If Vladimir Putin thought his troops were going to waltz into Ukraine and be welcomed with open arms, he was sorely mistaken. The war in Ukraine appears to have devolved into a stalemate, a war of attrition that may last until one side runs out of either weapons or soldiers. But regardless of which side comes out on top, gold could be the big winner in the aftermath of the conflict.
The entire world order has been shaken by Russia’s actions, not just politically and militarily, but monetarily as well. No one expected an all-out invasion by one state against a non-belligerent state. And consequently the US and Europe are struggling with how to respond to a situation that very few thought would happen.
The first actions taken against Russia were sanctions, which were arguably of little consequence. After all, Russia has been under sanctions at least since 2014, when it took over Crimea, so the country has had years to prepare for even more comprehensive sanction measures.
But the scale and scope of the recent round of sanctions did have a negative effect on the lives of ordinary Russians. For a while, it looked as though sanctions might end up having a major bite. But Russia and the ruble have bounced back from the initial shock, and surprisingly could end up being largely unaffected once things are all said and done.
However, the big winner in all this could be gold. Here’s why.
Can the Gold Standard Beat Sanctions?
Policymakers in Washington and Brussels thought that sanctions against Russia would be able to send the Russian economy into a tailspin and loosen Putin’s grip on power. We were told that Russia didn’t have much to offer the West aside from oil and natural gas, and so the effects of sanctioning Russian industry and cutting off Russian banks from the West would be inconsequential to the West.
We found out, however, that that couldn’t have been any further from the truth. Russian production of industrial materials such as nickel, palladium, and aluminum make it a country that’s, if not indispensable, at least a major player when it comes to the production and sale of metals for use in industry. In fact, world nickel markets were thrown into complete disarray and brought to their knees as a result of Russian sanctions, as a major Chinese steel producer with enormous short positions in nickel was on the verge of bankruptcy as a result.
Russia is also a major producer of fertilizer, so the prospect of sanctions on fertilizers has driven up the cost of fertilizer and will have a major impact in causing food prices to rise this year. The prospect of shortages can’t be ruled out either, as many farmers may choose not to produce food if they can’t get their hands on fertilizer or if fertilizer costs make it uneconomical to produce food.
And to add insult to injury, sanctions on Russian oil and natural gas haven’t had much of an impact, as China and India have been only too willing to purchase these products from Russia, which is offering them at a steep discount. Europe is still incredibly reliant on Russian gas too, and can’t cut off its imports without sending its economies into a tailspin and causing its citizens to freeze.
And so Putin decided to take the upper hand and demand that henceforth only rubles would be accepted in payment for its oil and natural gas. With Russian banks shut off from doing business with the West, this was clearly an ultimatum that was intended to squeeze the West, and particularly Europe. Payments can still be made in dollars and euros, but must be made through a designated bank, where payments will be instantly converted into rubles.
The Russian central bank also took a very important step by essentially pegging the ruble to gold. The central bank has declared that it will buy gold at a price of 5,000 rubles per gram of gold. That would mean each ounce of gold would cost about 155,505 rubles. At current exchange rates that would equate to a gold price of just under $1,850 an ounce. This does three important things.
1. Sets a Gold Price Floor
First, it establishes a price floor for gold. If the price of gold were to drop significantly under $1,850 an ounce (which is unlikely), gold could very well start flowing into Russia to take advantage of the fixed price there.
2. Puts Russia on a De Facto Gold Standard
Second, it has moved Russia one step closer toward an official gold standard. By promising to buy gold at a fixed price, Russia has all but officially defined the ruble monetary unit as 1/5000 of a gram of gold. That’s big, and the consequences for the international monetary system could be profound in the coming years.
3. Allows for Monetary Security
And third, it ensures that Russia will have a ready supply of money. Russia is one of the world’s biggest producers of gold, responsible for up to 10% of world production. The central bank’s actions have essentially monetized gold, which has both domestic and international ramifications.
Domestically, gold demand has increased significantly as everyday Russians seek to protect themselves and their households from the effects of sanctions and the potential for any weakness of the ruble. At one point the central bank even suspended gold purchases, so strong was demand from Russian households.
There’s no denying that sanctions have had an impact on Russia’s economy. But the country was at least somewhat prepared for that to happen, and had the option of pivoting to gold, which it decided to do.
Sanctions Could Destroy the Dollar
Rather than striking a decisive blow against Russia, therefore, the sanctions may end up boomeranging and harming the dollar. With China and India thus far unwilling to play ball, this round of sanctions may end up demonstrating that being cut off from the dollar or cut off from the Western financial system may not be the death blow that the US thought it would be. And it could spur closer ties between Russia, China, and India that could result in a gold-backed or gold-based financial system that could rival the dollar.
It’s too early to state with certainty that this is the nail in the dollar’s coffin, but it certainly could be the beginning of the end. At the very least we’ll see just how successful Russia will be with its experiment at tying its currency to gold.
These are heady times we’re living in, and we could be seeing the beginning of a return to a world monetary order in which gold plays a defining role. After over 50 years of a system of floating fiat paper currencies, it’s perhaps only natural that we’re seeing a return to the safety and stability of gold.
Certainly the actions of Russian households are demonstrating the effectiveness and popularity of gold as a safe haven asset. And they should serve as a warning to American households and investors.
Gold Reasserts Itself as a Safe Haven
When it comes to economic crises and currency troubles, very often gold is the asset most people choose to protect their wealth. Its ability to defend against inflation, currency devaluation, and economic turmoil is why so many flock to it during times of crisis. And if US sanctions and Russia’s move to embrace gold end up toppling the US dollar, it could be US consumers and investors who flock to gold in the future.
The dollar being dethroned as the world’s reserve currency won’t happen overnight, but it could happen sooner than we think, even within our lifetimes. Even mainstream economists like Kenneth Rogoff see the sanctions as a potential blunder that could end up destroying the dollar and ushering in a new monetary system.
Those changes could very well come within your lifetime, possibly right smack in the middle of your retirement. Are you prepared? Will you wait for the dollar to start crashing before you protect your investments and your sources of retirement income, or will you stay ahead of the curve and protect your wealth today with a gold IRA?
A gold IRA allows you to invest in physical gold coins or bars while still enjoying the same tax advantages as a conventional IRA. And you can roll over or transfer assets from your existing IRA, 401(k), 403(b), TSP, or similar retirement accounts into a gold IRA tax-free, ensuring that you don’t have to take a tax hit to diversify and defend your assets.
If you’re serious about maintaining your wealth into retirement, call the experts at Goldco today to learn more about how gold can help you safeguard your savings and protect your retirement dreams against future changes to the world monetary system.