Buy Gold But Only For The Right Reasons

The alternate financial “news,” such as Zerohedge, has recently been flooded with an increasing number of ridiculous articles that claim Russia has “profoundly altered the international trade and monetary system by linking the Russian ruble to gold.” Click here for just one example of this nonsense. According to this muddy thinking, Russia’s announcement that it will buy gold at 5000 rubles per gram puts “a floor under the price of gold and the ruble.” Simply put, it is a ridiculous claim that is easily refuted.

Russia’s willingness buy gold at 5,000 rubles per gram is irrelevant. It does absolutely nothing to tie the ruble to either gold or the US dollar. If the ruble sinks back down to 150 rubles to the dollar, for example, Russia’s central bank offer will be to buy gold at half of gold’s dollar price. How many people will sell gold to Russia’s central bank under those circumstances? Only people who have a gun pointed at their heads.

Given the brutal Russian invasion of Ukraine, I won’t rule out the idea that guns could eventually be pointed at the heads of Russian gold mining executives. However, even if Russia confiscated gold at the point of a gun, and successfully paid the under-market prices of 5,000 rubles per gram, there would still be no link between gold and the ruble. The article writers invariably claim that Russia’s offer to buy gold is a “floor” on the price of gold. That is false. It is NOT a floor. It is a cap.

To create a gold standard, Russia must not merely offer to BUY gold for 5,000 rubles per gram. It must offer to SELL it at that price. The willingness to sell gold in exchange for a fixed number of units of currency is what links a currency to the value of gold. However, the Russian state cannot afford to do this. The ruble will likely continue to be under pressure, as the result of strict sanctions. That means more and more people will want to trade rubles for gold. If Russia offers to sell unlimited amounts of gold for 5,000 rubles per gram, unlimited numbers of people will buy every single ounce of gold the Russian central bank has on offer.

The buyers, incidentally, will not be limited to Russians. Gold will quickly fly out the central bank’s vault and out of the country as well, sanctions or no sanctions. One way or another, legally or illegally, Russia would quickly be stripped of its gold reserves in record time. There is just no way around this fact. But, don’t get me wrong…

I believe in the gold standard. A strict fix between currencies and gold would benefit most people. It would end the huge wealth disparity between those with close ties to the world’s major central banks versus those outside the loop. The problem is that this is not that. It is merely an absurd fantasy about a supposed link between the ruble and gold that should be ignored. Nothing Russia has done links the ruble to gold or the US dollar.

Contrary to other claims, Russia’s offer to buy gold at 5,000 rubles a gram does not harm the US dollar. The ruble has temporarily recovered from the depths of its collapse, but that is not the result of any link to gold. It is purely the result of severe currency controls and high interest rates, combined with a high level of government manipulation inside the Moscow currency market. This has lead to a large disparity between the international value of the ruble and the value it supposedly has in Russia. Gold has nothing to do with it.

Gold is a worthy addition to any investment portfolio, especially now, in a time of high real inflation and no more than moderate expected increases in interest rates. These factors make buying US and other government bonds foolish because they continue paying historically low interest rates. As rates rise, moreover, the value of the bonds will surely fall. Buying bonds, right now, is a way to lose money.

So, go ahead, buy gold. But, don’t buy it in the hope of relying on help from alleged war criminals, like Vladimir Putin, to make it rise in price. Buy it because the macroeconomic environment supports its purchase. Anyone can purchase a little gold in the form of small coins and bars at coin shops and jewelry stores all over the world. Some gold stocks now pay solid dividends, such as Agnico Eagle Mines (AEM), AngloGold Ashanti (AU), Yamana Gold (AUY), as well as a host of others.