Questions will start to be asked about the continued viability of the US dollar as a global currency
The Central Bank of Russia has announced that “In order to balance supply and demand in the domestic market of precious metals, the Bank of Russia will buy gold from domestic credit institutions at a fixed price of 5,000 Russian rubles per gramme from 28 March to 30 June 2022. The established price level makes it possible to maintain a stable supply of gold and smooth functioning of the gold mining industry in the current year. After the period specified, the purchase price of gold can be adjusted taking into account the emerging balance of supply and demand in the domestic market.”
The moves could be game-changing should other countries follow suit, with particular impact on the US dollar. While not yet a deliberate link from the standard practice of comparing the Ruble to the US Dollar, if maintained it could have significant, global economic impacts. To move to a Gold standard, Russia would need to offer buying and selling at both ends of the equation and is has yet not determined a fixed price for gold in rubles, it has only carried this practice forward until the end of June.
Russia has some of the world’s largest proven (uncirculated) gold deposits and mined gold reserves in the world. The United States however, although it has also built-up significant gold reserves, has pegged the US dollar to debt. Interestingly, the US dollar has declined 80% against the value of gold in the past two decades. China also has significant gold reserves.
While the US has placed sanctions on the ability to buy Russian gold, the linking of the national currency to a temporary fixed gold value places a different emphasis on the current financial struggle between the US and Russia. Questions will be asked about the real value of the US dollar as it is not pegged to hard assets. These questions will get louder if other countries such as China, and India, two of the largest users of gold, decide to peg their currencies to a basket that includes the precious metal in addition to the existing currency values – typically the US dollar, Canadian dollar, Euro, British Pound, Japanese Yen, Swiss Franc, and the Swedish Krona. Were other major economies to let it be known they were including the Gold value within their currency baskets; it would indirectly, and partially link the US dollar to asset instead of debt values.
These are unknown waters; however, the likely impact would be pressure on the US dollar at a time when its economy is already under pressure. It is a difficult balance presented to Washington, while it might have sanctioned Russia against use of the US dollar, it cannot realistically do so to any other major economies. How a move to use a new gold standard or to partially introduce one will be the subject of much global economic study these next few weeks. Washington will be concerned, as purely by bringing up the subject the value and reliability of the US dollar as a global currency is being called into question. Those voices and theories can be expected to become louder.