What a two weeks this has been! First, Russia announced they would only accept rubles (or of course gold) for gas, then followed by a 5,000 ruble bid per gram through June 28 for any sellers of gold. As mentioned in my article last week “Did you hear the shot” Did You Hear The Shot? (jsmineset.com) this was THE biggest (and most ingenious) news since 1973.
Ingenious? Absolutely! I have been on record for many years that COMEX/LBMA/LME would eventually be broken and forced into a failure to deliver. I stand by that, but I must admit that the method being used by Russia is not what I had envisioned. I was wrong. My thought process was that a cartel, or foreign sovereigns (or just one sovereign) would load up on contracts and demand delivery. This type of action would certainly have elicited the response of the US military.
Rather than a frontal assault on deliverable gold, Russia has chosen to let the world assault the exchanges via arbitrage, let me explain. When Russia first announced their bid for gold grams, because the ruble had fallen so dramatically after their operations in Ukraine began, the math worked out to only about $1,450 per gold ounce. Naturally the gold bugs panicked because the bid was so low. What they missed was looking at the 30 days before the invasion. If that average ruble price was used, then gold would have been bid near $2,000. In the days that followed Russia’s bid, we have seen the ruble continue to strengthen where the 5,000 ruble bid is now just under $1,900. In fact, early last week when gold (and silver) were attacked on the COMEX, price got to within about $20 of Russia’s bid and then immediately rallied back above $1,900. I give you this background to see where this will lead…
So here we are, Russia will only accept rubles (or gold) for their gas, it can only be a short time before rubles will be demanded for ALL Russian commodities. They have created their own positively self-reenforcing loop! Very few nations hold any rubles as part of their monetary reserves. On average, global central banks hold roughly 60% of their reserves in dollars. What this will do is force buyers of Russian goods to sell some of their monetary reserves (whether they be dollars, euros, yen, pounds, or what have you) to purchase rubles for payment.
This is almost an exact mirror of Kissinger’s deal with the Saudis which created the petrodollar. Without a doubt, the ruble will strengthen versus the dollar (and all the other fiats) because dollars etc. will necessarily be sold to purchase rubles for trade settlement. The genius of this is that as the ruble strengthens, the bid for gold grams will go higher and higher and thus revaluing Russia’s gold reserves higher. But this is only part of the genius …as the West is and has been massively “short” paper gold contracts used to suppress price. Vladimir Putin well knows that the Achilles heel to the dollar and all other fiats is Gold, or better described, the PRICE of gold in those fiats. As the gold price rises, confidence in those fiats wane.
So rather than a frontal assault on exchanges which would be seen publicly as an attack, Mr. Putin decided to act in a manner that benefits Russia …without forcing an immediate and public attack. Make no mistake, the outcome and consequences will be exactly the same, but no one can claim Russia is demanding anything other than to sell their resources in their own national currency AND accumulate more gold reserves along the way! The “consequences” by the way are extremely ruble friendly and dollar negative.
Another aspect that I must admit I missed is this; prior to Russia’s announcement, who in the world would have projected it would be the ruble that took down the dollar? It was only 30 years ago that the ruble, and thus the Soviet Union collapsed as they ran out of hard currency (gold). In all the 30 years since, I have never seen or heard of the scenario where the ruble takes down the dollar but here it is and in your face! Year after year and bubble after burst bubble, the West has financially engineered themselves into a corner. More and more debt was assumed and paper derivatives of all sorts were written at the expense of commodity pricing. That has now changed and the massive commodity shorts will be burned in nickel fashion!
The world has changed more dramatically in the last month than any time since 1971 when the US defaulted the gold standard and 1973 when the petrodollar was cooked up. As a child of the 1960’s who practiced “duck and cover” in elementary school, I find it astonishing that it took Russia to start the world back on the road to REAL and FAIR settlement. Oh the irony!
Lastly, over the years, Wall St. has been fixated on many things from money supply, to unemployment, the 10 yr Treasury yield and even overnight repo loans. Now, the only thing that matters for the foreseeable future will be the dollar/ruble cross exchange rate. In essence, a financial war between Russia and the US via their currencies has begun. I do not envision this to be a protracted “financial war” for the simple reason that the US and the rest of the West is so highly indebted and financially entangled via derivatives. The nickel market implosion is the road map to financial and living standard hell for the West, other commodity markets will ultimately follow as sure as the Sun will rise tomorrow. If you wondered what the reset will look like, just keep your eyes open and watch what unfolds over the next several months!