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Category: Bullion Bulletin

Bullion Bulletin: Russia’s latest revolution

Karl Marx once said "although gold and silver are not by nature money, money is by nature gold and silver...". President Vladimir Putin seems to think...

28 August 2022

Gary Mead

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Karl Marx once said “although gold and silver are not by nature money, money is by nature gold and silver…”. President Vladimir Putin seems to think the same way – Russia’s central bank has tripled its gold reserves since it annexed Crimea in 2014.

Russia’s determination to humble the West’s political hegemony was shockingly announced in February when it sent its tanks into neighbouring Ukraine. It’s also accelerating its other and no less significant ambition, that of re-drawing the current monetary, US Dollar-dominated, global hegemony.

President Vladimir Putin fired his first missile in this monetary war in June this year at a summit meeting of the BRICS countries – Brazil, Russia, India, China and South Africa. He said then that the BRICS countries were developing a “new reserve currency”.

Some see this as a move “to address the perceived US-hegemony of the IMF [International Monetary Fund]” and its international reserve asset, the SDR (special drawing rights, which is based on a basket of the US dollar, the euro, the British pound, Japan’s yen, and China’s yuan).

China’s Renmimbi has already made inroads into Russia’s foreign exchange reserves, about 17% of which are now in the Chinese currency; China has not joined the sanctions imposed on Russia by the West. Russia has completely removed all US dollar holdings from its National Wealth Fund, the country’s sovereign wealth fund.

Russia’s finance ministry has now announced it is backing a new international standard for trading precious metals – the ‘Moscow World Standard’ (MWS) it calls it – which it says will become an alternative to the London Bullion Market Association (LBMA). The LBMA systematically manipulates precious metals markets to depress prices, suggests Russia’s ministry of finance. The MWS, which will also have a “price fixing committee”, is necessary for “normalizing the functioning of the precious metals sector” says the ministry.

The London OTC (over-the counter) gold market, under the auspices of the LBMA, “today comprises approximately 70% of global notional trading volume” according to the World Gold Council (WGC). Re-setting the global gold trade will be an enormous undertaking, and would have profound business and economic effects. Russia produced 314 tonnes of gold in 2021, about 10% of the global total and worth some $19 billion at current prices. That gold is mainly sold to Russian commercial banks, which sell it to the Russian central bank or export it. Since the war started, Russia’s customs service and central bank have suspended publication of import and export data and information about state gold holdings.

In one sense Russia is taking retaliation – the LBMA removed Russian gold refiners from its accredited list in March this year. On another level the MWS is a dagger aimed at the heart of the way the gold market has been managed for many years. If it succeeds, Russia will have created a precious metals marketplace that will be regulated by countries that control these metals’ production. The Eurasian Economic Union (Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia), the BRICS and Africa, Peru and Venezuela, account for around 62% of global gold supply. All are eagerly sought as members.

There are many questions about the promised ‘revolution’, not the least of which is – will it get off the ground? If the MWS does, it will certainly be disruptive to have two competitive ‘good delivery’ standards co-existing and vying for business. Will markets have the kind of confidence in the MWS that has been generated by the LBMA? Those ‘allies’ of Russia, all the countries which have not sanctioned it, will no doubt queue up to support it.

Nevertheless, questions of honesty, quality control, and storage security will inevitably crop up. Most important of all perhaps are: what will the “price fixing committee” decide the price per ounce should be; in what currency will that price be quoted; and against what will that price be benchmarked?

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