Russia Proposes Gold Standard Competing With London Market
Shortly after the Russian invasion of Ukraine, the LBMA banned six Russian refineries from good delivery in the European Union, the United States, and the U.K. Russia has since proposed creating the Moscow World Standard (MWS) as the new trading standard of precious metals. The MWS would be a separate and competing entity to the London Bullion Market Association (LBMA. The MWS would create two different precious metals markets and pricing mechanisms.
The LBMA consists of 145 member companies across 20 countries. Members are participants across the precious metals industry: financial institutions, miners, refiners, trading, vaulting, transportation, and manufacturing. The primary members are 12 “market maker” banks, with seven full market maker status and five market makers. Full market makers trade at the spot price, forwards (futures contracts), and options. Market makers provide two-way pricing in one or two of the trading platforms.
What is the LBMA?
The LBMA self describes as the “global authority on precious metals.” The LBMA sets the international standards for the global Over The Counter (OTC) bullion market. The LBMA sets the internationally recognized gold, silver, platinum, and palladium prices twice daily. They also control the good delivery lists for gold and silver, which trade on the London Bullion Market. The LBMA sets approximately 78% of global gold prices, and the New York-based COMEX sets about 8%.
|Full Market Makers||Market Makers|
|Citibank N A||BNP Paribas SA (F)|
|Credit Suisse AG Zurich||ICBC Standard Bank (S)|
|HSBC||Merrill Lynch International (S,O)|
|JP Morgan Chase Bank||Standard Chartered Bank (S,O)|
|Morgan Stanley & Co International Plc||Toronto-Dominion Bank (F)|
|Goldman Sachs International|
Why is Russia Challenging LBMA’s Market Position?
Without LBMA accreditation, it is virtually impossible to transact with any bank or country wanting to maintain its accreditation. Russia losing LBMA accreditation was an effective tool to enforce another lever of sanctions. Since the Russian invasion, multiple countries have sanctioned Russian gold. Russia’s response to sanctions has been to strengthen trade relationships with China and the other BRICS nations.
Russia wants a legitimate seat at the international precious metal table. The current system excludes Russia, producing 10% of the world’s gold. The bankers currently controlling the market come from countries that only contribute 22% of the world’s total gold supply. The coalition of central banks and bankers Russia wants to establish represents between 57-62% of the world supply. The primary goal is to make membership attractive to countries oppressed by the current system, which includes the BRICS, Venezuela, Peru, many Middle Eastern countries, and Africa. Gold and other precious metals would not be priced in Dollars or Euros. The precious metal prices would be fixed in the currencies of member countries, or the new BRICS currency President Putin has been building.
Russia also is looking to make a fair system free from corruption. The LBMA member banks have been accused of collaborative price manipulation at various times. In 2020, JP Morgan Chase was fined $920M for manipulating precious metals prices. On August 10, 2022, the JP Morgan Global Chief of Precious Metals and former LBMA member, Michael Nowak, was convicted of 13 counts of attempted price manipulation, commodities fraud, wire fraud, and spoofing precious metal future prices. The conviction is connected to the fine paid in 2020. The DOJ said the crimes took place over eight years and happened thousands of times.
What Would Two Governing Bodies Mean for Investors?
Competition in the market could level the playing field. The current pricing system for precious metals is primarily the paper market. Forwards, options and metal ETFs drive the price because paper gold significantly outweighs physical gold. Scholars debate the total leverage of the paper market. There is speculation and some clues, but the leverage is between 10-1 and 250-1. Two competing governing bodies would reduce the frequency of blatant price manipulations like the JP Morgan Chase fiasco.
Zero Hedge reports a disparity in the price set in Russia versus the current LBMA price. “Russia has fixed the price of gold in rubles at 5000₽/g, which works out to $2,447.17 per troy ounce. This compares rather favorably to the current LBMA fix of $1737.84.” Certain countries and investors would have access to both markets creating room for arbitrage. Competing banks will set the prices almost identically to eliminate the predictable risks associated with investors buying in one market and immediately selling in the other or vice versa. It is more likely that the LBMA would raise prices to parity than Russia would decide to lower theirs.
How To Position Yourself
It makes sense to be prepared. The creation of MWS is a game changer. There is no scenario where the creation of the MWS does not forever change the metal market, weaken the Dollar, and divide the world economy. There are no guarantees, but Russia has done everything it said it would do concerning gold. Russia pegged its currency to gold. Russia has strengthened its ties with China and the other BRICS countries, and the countries are actively working together to create a currency to compete with the Dollar's international supremacy. Despite sanctions, the Rubble is the strongest performing currency of 2022.
For years, the gold industry has been saying gold is severely undervalued, and there will be a massive price revaluation. If you have read my posts or spoken to me, I think the "gold is going to the moon" shtick is misguided, greed-based marketing. I am a strong proponent of gold as protection and tend to downplay bullion for investments. My position has been and continues to be that gold primarily protects your accumulated wealth. Any gains are the frosting on the cake, not the cake itself. I could not, in good conscience, see how the “gold is going to the moon” scenario could happen until there was a significant change in the system that prices gold. The creation of the MWS is the exact type of scenario I have been saying would be needed before I could give the nod to what the gold industry has been predicting for years.
Today is the scenario every gold bug has been hoping would come. Suppose Russia successfully creates a second precious metals market. How much of your portfolio do you want in gold to sell into that market? I will not say gold is going to the moon, but it looks like this cake will have more frosting soon. Now may be the best long-term upside gold setup I have seen recently.
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