Bubble Monitor 4/5/2022

Apr 5, 2022 | Bubble Monitor

Does Currency Need to be Backed by Gold?

There has been a lot of chatter about Russia’s decision to link the Ruble to gold (5,000 Rubles to 1 gram of gold). That is not to say that people can buy gold from Russia’s central bank, just that the Ruble’s value is now tied to the value of gold.

Currently, if someone wants to buy oil from Russia, they must pay in Rubles by converting their own currency in an amount tied to the price of gold as opposed to buying Rubles at a price dictated by the open markets (supply and demand). Before the Ukraine, oil buyers would pay Russia in US dollars, supporting the US dollar as the world’s reserve currency. Notably, the US dollar used to be on a similar “gold standard” prior to 1971.

What is so special about gold? You can’t eat it and it won’t heat your house. However, it does provide a metric for value that has been recognized since the beginning of civilization.

All-the-same, it’s not the gold peg that is really supporting the Ruble. Rather, it is Russia’s vast supply of oil and other commodities like wheat that provide support for the Ruble. Russia’s currency is pushed higher by strong demand for these resources with a floor that is pegged by the Ruble’s link to a fixed amount of gold. The peg could just as easily be tied to another hard asset (like a basket of commodities and maybe even waterfront property).

In conclusion, a country’s wealth is not determined by its gold reserves so much as global demand for its natural resources, products, and services. A country rich in gold but poor in the necessities of life will eventually go broke using their gold to pay to import the more important things. Conversely, a country poor in gold but rich in these other things will always have a strong currency whether or not it is backed by gold. 

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Disclaimer of Liability: Although the information in this post has been obtained from sources NBE Media LLC believes to be reliable, NBE does not guarantee its accuracy. The views expressed herein are subject to change without notice and in no case can be considered as an offer or solicitation with regard to the purchase or sales of any securities. NBE Media LLC’s analyses and opinions are not a guarantee of the future performance of the economy nor any industry, company or security. NBE Media LLC disclaims all liability for any misstatements or omissions that occur in the publication of this post. In making this post available, no client, advisory, fiduciary or professional relationship is implied or established. While this post is intended to provide an relevant economic analysis, it cannot be used as a substitute for independent investigations and sound business judgment.
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