Edge-Forex Forex

Gold: Putin’s Haven

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Sanctions imposed by the West on Russia’s central bank have demonstrated the vulnerability of any country holding cash in its foreign exchange reserves. Bitcoin is a passing fad with no real value; in fact, it is worse than cash because it only exists on a computer screen. Gold serves two functions that fiat currencies or any other financial innovation cannot: first, it serves as a safe haven during times of turmoil, and second, it serves as a store of value. 

Gold is dismissed as a speculation since it doesn’t create sprouts, and that really intends that without a profit or yield, the consistent pay and deliberate development wanted by institutional financial backers don’t exist. 

Gold is also regarded as a valuable store of value. The precious metal has proven to hold its value over time. Accordingly, financial backers consider it to be a method for saving riches, rather than paper or “fiat” monetary forms, which are helpless to expansion and lose esteem over the long run.

Gold provides something to all of us that fiat money or any other financial innovation cannot. Gold is insurance; it may not sprout, but it is irreplaceable in its functions. 

The Russian Central Bank increased its gold purchases significantly in 2014, the year Russia was sanctioned by the US for invading Crimea, a strategically important peninsula in southern Ukraine. The country’s gold reserves are now the fifth largest in the world, with a market value of around $140 billion.

Following Russia’s invasion of Ukraine on February 24, the Russian ruble fell to a record low of 110 to the US dollar. It continued to fall (rising numerically) to 150 on March 7, the day the United States announced a ban on Russian oil imports. While the ruble has regained some of its lost ground, the exchange rate is still in record-low territory at 1USD=97.1693RUB. 

The bigger hammer fell in the first week of March, when the United States and Europe sanctioned Russia’s Central Bank (CBR). Western allies hoped to deprive Russia of its $630 billion reserve stockpile by freezing the bank’s assets in their jurisdictions. 

Some believe that the Kremlin should invest in cryptocurrencies such as bitcoin right now. While ordinary Russians will likely find some relief from the falling ruble and Western sanctions by adding to their crypto wallets, we do not expect the same to be true on a macroeconomic scale. 

According to Fortune, the founder of Binance, a cryptocurrency exchange, “crypto is too small for Russia.”

Furthermore, the use of blockchain, which is publicly accessible, makes it too traceable for the Kremlin and others attempting to avoid economic sanctions. Binance announced on February 28 that it would not process transactions involving sanctioned Russian individuals or entities. 

Russia hasn’t yet had to liquidate its gold reserves or establish a gold standard, but the fact that we’re even talking about the “barbarous relic” in this context speaks volumes about gold’s continued importance in a crisis. 

Banks are suddenly snatching up bullion like it’s out of style. According to Peter Schiff’s March 18 column, “banks are restocking gold at the fastest rate in years.” 

Schiff, a gold bug, claims, “This is the largest inflow since October 2020, and we’re only halfway through March!” before concluding, “The Comex gold market has been flashing warning signs since early January.” This is still the case today.  The latest metal influx lends credence to the notion that banks are bracing for increased delivery volume and potentially higher prices.” 

The inflationary dynamic at work in most of the world’s developed economies has prompted the US Federal Reserve to “go hostile” with a series of planned rate hikes that could bring the overnight lending rate to 3.25 percent by the end of this year, tying into the gold bull narrative. 

Fed Chair Jerome Powell’s last-minute shift from fiscal dove to fiscal hawk is almost certain to send the stock market crashing, driving investors out of stocks and bonds and back into bullion.

Remember that the last time the Fed attempted to raise interest rates, from 2015 to 2018, it only got to 2% before the markets tanked and the central bank was forced to reintroduce quantitative easing. 

Inflation was not a problem at the time. According to the Producer Price Index, it is now in the double digits. Gold is a tried-and-true hedge against inflation, which is the enemy of yield-seeking investors. 

We also have a war that is keeping commodity prices high, militaries re-arming, record amounts of sovereign debt, and negative real interest rates, all of which are combining to create what we believe is the perfect storm for gold.

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