Russia’s “gold peg”: Lessons for Western investors

by
Claudio Grass
My articles My booksMy videos
Follow on:TwitterLinkedIN

It is undeniable that the ongoing crisis in Ukraine has polarized Western societies to an extent unseen in decades in any other foreign conflict. For over a month, we have been bombarded unceasingly by all mainstream media sources with reports and stories about Russia’s invasion and this conflict has already created deep social rifts in many other nations, and EU members in particular. No matter where one stands on this topic and no matter how passionate one might feel about it, I believe we can all agree that Western media has been far from unbiased in reporting relevant developments from the front. Neither has Russia state media naturally, as we might have expected, especially in the context of an ongoing conflict.

This considerable “gap” between the two versions of reality presented and propagated by the opposing sides creates a heavily contorted and skewed understanding of events in the minds of most citizens and voters, which in and of itself is extremely dangerous and can very easily dim the hopes for a swift and peaceful resolution. But it is also dangerous for investors, especially for those of us who understand the importance of geopolitical dynamics and shifts. There are essential pieces of information and consequential developments that most Western investors and ordinary savers are not being fully and accurately apprised of.

One such story, that I found to be very interesting and shockingly underreported, was the announcement by the Russian central bank on March 25, that it would buy gold at a fixed price of 5,000 roubles a gram until June 30. Prior to this announcement, the Russian ruble had dropped to record lows against the U.S. dollar, due to concerns about the heavy sanctions imposed by NATO allies. However, as a result of the decision to peg the currency to gold, the rouble saw a remarkable rebound, quickly returning to pre-invasion levels. Soon thereafter, on April 8, the Russian central bank announced that it would scrap its previous plan of buying gold at a fixed price from local banks and instead it will continue buying at a “negotiated price”, because of a ”significant change in market conditions”.

Now, if we could put political convictions, sentiments and affiliations aside for a moment and we look at this story objectively, there are quite a few important signals that we can separate from the noise. For one thing, the initial announcement to essentially peg the rouble to gold, in response to the free-fall it suffered as a result of the sanctions, clearly shows that everyone, even central bankers, still understand very well the trust that the market has in the yellow metal.

The scheme obviously worked, as expected, and the boost that the currency received provided further confirmation of what long-term gold investors always knew. Given the fact that fiat money is backed by nothing but faith in the government, when that faith crumbles, so does the perceived value of the pieces of paper that it printed. When faced with such a crisis, that can and has in the past proved to be existential, the State, any state, quickly turns to the same safe haven, and the trust it inspires, as any other investor.

Furthermore, the second announcement of the Russian central bank, to reverse its initial stance, also speaks volumes to investors who understand both monetary history and the dynamics of the current system. Even though Russia is one of the world’s biggest gold producers, no State under this system could afford, or would politically risk, to “tie the hands” of its central bank.

Pegging any fiat currency to gold would immediately put an end to all the reckless money printing operations and all the populist fiscal policies we’ve grown accustomed to. Especially in times of actual conflict, this would be very dangerous politically, not just for the Russian government, but for virtually every other political establishment on the planet too.

For precious metals investors, this entire affair clearly serves as yet another confirmation of the essential role that gold plays, in particular in times of crisis. And especially as Western citizens, after having been told by central bankers and politicians for decades that gold is a useless rock and a “barbarous relic”, the lesson here is even more important: “Do as they do, not as they say”.

Claudio Grass, Hünenberg See, Switzerland

This article has been published in the Newsroom of pro aurum, the leading precious metals company in Europe with an independent subsidiary in Switzerland.

This work is licensed under a Creative Commons Attribution 4.0 International License. Therefore please feel free to share!

You Might Also Like

JERM WARFARE WITH ASTRID STUCKELBERGER & CLAUDIO GRASS & BREAKING FREE FROM COVID MADNESS

2022-03-09

Astrid Stuckelberger and Claudio Grass have been on my podcast before.

Central Banks’ record gold stockpiling

2022-01-22

According to recently released data by the World Gold Council (WGC), as of September 2021, the total amount of gold held in reserves by central banks globally exceeded 36,000 tons for the first time since 1990. This 31-year record was the result of the world’s central banks adding more that 4,500 tons of the precious metal to their holdings over the last decade and it provides ample support for the investment case for gold, in both directly performance-related terms, but also from a big picture perspective. 

Lessons from 2021: The rational way out

2021-12-27

As we are all preparing to bid farewell to 2021, there is a general feeling that this year, much like its predecessor, will not be missed. To my mind, however, it is clear that even though the past 12 months didn’t really teach us anything new, they did help cement the lessons of 2020 and spread important ideas to people who might otherwise have never come to question anything about the status quo.

Government interventions and the Cobra effect – Part II

2021-12-03

Of course, one of the most important and consequential parts of the incredibly complex organism that is the economy is money itself. It is its lifeblood and as the song goes, “it makes the world go round”. Therefore, manipulating the currency itself is one the most dangerous and hubristic things a central planner can do, which probably explains why it’s their favorite pastime.

Government interventions and the Cobra effect – Part I

2021-12-02

Almost two decades ago, German economist Horst Siebert coined the term the “Cobra effect” to describe the real-world consequences of “well-intentioned” government interventions that go awry and produce the exact opposite results from what they aim for.

Corruption of the currency and decivilization – Part II

2021-11-03

Many rational economists and students of history have written countless analyses on the gold standard and the terrible impact that its end has had on the world economy. However, as the Fall of Rome clearly demonstrates, the implications of the introduction of the fiat money system and of the limitless manipulation of the currency by the State reach much further.