Lessons from Russia’s “gold peg”.

Lessons from Russia’s “gold peg”. By Claudio Grass.

One such story, that I found to be very interesting and shockingly underreported, was the announcement by the Russian central bank on March 25, that it would buy gold at a fixed price of 5,000 roubles a gram until June 30.

Prior to this announcement, the Russian ruble had dropped to record lows against the U.S. dollar, due to concerns about the heavy sanctions imposed by NATO allies. However, as a result of the decision to peg the currency to gold, the rouble saw a remarkable rebound, quickly returning to pre-invasion levels. Soon thereafter, on April 8, the Russian central bank announced that it would scrap its previous plan of buying gold at a fixed price from local banks and instead it will continue buying at a “negotiated price”, because of a ”significant change in market conditions”.

The initial announcement to essentially peg the rouble to gold, in response to the free-fall it suffered as a result of the sanctions, clearly shows that everyone, even central bankers, still understand very well the trust that the market has in the yellow metal. The scheme obviously worked …

 

The Russian Rouble is today trading just below its level on Feb 24, the day Russia invaded Ukraine.

 

The second announcement of the Russian central bank, to reverse its initial stance, also speaks volumes to investors who understand both monetary history and the dynamics of the current system. Even though Russia is one of the world’s biggest gold producers, no State under this system could afford, or would politically risk, to “tie the hands” of its central bank.

Pegging any fiat currency to gold would immediately put an end to all the reckless money printing operations and all the populist fiscal policies we’ve grown accustomed to.

Currencies only sober up if they have to. The party continues.