A New Gold Standard Won’t Happen Overnight. It Is Happening In Stages.

Investors were bombarded with headlines last week about a new gold standard in Russia and the beginning of the end of the U.S. dollar as a global reserve currency. The real story was an interesting one but didn’t quite live up to the headlines. Still, it’s worth a close look as described here.

As reported, the Central Bank of Russia declared that the Russian ruble (RUB) would be pegged to gold at the rate of RUB5,000 per gram. Taking the dollar price of gold at the time of the announcement (about $1,930 per ounce) and converting grams to ounces (31.10 grams per Troy ounce), yields a USD/RUB exchange rate of about 80.0. And that was the point.

The idea of Russia’s announcement was not really about a gold standard. It was an effort to prop up the ruble at the level it held before the War in Ukraine.

To that extent, the gambit was successful. The RUB is trading at 79.38 bid and 84.38 asked as of this writing. Put differently, the Russians were using gold, a reliable asset, to support the ruble against the dollar.

In a three-way trade involving gold, dollars, and rubles, it is possible to arbitrage any change in the USD/RUB rate by, for example, buying RUB for USD, buying gold with RUB, selling gold for USD and pocketing the difference. That won’t happen because Russia limits the entities that can actually buy gold with RUB, and exchange controls and sanctions also make the trade impractical.

That doesn’t mean the announcement is not significant. It’s best understood as an early indication of major changes underway even if this one change does not transform the world.

This article reports that China and Russia are in discussions to develop their own gold market on a platform provided by the Shanghai Gold Exchange. Beyond that, a more liquid market is developing between rubles and Chinese Yuan (CNY), especially as Russia turns to China for foreign exchange liquidity in the face of U.S. and EU economic sanctions.

A somewhat liquid CNY/Gold market already exists, although it is also limited because CNY is still subject to Chinese capital controls. These developments will take time, but in the end a liquid global market in gold, CNY, and RUB could develop without reference to U.S. dollars.

It’s one of many developments including increased appetite among foreign central banks for Euro-denominated assets that all point in the same direction – the end of the U.S. dollar as the leading reserve and payment currency in the world.

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