Russia and Gold

I went out for coffee and when I got back, Microsoft had riddled windows with spyware, a deadly virus was released on the world, Australian police used drones to enforce lockdowns, Antarctica had heatwaves, plastic became a plague, artificial intelligence is ruling our lives and Russia invaded Ukraine result-of-which we're on the verge of WW3. Hoorah!

It is worth attempting to scrape some value from the extreme situation we find ourselves in. Ukraine 2022 provide a unique opportunity to stress-test one of the bigger precious metal theories from the recent decade - the notion that a sudden massive demand for real physical gold would collapse the western banking system.*

Being immune from direct experimentation has allows this concept to thrive and mutate over the years. Here are some of the big variants:

- The 'paper gold' derivatives system would explode
- The United States Dollar would 'collapse'
- The major bullion banks would be crashed
- The Freegold era would be ushered in
- The COMEX would bust from individuals standing for delivery

This myth is officially busted. Here is the test in all it's simplicity: all Putin needs to do is to demand gas and oil payments in physical gold and hey-presto the economic system of his adversary would be on its knees without even firing a shot. Russia has the means, the motive and the opportunity - surely this apparently very-obvious vulnerability would have been exploited already if it were real? Or maybe Putin didn't get the memo on 'buy silver, crash JP Morgan'?

I raised an eyebrow when reading they had 'pegged' the Rouble to Gold starting 28th March 2022 giving the initial impression they were selling energy for gold using the Rouble as a proxy.  As I understand it, the arrangement wasn't a true gold standard because exchanging Roubles for central bank gold at a fixed price wasn't a feature - and in any case by 7th April 2022 Russia's central bank ended the fixed price arrangement so whatever they were experimenting with ended nearly as abruptly as it began.  The price of gold showed nothing noteworthy during that time period (my highlight).


In March, six Russian gold refineries had their accreditation temporarily suspended from The London Bullion Association (LBMA) which means they can't sell newly refined bars into the London market however 'Gold and silver bars produced by the refineries while they were accredited remain valid to trade, according to LBMA rules', which is why Russian bars are still present in the GLD bar listing. At first I thought this might choke the physical gold supply but article explains it away: "Bankers and traders have said the removal of Russian refiners would have little impact on the market and Russian metal would still find buyers in places such as China and the Middle East". Quite, since Russia's supply is quoted at ~330 tonnes/year. No disruption so far - could it be the physical gold market is robust?

Personally I still favour the idea of Freegold - having Gold as the ultimate neutral global reserve asset ** floating against all other currencies would limit the ability of governments to wage war and reduce their capacity for totalitarian measures against the general public. But until that happens we owe it to ourselves to abandon childish mythology in our understanding of the world.



* Market 'manipulation' is a separate topic - in 2022 we know regular collusion and manipulation of futures markets by the big players are very real and are well documented thanks to the myriad fines issued (link).

** At some point in history the US Dollar will no longer be the global reserve currency.  On this topic I recently came across an exposition by Ray Dalio (43 minute animated summary of his book - link).

4 comments:

Bron Suchecki said...

That was a long coffee Warren. Good to see you back.

Warren James said...

Thanks Bron - I hope to stick around - it will be an important decade for gold.

Wanted to share some annecdotal stories about buying a few gold coins in United Kingdom during the first weeks of the Ukraine war. A bullion shop in London actually terminated my shopping account because I failed their residency tests - although I am not a Russian Oligarch trying to bypass sanctions it seems they had plenty of similar activity around that time, enough to quickly dismiss customers who didn't fit the mould. The second place was able to secure an order but they initially quoted 7-weeks for delivery - which ended up being only 3½ weeks.

I know of course that the market is completely different for coins vs. central bank bars but the experience did force me to realise that exchanging dollars for phyzz during a ground-shaking financial crisis would be impossible because of the paperwork bottleneck alone - individuals would be basically powerless and the big established players would scoop up anything available. p.s. I think crypto is a waste of time.

Bron Suchecki said...

Warren, could you send me an email, it appears your old email is no longer working.

You may find this youtube from CMP Group of interest https://www.youtube.com/watch?v=muy5UtaSB9g specifically at 15min mark

AdvocatusDiaboli said...

Nice to read from you again, hope and wish you all the best.
AD