Is Russia Moving to a Gold-Based Currency? – Your News to Know
One recent theory says Vladimir Putin is planning to move off of the ruble and into gold. Find out what’s going on, and all your other news to know.
Each week, every week, Your News to Know brings you the latest news and critical reads about the overall economy and the gold market. Stories this week include: Demand for gold in Greece rises as uncertainty in Europe increases, speculation arises that Russia might introduce a gold-based currency and a report details why deflation can strengthen the value of gold.
Greeks demand more gold as Syriza stands up to Europe
In the wake of political turmoil rising in Greece, many in the country are turning to gold as a safe haven, Bloomberg reports. The U.K. Royal Mint revealed that they are experiencing an increased demand for gold coins from Greek investors in line with the uncertain future of Greece’s economy. “There has been a noticeable increase in demand in this last quarter,” the head of Royal Mint’s bullion sales, Lisa Elward, told Bloomberg News. “We tend to see an upsurge in sales at times of political and financial uncertainty.”
The increased interest in gold coins by Greek investors fueled existing speculation that the country might cease to use the euro as its currency, which would potentially plunge the eurozone into financial turmoil. Greek bonds and stocks lost further value as the country’s Prime Minister, Alexis Tsipras, told the Greek parliament that he still intends to abandon the current funding plan that lasts until the end of February.
There are rumors that Greek bank withdrawals exceeded 15 billion euros before the elections that saw Greece’s anti-austerity party, Syriza, rise to power. Greece’s threats to compromise Europe’s financial stability, coupled with slow economic growth outside of the U.S., has contriubted to the price of gold climing nearly over 4% already this year.
Matthew Turner, a financial analyst at Macquarie Bank, reaffirmed the view of gold as a safe haven in times of financial distress: “The one thing everyone knows about gold is it is a good thing to hold if your currency is about to devalue,” he said in regards to Greece’s recent demand for gold. “During periods of monetary uncertainty people will always think gold is a useful addition to their portfolios.”
Could Russia be moving towards a gold-based currency?
In a recent column for Mises Daily, Marcia Christoff-Kurapovna tackled the possibility that Russia might be looking to replace its currency, the ruble, with a gold standard. She argues that, while this option might seem far-fetched to some, several factors over the last decade point towards this being a likely scenario.
Christoff-Kurapovna mentions that ever since President Vladimir Putin assumed office in 2000, the country has avoided taking on the West’s debt while stocking up on gold. In fact, in an attempt to strengthen its economy, Russia has recently become the world’s top buyer of gold – and largely refusing to part with its large stores of gold – something that other eurozone countries have unsuccessfully attempted in recent history.
Should the change in currency occur, this stockpile would provide Russia with enough value during financial turmoil. “In buying as much gold as it has, the country is, in part, ensuring that it will have enough money in circulation in the event of such fundamental transformation,” Christoff-Kurapovna states.
The author also warns that, should Russia indeed adopt a gold standard, it would present a tremendous change in the global monetary order, the first of its kind. “The repercussions of Russia on a gold-exchange standard would be immense,” she notes. “It could mean the threat of a severe inflation in the United States should rafts of unwanted dollars make their way back across the Atlantic – the Fed’s ultimate nightmare. Above all, the country will avoid the extreme debt leverages which would not have happened had Western capitals remained on gold.”
Deflation around the globe likely to have a positive effect on gold’s price
A recent report by Julian Jessop, head of commodity research at Capital Economics, focused on the state of gold during deflation and dismissed the popular belief that such an environment wouldn’t be good for its price. The company believes that deflation over a longer period of time would actually have a positive impact on the metal.
“Overall, our view is that the wider implications of a lengthy period of deflation, even one triggered by a favorable shock such as cheaper oil, should strengthen rather than undermine the price of gold,” Jessop believes. “Indeed, it is not difficult to think of circumstances in which deflation could be positive for gold, many of which apply now.” In the report, he points to low or non-existent interest rates as an example of a deflationary situation that would minimize the opportunity cost of holding gold.
The article also mentions the recent loosening of the Reserve Bank of Australia’s monetary policy as the latest contributor to the global currency war that is taking place, as the RBA sliced interest rates down to 2.25%.
Jessop also points towards gold being a safe haven both during economic and financial straining caused by deflation as well as potential inflationary shocks and currency debasement that could occur in the future. “Most people would, of course, regard falling prices as good news. The problems come when deflation in consumer prices is reflected in falling nominal incomes and in asset prices, or when expectations of falling prices become ingrained,” he added.
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