U.S. Sanctions to Bifurcate Gold
Gold will be More Expensive to You; Cheaper for Russia's Friends. When we adjust a complicated system, we often cause unforeseen "Law of unforeseen consequences."
"However, in reality, the current "strength" of the rouble and its supposed gold peg represent nothing but the weakness of Russia's economy and its fiscal management in the face of Western sanctions.
First, it must be understood that the rouble's strength, while not wholly illusory, is the result of an extreme decrease in trading levels and the Russian government's own capital controls. The rouble is not quite an inconvertible currency yet – Russia's banks are not yet under a blanket ban – but almost all trading takes place on Russia's MOEX exchange. Exporters are required to sell their foreign currency to the state." — Maximillian Hess, "The Russian Threat to dollar hegemony is nothing but a fantasy." Aljazeera, April 12, 2022
A crucial and free tutorial on markets has been playing out as oil prices and its distillates surged higher in response to the War in Ukraine and US/EU sanctions on Russia. If you have been paying attention, among other things, you may have noticed that:
1)The oil products you buy are priced at nose bleed levels. Gasoline prices in the U.S. have soared by 32% since Russia invaded Ukraine to a record high of $4.67 earlier this month.
2) India and other Asian nations, including China, are buying Russian oil. Indian purchases of Russian oil have surged from 12 million barrels over all of 2021 to about 60 million barrels so far in 2022.
3) As reported by PBS, "Moscow is offering them at steep discounts of $30 to $35, compared with Brent crude and other international oil now trading at about $120 per barrel."
4) As the New York Times reported, "China and India, the world's most populous countries, have swooped in to buy roughly the same volume of Russian oil that would have gone to the West. Oil prices are so high that Russia is making even more money now from sales than it did before the war began four months ago. And its once-flailing currency has surged in value against the dollar."
These facts underscore the difficulty of manipulating markets politically. When we try to make a single change within a complex system, we often end up causing a chain of unintended consequences. Such is "the law of unintended consequences." presumably, the decisions by U.S. and E.U. politicians to sanction Russia were not aimed at increasing Moscow's revenues from oil sales, much less harming Western consumers by raising the price of gasoline to a record high.
Nonetheless, that is what happened.
With that in mind, it would be reasonable to take a cautious attitude towards sanctions on Russian gold sales. I believe the expectation that such sanctions could be effective is remote from the facts.
Sanctions on "Conflict Diamonds" Fail
If you are old enough, you may remember the controversy that raged two decades ago about the role that so-called "conflict diamonds" played in financing armed conflicts in Africa. In particular, reports submitted o the U.N. Securities Council in 2001 showed that sales of diamonds and other natural resources continued to finance armed conflicts in Angola, Liberia, Sierra Leone, and Guinea despite "improved enforcement and monitoring of U.N. arms and diamond sanctions."
A contemporary report from August 10, 2002, summarizes the futility of sanctions on "conflict Diamonds: "U.N. sanctions and humanitarian organizations' efforts to keep conflict diamonds off the market haven't been effective. The gems smuggled out of suspect areas are usually indistinguishable from legitimate diamonds. Easily visible variations can turn up within a single mine. Only in rare cases do unusual characteristics characterize a site, such as a particular yellow tint. Compared with other types of gems, high-quality diamonds are remarkably similar between sites, a problem that's exacerbated when stones are polished."
What Science News says of diamonds is even more emphatically true of conflict gold. Russia is the world's second-largest gold producer. The output of Russia's gold mines sells for $20 billion annually. The gold from Russian mines is chemically indistinguishable from pure gold mined in any other locale in ancient times.
If the 500 tons of gold that supposedly made King Solomon the wealthiest man of all times was real and not a fable, his gold would have been chemically indistinguishable from Putin's gold.
Based on the Bible's report on King Solomon's wealth, he would have been one of the wealthiest persons who ever lived. He reigned for 39 years. Each year he received 25 tons of gold. That implies a total holding of about 1000 tons of gold.
Of course, one would need to be a Biblical scholar to accurately interpolate King Solomon's holding to calculate his Forbes ranking today. It is unclear to me when King Solomon added his 25 tons of gold during the year. There are 32,000 ounces in a ton but 35,840 ounces in an English long ton. As I write, the price of gold is $1847.33 an ounce. A calculation in 1992, when the gold price averaged $333.00, put King Solomon's peak wealth at $2 trillion.
The wisdom of Solomon could come in handy today. Not only in parsing the effects of US/EU sanctions on Russian gold sales. I would expect the announcement of the sanctions to raise the price of gold on world markets. Equally, Russia will likely opt to sell gold at a discount to established prices to its friends, especially China, India, and other Asian countries.
Another point where the wisdom of Solomon could help your investment success is understanding numismatic coins. If you aren't on the receiving end of a substantial flow of tax money, as was King Solomon, Or Genghis Khan, said to have been worth $100 trillion in today's terms, after he conquered 12 million square miles of land between 1206 and 1227.
You won't get that kind of lift in your portfolio. But if you are interested in profiting in Russian gold, look at high-quality gold coins minted by the czars.
An 1897 Nicholas II 15 rouble Czarist gold coin had a gold content of 0.3734 oz Its gold content was only a fraction of the U.S. Double Eagle $20 gold coin, but its numismatic value might be even greater as it is a much rarer coin today.
Although it may seem counter-intuitive, numismatic coins tend to outperform bullion. Gold stock also can add leverage to your gold investments. Stay tuned to Strategic investment for gold-stock ideas. I recently recommended buying 10,000 shares of Madre Tierra Gold in a REG A+ Offering at $0.50. This investment was described in a special report on June 14. Could you write to us and ask for your free copy?
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