportunities.
Which brings us to the first question:
At what exchange rate would the price of gold be the same between inside and outside Russia?
Answer: 80 rubles per dollar.
After the invasion of Ukraine, the exchange rate went from 78 rubles to 145 rubles per dollar at the height of the panic and today we are back to 82.
So, mission accomplished.
How did it happen?
Here is a crazy explanation:
Ivan Popov, the famous Russian oligarch, who no longer has access to his dollar accounts, has gold in Russia. He goes to change it at the CBR to make ends meet. The CBR gives him rubles, and immediately sells the gold for the same amount in Istanbul where it has an account. It receives dollars and sells them for rubles, which makes the ruble rise against the dollar...
And when the dust settles, the CBR will cover its short position by delivering gold supplied by the country's gold mines.
So it is hard to imagine the ruble falling violently against the dollar again.
This leads me to the following question: could the ruble rise sharply since, from now on, hostile foreigners will have to buy their raw materials in rubles, which may create a strong demand for the Russian currency?
Let's assume that this new demand brings the ruble to 70 rubles per dollar.
At that point, the importer has the choice of paying the full ruble price to buy his raw materials, or using his rubles, which he exchanges for gold on the Istanbul market, and delivering the gold at an equivalent of 80 rubles per dollar.
Any financial manager will choose the second solution and pay in gold.
But the CBR will demand the delivery of physical gold and refuse any paper gold that could be confiscated.
Now, there have been persistent rumors for a long time that some of the major US banks have sold far more paper gold than they have gold in their vaults.
This means that they are short on gold, and that they will probably have to cover these positions since more and more physical gold will disappear and never come back ...
And as usual, it's the one who panics first who will lose the least.
Watch the stock prices of the major U.S. banks... if they start to fall, you'll know why.
But let's stop with the technicalities and get to the point. The decisions taken by the Russian authorities consecrate the end of the so-called Bretton Woods regime, since this means that if the United States needs Russian raw materials, it will not be able to pay with green pieces of paper, but will have to give either:
3. Products or services of equivalent value
In the new system, if it becomes widespread, it means that no country will be able to have deficit current accounts until the end of time, forcing others to accept its currency in payment. This means that in the long run, the famous imperial privilege (Rueff) of being able to exchange goods for paper is dead and buried. And so if I look at the new system proposed by the Russians, I understand that they want to replace the "standard dollar exchange" which has existed since 1945 with a new system based on a fixed relationship between the price of gold and the price of energy, with energy being replaced by the ruble, as the variations between the prices of the ruble and energy are correlated, as my first graph shows:
Changes over two years on oil price and ruble rate
Obviously, the Russian authorities have decided to do without the dollar and the euro, and those who want to buy Russian raw materials will have to use either gold or the ruble.
And as Russia is the only country that has continued to invest in these industries, the other countries being too busy sacrificing themselves on the altars of Gaia, they will be forced to go under the Russian knife.
And when they do, Russia will immediately appear as an economic giant, but also as a financial giant, since Russia will be the most solvent country in the world.
Of course, interest rates in Russia will drop from 20% to 2% as the ruble will be pegged to gold, making it easier to invest in raw materials in Russia.
If these maneuvers succeed, it will be extraordinarily bearish for the dollar and bullish for gold, as all those who had accumulated foreign exchange reserves to be able to buy oil will convert them at full speed to buy gold ... to be able to buy oil, again.
In this new world, the European countries that have a lot of gold will not want to share it with those that do not, and so the euro will disappear.
There are two possible solutions for the United States, and none for Europe:
Start World War III, which would be a bit risky
Massively revalue the US gold stock, the largest in the world, so that their debts are again at least partially covered by the local gold stock
Which brings me to my last question: How much should this revaluation be?
Let's first look at the ratio between gold and the stock market, which always returns to its average of 1.6.
Gold against SP 500
A quadrupling would do the trick, which would bring gold to $8,000/ounce...
And if I look at the ratio of the value of US gold reserves (an asset) to the value of foreign exchange reserves deposited at the Fed on behalf of foreign central banks (a liability of the US), we would have to multiply the price of gold by about six times for the ratio to balance out around 100.
This would bring us to $11,000/ounce.
Let's move to $10,000/ounce and call it a day.
US gold reserves vs. foreign exchange reserves deposited at the Fed on behalf of foreign central banks
Buy gold and buy gold mines, which are growing like wildfire since the invasion.
Original source: Institut Des Libertés
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