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Currency Wars Escalate as Russia Retaliates against Sanctions
U.S. and Europe Test Ability to Cancel Major Commodity-Producing Country
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Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
Precious metals markets enter trading for the second quarter with favorable fundamental drivers in place.
Inflation pressures and war-related fears helped the gold market post gains during the first quarter. However, prices for the precious metal have come off their spike highs from early March.
As of this Friday, April 1st recording, gold trades at $1,938 per ounce and is down 1.5% for the week. Silver shows a weekly loss of 2.7% to bring spot prices to $25.09 an ounce.
Turning to the platinum group metals, they fared poorly overall last month despite entering March with strong upside momentum and seeing huge gains in copper, nickel, and other industrial metals. For the week, platinum is down 1.5% to trade at $1,017. And palladium is off 2.8% since last Friday’s close to check in at $2,326 per ounce.
The raw material that has been in the news the most of late is crude oil. Oil prices fell sharply on Thursday after President Joe Biden announced an emergency tapping of the nation’s strategic oil reserves. The government plans to release 1 million barrels of oil per day for the next six months, which will add up to a record drawdown of 180 million barrels.
The move will surely bring some temporary relief for motorists struggling with high fuel costs. In theory, it will also buy time for oil companies to ramp up production to offset the loss of Russian supplies.
But as with all political interventions into markets, there will be unintended consequences. Artificially flooding the market with a temporary supply source will encourage more consumption and discourage new drilling.
There’s an adage in commodity markets that the cure for high prices is higher prices. When prices rise, they send the signal to producers that they should increase output. Then when more supply hits the market, prices tend naturally to fall toward a new equilibrium.
That’s how commodity cycles normally work. But we are not living in normal times.
War and economic sanctions are creating disorder not only in commodities but in currencies as well.
In the past, the U.S. has imposed sanctions on small rogue regimes in the Middle East and Latin America to punish and isolate them. But trying to completely blacklist a country as large and resource-rich as Russia and getting the rest of the world to comply is proving to be difficult.
The world’s two most populous countries, India and China, want to continue trading with Russia. They are adopting alternative means of settling trades in their own national currencies and in Russian rubles.
In response, some politicians want to pressure India and impose new sanctions on China. But their combined economies are simply too large to be pushed around. America would be isolating itself geopolitically and diminishing the U.S. dollar’s status in international finance if it moved to economically punish most of the rest of the world.
Ironically, heavy-handed sanctions policies may end up inflicting more damage to the dollar than to the ruble.
Vladimir Putin’s government has told what Russia considers “unfriendly” countries to pay in rubles or gold if they wish to obtain oil, gas, and other Russian exports. As a result, Russia is now seeing a big influx of demand for rubles. Far from entering a death spiral, the currency is actually strengthening in value – and has already risen all the way back to the levels seen before Russia’s invasion.
Moscow will now convert surplus rubles into gold. With the ruble now linked to physical gold bullion, both gold and the ruble could rise together. And an ounce of Russian gold has just as much intrinsic value as an ounce of gold from anywhere else in the world. No amount of sanctions will change that fact.
As currency wars are being waged among world powers, gold remains the ultimate standard of value.
The world monetary order appears to be bifurcating. The U.S., Europe, Japan, and their allies are pitted against Russia and its trading partners including China.
The era of globalization and free trade based on the U.S. dollar standard is over. A new era is emerging. It is being borne out of geopolitical polarization and resource scarcity.
It will translate into rising price inflation in the United States as major exporting countries are no longer able or willing to accept Federal Reserve Notes without question like before.
Gold will likely figure more prominently in the bipolar global monetary system. In an environment of conflict and mistrust, hard money is the safest and surest form of payment or reserve holding.
A large increase in central bank buying of gold around the world could have a huge impact on precious metals prices.
And whereas gold is the money of kings, silver is the money of the masses.
Working class and middle-class folks who want to save money and protect it from the corrosive forces of inflation have few options. Bank accounts will never pay enough interest to keep pace with price level increases. Meanwhile, real estate, Wall Street instruments, and cryptocurrencies carry many other risks – especially for unsophisticated investors.
But an ounce of silver is easy to understand, easy to obtain, and easy to afford – at least for now.
We certainly live in interesting times. Hopefully more Americans will be taking action in the coming weeks and months to hedge against risks we face – both individually and nationally – as a result of the high-stakes monetary brinksmanship that’s playing out right now on the world stage.
Well, that will do it for this week. Be sure to check back next Friday for our next Weekly Market Wrap Podcast. Until then this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a great weekend everybody.