Over the weekend news out of Tehran reported that the Iranian government would be launching a gold-backed cryptocurrency. Shahab Javanmardi, the CEO of Iranian Information and Communication Technology (ICT) FANAP, commented, “Iran’s cryptocurrency will be supported by gold, but its function is similar to other cryptocurrencies. The crypto asset is designed to maximize the use of Iranian frozen bank assets.”
For many years Russia, Iran, Venezuela, China, North Korea, and other countries have been evaluating alternatives to using U.S. dollars for global trade. The impact of U.S. sanctions can be crippling for the economy of the sanctioned country and the U.S. has successfully pressured SWIFT to assist them in their enforcement of global sanctions.
In response, Russia has been building its own alternative to SWIFT.
News agency Reuters reported just a few months ago, Russia backs global use of its alternative SWIFT system.
What we find as interesting as Russia’s new technology is its consistent acquisition of gold. In the chart below our team analyzed three key data points from Russia.
The first is its holdings of gold which have been increasing steadily year over year for almost two decades (reflected as the amber-colored bars in the chart below).
Russia has over $100 billion in gold reserves.
We also then plot the exchange rate XAURUB (red line upper panel) which calculates the amount of Russian rubles it takes to buy 1 troy ounce of gold. We can see that like most currencies priced against gold, it takes more and more fiat currency to buy 1 troy ounce of gold. Not surprisingly as Russia’s gold reserves increase there is less volatility against gold.
The bottom panel of our chart shows the year over year growth of M2 money supply in Russia. Money supply growth is decelerating at the same time that gold purchases are accelerating. In our opinion, Russia is making the move to a 100% gold-backed ruble.
And if that wasn’t convincing enough for you here’s your bonus chart showing Russia’s holdings of U.S. treasuries. They’ve dropped by over 80%. Business Insider reported Russia is dumping US debt and buying gold instead
The U.S. dollar is the reserve currency of choice globally and much of that is driven by the fact that most global commodities are priced in dollars, especially oil.
While Iran has already been selling oil directly for gold, Russia and China prefer to not make things so obvious so they have time to accumulate gold reserves at low prices. Russia and China are already transacting in oil directly in rubles and yuan. Ultimately it will be in gold.
It is our opinion that gold as a currency is about to become the subject of national security in the United States and Europe.
Conversations about the dangers of Facebook’s Libra are a distraction and just the prelude to the real issue, fiat currency is systematically unstable. Gold is not printed by central banks and thus cannot be diluted as regular fiat currency can and the country with the highest reserve ratio vs outstanding currency supply (ideally 100% backing) will have enormous economic and strategic advantages.
In fact, we believe that this is such a major security issue that it will work its way into the political dialog for the 2020 U.S. elections.