EDITOR'S NOTE: A long-standing principle that’s been reduced to a mere marketing cliche on overdrive is that gold always has its reckoning at the moment of a currency’s collapse. But to witness the “proof” behind this principle as it applies to a major segment of the global economy is something we don’t often get to see. The Russia-Ukraine war may allow us to witness this potential emergence firsthand. Because the US dollar comprises 60% of the world’s reserves, America was able to weaponize its currency against the Russian ruble, sending the latter spiraling down. Russia, in turn, is in the process of weaponizing its commodities. It can force its partners to trade in the ruble, gold, or even bitcoin. Among the three, gold is the only Tier 1 asset held by most central banks across the globe. The notion of gold as a currency may be closer than that of the dollar losing its reserve status. But as the world grows more disillusioned with the myth of globalization, as the strongest monetary holders exercise an unspoken hegemony over all participants, gold is once again proving to be the only form of money that can promise freedom, value preservation, and a hedge against both counterparty risk and hegemonic prostration.
(Kitco News) - The devastation created by Russia's invasion of Ukraine continues unabated and it is now starting to have significant implications for the global economy. According to some economists, we are witnessing the end of globalization.
Lines are being drawn between allies and opponents that won't easily be undone, even if the conflict in Eastern Europe were to end. Gold, it appears is playing an essential role in this new environment, where currencies and commodities are being weaponized.
Global commodity markets remain in chaos as nations look to establish their own domestic supply chains. The biggest impact is being felt in the energy sector as Russia's nat gas represents 40% of European demand.
There is a growing threat that Russia could weaponize its commodity markets as it demands 'unfriendly nations' pay for their energy in rubles. Russia is also looking to accept gold and even bitcoin for its oil and gas. According to some economists, Europe, already teetering on edge, could fall into a full-blown recession if Russia decides to withhold supply.
As pressure mounts, Europe is looking to wean itself off of Russia's oil and gas, but that won't happen until the end of this decade. Energy is just one commodity, but it's not alone; agriculture and base metals are also impacted by rising geopolitical tensions caused by the conflict.
Looking at the broader picture, many economists and market analysts see a growing trend where nations warry of the U.S. and its western allies start to reduce their exposure to the U.S. dollar. This is not going to happen overnight. The U.S. dollar presents about 60% of total global reserve assets. It could take decades for the U.S. to lose its reserve currency status, but that will not stop some governments and central banks from diversifying their holdings now.
Not only are nations trying to insulate themselves by diversifying, but we can also expect that the development of domestic supply chains will lead to elevated consumer prices. We can no longer reply on global markets for cheap goods and gold is an attractive asset for consumers looking to preserve their purchasing power. We are already seeing this in Russia. Gold is the most attractive asset because it is seen as a store of value and has no counter-party risk.
This week, according to a report from Kitco's Anna Golubova, the state-controlled VTB Bank, Russia's second-largest lender, sold one tonne of gold to consumers in March. The most in-demand product is its one-kilogram gold bar, worth about $68,000.
As long as chaos reigns, gold will shine as solid currency.