Sometimes it is difficult to know who to hold responsible for the economic conditions and inflation we see all around us today. The most frequently cited narrative usually involves the military conflict between Russia and Ukraine. Perhaps a more significant cause is the economic conflict between Russia and the West; sanctions and removal from the SWIFT banking platform were supposed to stop Russia in its tracks. But we have been writing for the last few years about how the sanctioning process was making some of the sanctioned nations, including Russia, stronger and more resilient than before. As early as 2017, we warned that “…the pressure for a dollar alternative will sooner or later overwhelm the ability of the United States to prevent it.” While few of us that have enjoyed living in a dollar-centric world are happy about it, the tipping point may have just occurred over the weekend.

The U.S. and allies have sought to prevent Russia from accessing global capital markets and locked down their central bank currency reserves. Essentially, the West has forbidden Russia to use dollar or Euro based assets or trading instruments. They thought that this would be so crippling and devastating to the Russian economy that they would immediately change course in their military objectives in Ukraine. But instead of doing so, Russia has decided to fight back against the existing dollar-based financial order of the world. As the attached graph indicates, they are not alone. The number of nations and the corresponding population attempting to sanction Russia is vastly outnumbered by the number of nations and populations that are not. Based on most American news coverage of the conflict, you might find that surprising. 

When looking at economic realities, we often have to look past the latest headlines to find the root causes for whatever is happening. It is usually best to take most reporting on the subject with a grain of salt in light of previous information shared by the media. Information like “Hillary will be President,” “The spread of Covid 19 will be halted in 2 weeks,” and “Inflation is transitory” are but a few. Often gold is minimized and ridiculed in financial circles as an insignificant “pet rock” that pays no interest or dividends. But for some reason, the United States maintains the most significant official gold reserves of anyone on the planet. Whether you believe the gold is there or not, they claim it is. If gold was not necessary, what would be the point of maintaining over 8,000 tons of gold?

In his 2011 best-selling book “Currency Wars,” author James Rickards outlined a scenario in which Russia and China increased their reserves of gold as a way to break free from the dollar-based financial system. This possibility was expressed during a war game strategy session Mr. Rickards was invited to participate in at the Pentagon. It would appear that perhaps Russia and China read his book and took this advice, as that seems to be the course of action they have taken over the last several years. The actions recently initiated by the United States against the remaining dollar/US Treasury holdings of Russia have alerted the entire world that dollar reserves are not as safe as they used to be - because they can be confiscated or rendered useless at any time. However, physical gold held in local vaults cannot be confiscated by decree of a foreign power.

In the latest phase of the “dollars vs gold” battle, Russia has essentially said that because they are being prevented from using the Dollars or Euros they would otherwise be able to trade with, they will now only accept Russian Rubles, or gold - as payment for energy (oil or gas) from nations that have sanctioned them. This means those trying to weaken Russia will have to help strengthen the Russian currency when they purchase energy. It also means that the paper-based gold derivative trading system will soon become swamped and unable to function, as physical metal delivery becomes impossible at artificially depressed prices. Contracts will settle for cash - often with dollars that are no longer useful for purchasing Russian gas or oil. If this stands, the “Petro-dollar” era will continue to sunset, and the United States will have to learn to live within a budget. China is also on board with this, which is significant as they are the largest energy importing nation today.

Europe has to have the energy to survive. Even if we assume that the U.S. and its allies somehow convince other nations not to purchase Russian energy with Rubles or gold, it will still harm the American population. As we discussed briefly on Friday’s Metals Minute broadcast, the United States has begun exporting American diesel fuel to Europe in the same ships previously used to import Russian and European diesel fuel to the United States. While oil is far from a record high price, diesel and other fuels are at record levels for Americans. Whether oil, natural gas, or coal, the United States is trying to make up at least a portion of the resources Europe has lost due to sanctions against Russia. This means resources previously available to Americans are being shipped to Europe - thereby creating shortages and higher inflation.

Just as the importance of owning precious metals is being rediscovered on a global scale, it is also essential for you and me to own. Previous generations of Americans used to purchase a gallon of fuel for $0.25 in a silver quarter. Even though fuel is at record-high prices in dollar terms today, a gallon of fuel can still be purchased from the value residing in the melt value of that same silver quarter. $3,500, represented by 100 ounces of gold, used to be enough to purchase two new automobiles in 1966. Won’t find a good used car today for $3,500 in today’s dollars. But those same 100 ounces of gold today ($200,000) would get you four nice cars or a couple of new luxury cars. The world is waking up to the dangers of storing all their savings in dollars. Perhaps it is time for us to wake up as well.