Ruble with gold backing could be a game-changer

The Bank of Russia backed the ruble with gold purchases. But more important, it is doing this at a fixed rate of five thousand rubles ($59) per gram between March 28 and June 30, thereby raising the chances of Russia going back to the gold standard for the first time in nearly 100 years.

Suppose Russia decides to take its next move, which was recently proposed to sell its commodities in rubles. These actions could have a massive impact on the ruble, US dollar, and global economy.

What makes fixing a price to buy gold for rubles so critical?

In offering to purchase gold at Russian banks at a set cost of five thousand rubles for a gram, The Bank of Russia has connected the ruble with gold. Since gold is traded in US dollars, it has set a floor price for the ruble in US dollars.

This linkage has been on the move since March 25, when it was the time that the Bank of Russia made the fixed price announcement. It was traded at about 100 to the US dollar, but it has ripened and is currently at an 80-to-1 ratio to the US dollar. Why? Because gold is trading internationally at around $62 per gram, which is the equivalent of (5,000 / 62) = approximately 80.5, the markets or arbitrage brokers have noticed, pushing the exchange rate of RUB/USD up.

Thus, the Russian currency now has a base to US dollars regarding gold. Gold does have the base also because five thousand rubles per gram correspondents to 155,000 rubles per troy ounce of yellow metal, and with a base for RUB/USD of around 80 at the time of this writing, that's an average gold price of $1,940. And should the Western gold markets for paper of LBMA and COMEX exchanges attempt to push down the US dollars gold prices, they must try to weaken the ruble, too; otherwise, the paper manipulations of paper trading contracts will be exposed to the world.

In addition, due to the gold to ruble connection in place, should the Russian currency continue to increase in value (for instance, due to the demand generated by required energy payments made in rubles), this will be mirrored in a higher the price of gold.

How does it imply the crude oil?

Russia is the largest global natural gas supplier and the third-largest crude oil exporter. Russian demands that foreign purchasers (importers of Russian gas) have to pay for this natural gas with rubles; this instantly links the cost of natural gas to the ruble and the price of gold. Thus, Russian natural gas can now be linked by the Russian currency to gold.

This can be accomplished using Russian crude oil. If Russia starts to require the payment of crude oil exports in rubles, there would be an immediate and indirect peg with the gold (via an established price ruble-gold connection). Therefore, Russia might begin accepting gold as a direct payment for crude oil exports. This could be applied to all commodities that are not limited to crude oil and natural gas.

What does this indicate regarding the price of gold?

Using both sides of the equation, i.e., linking the gold to the ruble and linking energy payment to rubles, the Bank of Russia fundamentally alters fundamental assumptions that underlie the international trade system while accelerating the transformation of the global monetary system. The wall of buyers seeking real gold to use as payment for actual commodities may be able to blow up the paper gold marketplaces of LBMA along with COMEX exchanges.

A fixed-price peg placed between gold and rubles creates a floor for the rate of RUB/USD, but it also serves as a sort of floor for the price of the US dollars gold prices. Beyond that, the linkage of gold to energy-related payments is the primary issue. The rising demand for rubles could boost the RUB/USD exchange rate and increase the price of gold because of the fixed ruble-gold linkage. If Russia starts to accept gold as a direct crude oil payment, it will represent a significant paradigm shift in the price of gold as it will tie the crude oil price directly to the price of gold.

That is to say, Russia could start declaring that they will take one gram of gold for every barrel of crude oil. It doesn't need to be one gram, but it should be reduced compared to the current crude oil benchmark price to increase taking-up, e.g., 1.2 grams per barrel of oil. Buyers then rush to buy physical gold to purchase the Russian oil exports. This will create massive tensions in New York and London exchanges in the paper gold market. The fundamental discovery of the gold price is built on unallocated and synthetic fractionally-backed, cash-settled "gold" and gold price derivatives contracts.

Ruble, and what is the significance?

The ruble's link to gold by the Bank of Russia has put a floor under the RUB/USD rate, stabilizing and strengthening the Russian currency. The demand that the natural gas exports be paid in rubles (and perhaps crude oil and other commodity products later on) could again serve as stabilization and help Russia's currency. If the majority of the international trading market starts accepting the use of rubles in commodity payment arrangements, it could push the currency to become a virtual global currency. In the same way, any move made by Russia that accepts direct gold payments for oil transactions will result in more gold from the international market flowing into Russian reserves, which will boost the financial position of the Bank of Russia and, in turn, strengthen the Russian currency.

Discussion of a formal gold-backed ruble could be premature; however, the possibility of a gold-backed ruble is something that the Bank of Russia has considered.

What does this indicate regarding the other currencies?

The world's monetary system is changing quickly, and central banks all over the globe are paying attention. Western sanctions like the freezing of the vast majority of Russia's foreign reserves as well as attempts to restrict Russian gold have revealed that the rights to property on FX reserves that are held overseas might not be protected as well as that the gold of central banks stored in vaults, at the New York Fed, and the Bank of England is not exempt from confiscation.

What does this indicate regarding the US Dollar?

From 1971 onward, the reserve position for the US dollar has been supported by crude oil. The time of the petrodollar was feasible due to the continued use by all nations of US dollars to exchange crude oil and the US's ability to block any competition to the US dollars.

However, we see an early indication of the closing of the 50-year-US dollar domination and the emergence of a new multilateral commodity and gold-backed monetary system. The freezing of Russia's foreign currency reserves is the catalyst. The huge commodity-rich countries around the globe, such as China and oil-exporting countries, might now think that it is the best time to shift towards a more fair monetary system. It's not surprising since they've been talking about the issue for years.

While it is yet too early to determine what impact the US dollar will be, it will undoubtedly emerge from this time much weaker and much less dominant than before.

What are the consequences?

The Bank of Russia's decision to tie the ruble to gold and tie payment for commodities in the Russian currency to gold is a paradigm shift that the Western media hasn't yet realized. When the dominoes fall, the events could be reverberating in various ways. Demand for physical gold will rise. The paper gold markets will explode. Revaluation of the gold price. The move away from the US dollar. More trading between commodities in bilateral commerce among countries of the non-Western region in currencies other than the almighty US dollar.

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