When the history of the war in Ukraine is finally written, the most long-lasting effect of it may not be its geopolitical ramifications or even geographical changes. In fact, it may be the changes to the financial system that have resulted from the war that will be its greatest impact. While it’s still too early to say definitively what may occur, the pieces are being put into place that could render the financial system of the future far different from the one that exists today.
From Bretton Woods to the Future
Since the Bretton Woods system broke down in 1971, the world has been operating under a completely fiat monetary system that has no relationship with gold or silver at all. It’s a completely unprecedented era in history, and one which has been disastrous for the value of national currencies.
Like Bretton Woods, the current monetary regime features the US dollar as the primary reserve currency of the world. That’s an arrangement that every American alive today has taken as a given. But how much longer can it last?
Empires whose currencies become the dominant one have a tendency to want to take advantage of their position, devaluing their currency in order to gain an advantage. That’s how the Roman Empire declined, and it’s what the US dollar has done over the past century. But things really accelerated after President Nixon closed the gold window in 1971.
Because of the US dollar’s dominant position, and the dominance of the US banking sector, the US government has felt that it can weaponize the dollar and the banking system when it wants to. And that’s just what happened when Russia decided to invade Ukraine.
The Financial Changes That Are Coming
President Putin’s decision to invade Ukraine met with sharp disapproval from the West. And the result was that Western nations subjected Russia to significant sanctions.
Among the most important ones were that seven Russian banks were cut out of the SWIFT bank messaging system. And Russia was banned from the London Bullion Market Association (LBMA), the organization responsible for publishing the London gold price and setting standards for the international gold trade.
Both of those moves could end up boomeranging back to harm the West. These sanctions have driven Russia and China to cooperate more closely, including the development of alternative bank messaging systems to form an alternative to SWIFT. And now Russia is proposing a new gold exchange to rival the LBMA.
The LBMA has not been without its share of criticism over the years, particularly with regard to how it sets gold prices. Its gold fix and now LBMA gold price are set through an opaque process involving sixteen LBMA members involved in a twice-daily electronic auction process. And as a result, there have been no shortage of attempts to try to manipulate gold prices over the years.
Another downside to the gold price is that it is heavily influenced by derivatives trading. Many gold trades are undertaken by speculators who don’t own gold and who don’t have any plans of taking delivery of gold. They’re solely interested in profiting from changes in the gold price. But their actions impact the price of gold for those of us who want to buy physical gold.
Russia’s proposal to set up its own gold exchange, therefore, could shake up the international gold trade. Russia is normally the second- or third-largest producer of gold in the world, behind China and nearly neck and neck with Australia. And if it cooperates more closely with China, it’s possible that much of the world’s gold production could end up trading on Russian or Russian-aligned gold exchanges.
If something like this were to happen, it could shift price discovery away from Western exchanges towards Eastern exchanges. And if the Russian exchange takes a dim view towards derivatives or requires that traders show proof of physical gold ownership or desire to take physical delivery before trading, it could give a better indication of the actual market value of physical gold than Western markets.
Physical vs. Paper Gold
Many people have speculated over the years that the gold price is being unfairly and unnecessarily suppressed by traders who don’t have physical gold and are merely playing around with various gold derivatives. So if Russia is able to successfully start a gold exchange that prioritizes physical gold, with a correspondingly higher price for physical gold vs. paper gold, that could incentivize more producers to market their gold in Russia or linked exchanges than in the West.
We’re obviously still only in the early stages of this competitive salvo, and plans like these can take years to bring to fruition. But it’s not out of the question to see the possibility that a Russian-Chinese alliance could upend the world gold market. And with rumors of a possible gold-backed currency replacing the dollar eventually as the preferred currency for international trade, moves made in gold today could have an impact in the future.
The benefit, of course, would be for owners of physical gold. While there are certainly many people who are happy to own a few shares in a gold ETF, the drawbacks of gold ETFs and other forms of paper gold are well known.
That’s why people who are serious about gold investment want to own physical gold. Shares and derivatives just won’t cut it. Whether it’s owning gold through a gold IRA or buying gold coins to store at home, investors who want physical gold want to be able to hold the gold they own in their own hands, or at least be able to take delivery of it whenever they choose to.
With rising interest rates, high inflation, and the prospects for recession growing all the time, more and more people are making the decision to buy physical gold to help protect their financial well-being. Goldco is committed to helping our customers benefit from owning physical gold, which is why we work with mints around the world to source authentic precious metals coins that you can hold in a gold IRA or store at home. Contact one of our experts today to learn more about how gold can benefit you.