Skip to main content Gold Or Rubles? A Pickle Worth Exploring

April 06, 2022
Gold Dollar Crash

Article by Michael Lebowitz in

Financial sanctions weighing on Russia are sending up red flags around the globe. The seizing of Russian foreign reserves and eliminating access to SWIFT is leading other countries to reassess the role of dollars in global trade. Today, there are likely quite a few central bankers and heads of Treasury asking themselves - Dollars, Gold, or Rubles?

Reserve Currency Status

The rule of law, economic and military might, and the most liquid capital markets are the principal reasons the dollar is the preferred currency for most global trade. Because of its status and global acceptance, the U.S. dollar is considered the world’s reserve currency.

Despite Washington’s reckless monetary policy and burgeoning trade and fiscal deficits, the dollar remains the world’s reserve currency. The benefit to the U.S. is that countries with dollar reserves must invest in U.S. Treasury securities regardless of yields. As a result, about a third of U.S. Treasury bonds are held by foreign entities.

Some media and investment analysts cite America’s monetary and fiscal irresponsibility as reasons for the dollar’s death. Yet, with each crisis, financial, health, or geopolitical, the dollar appreciates against almost all currencies. Like it or not, there are no better options. Even our enemies transact in dollars and hold U.S. Treasury bonds as reserves. That may be slowly ending as Russia, and other countries are exploring.

The “privilege” allows politicians to run unthinkable deficits and live above our means. It also keeps politicians and their parties in power. 

One of the most biting sanctions against Russia is freezing her U.S. dollar reserves. Reserves are currency, bonds, bills, and other government securities held by a central bank.

Like freezing your banking account or stealing your wallet, the sanctions against Russia cripple their ability to conduct foreign trade. The U.S. and Europe took control of Russia’s primary means of conducting trade. We can debate the pros and cons of the sanctions. Still, from an investment perspective, our time is best spent thinking about how Russia and other countries, enemies, and foes, might shield themselves from similar tactics in the future.

What Is Russia Doing?

Russia is a major exporter of agriculture, energy, and metals. They are heavily reliant on imports like computers, machinery, vehicles, and pharmaceuticals.

Countries, such as India, are not able or willing to uphold sanctions and must have Russian imports. Despite sanctions, global trade between India and Russia will not end. Instead, countries like India are seeking a “workaround.”

Russia recently demanded that “unfriendly countries” pay for natural gas in rubles. Before the conflict, about 97% of Russian energy giant Gazprom’s foreign sales were in dollars and euros. Now it appears gold and rubles will play a role.

Gold can be held as a reserve currency and converted to any currency the seller of goods prefers. For example, if Pakistan wants Russian goods, they can convert their rupees to gold and gold to rubles to complete the transaction.

Russia and other countries can retain their gold within their respective borders and not fall prey to seizure as is occurring with its dollars.

While currencies are now longer fully backed by gold, many countries hold substantial gold stockpile.

We are not suggesting the dollar loses reserve status. But we do want you to consider that some countries now have more incentive to seek an alternative payments source to the dollar. 

Gold is, not only, the solution but a currency that has worked for millennia and is helping Russia today.

Will enemies of the U.S. stop using dollars? Highly doubtful. Will they possibly add gold to their reserves? Most likely.

Gold has been used in trade for over 5000 years, and we suspect its .......

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