Most people’s attention has been on the accelerating inflation and reactive monetary policy decisions in the United States. This is the problem that we can see when we go to the store and it is the problem we feel in our wallets. The problem is complex though. It can’t be attributed to any one issue, so it is important to continue to zoom out and see the entire playing field.
One of the developments on that global playing field in the last few days has been the G7 decision to ban imports of Russian gold. I don’t spend a lot of time personally analyzing the gold markets, but feel this is another major milestone in the decades-long trend of attempted weaponization of currencies by developed nations leading to degrading trust in those very same currencies.
I went looking for someone who had more informed opinions about this development and came across Danny Diekroeger. Here is a quick summary of Danny’s thoughts in his own words:
This past weekend, news broke that the G7 will be banning imports of Russian gold. This could be the start of some big moves that goldbugs have been anticipating for years…
Many believe the price of gold in US dollars has been held down for years by the fractional reserve systems implemented by the LBMA and COMEX. There are something like 100 paper claims to every gold ounce in existence.
But fractional reserve systems are vulnerable to bank runs. If a lot of "paper gold" holders request to take possession of their gold, there simply isn't enough physical gold to match these claims. A supply/demand imbalance and a rush to obtain gold could pressure this system and cause these failures. Goldbugs have been talking about this situation for years.
And the cracks are starting to show. We saw something similar earlier this year in the nickel market, where the price went vertical and the London Metals Exchange canceled a bunch of trades.
Macro analyst Luke Gromen has theorized that destabilizing the western gold financial markets could be a key part of Russia's strategy to weaken the US dollar. We saw the beginnings of this when Russia tied the ruble to gold earlier this year.
And now the G7 has banned gold imports from Russia.
If people can't source their gold from Russia anymore, they may look to take delivery from the western fractional exchanges, putting pressure on the system as described above.
So what would that look like in a gold-bug's wet dream? Here's one way it could play out:
Increased friction of sourcing gold leads to a consistent rise in the price of gold, bringing it to new highs, etc. Then at one point on a delivery date in the futures market, one of the big western exchanges fails to deliver physical gold to a big paper holder who is requesting delivery.
This would be major news - a major western gold exchange unable to deliver. At this point we'd see a separation of the physical price of gold from the paper price. The paper claims would get cashed out at yesterday's price (you get cash, not gold). Meanwhile the price of actual physical gold shoots up vertically. And paper claims like $GLD etf holdings won't be worth the same as the gold bars under your bed. This would be madness for financial markets, but something that goldbugs have been long predicting.
Even a bitcoin maxi like myself can see this potential shock coming to the gold markets, and I can’t resist riding the wave. Got some physical gold coins secured in storage, hoping to sell for bitcoin when the panic hits.
This is a fascinating situation and one that is worth following over the coming weeks and months. As I stated before, I am not an expert on the gold market. The interesting part of this story is the continued attempts to weaponizing currencies on the geopolitical stage. If Danny’s theory plays out, there will be ramifications to gold, bitcoin, and various fiat currencies.
As with anything that you read in these letters, there is a risk that this situation does not play out. We would simply be watching an acceleration of the financial sanctions against Russia by G7 nations. It begs the question — what else is left for them to go after? How much more damage can they inflict?
We may find out sooner rather than later. If you enjoyed this piece, make sure to give Danny a follow on Twitter: @dannydiekroeger
Hope you all have a great start to your week. I’ll talk to everyone tomorrow.
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