+91 9815547518
Call Us

Will the world have a new Reserve Currency

War strategy

Russia just detonated the economic equivalent of a nuclear bomb.

No, this is not being overdramatic.

Putin has directed the Russian Central Bank to start buying gold and

has pegged its currency to Gold.

5000 rubles = 1 gram of gold

Let’s go a little back in time, and understand how this whole currency-gold thing works.

The business of “Money”

Money enables trust.

A rupee in any State in India is a rupee. No questions asked.

In the 1900s, when the world was low on trust, gold was that one thing

that everybody trusted humans to assign value to. Gold was the

default currency.

But transacting in physical Gold was very difficult (and dangerous).

So, countries found a way around it – they made their currency a

derivative of Gold.

And so began the era of the Gold Standard.

The amount of gold you had determined the value of your currency.

Eg: Assume the US has a total of $100 printed, backed by 50 tonnes

of gold.

Similarly, the UK has £1,000 printed, backed by 50 tonnes of gold.

Hence, $100 = £1,000, or, $1 = £10
That’s how exchange rates were determined. After World War II, the US owned 75% of the world’s gold.And its
economy was growing super fast. It did not have enough gold in its reserves to print more dollars (without gold in your reserves, you couldn’t print money – it was against the agreement signed by the top
10 nations of the world).

The US became the world’s gold mafia.

As an economy grows, the number of transactions grows, and the
country needs more money in circulation. As gold couldn’t be mined
fast enough (takes approx 10 years), the US called for all nations to
de-link currency and gold, and mutually decide on a standard. It
wasn’t in the US’ favour anymore to link gold and other currencies.

What were the other currencies linked to, then? Obviously, the US
Dollars.

Today, the scenario is such that gold is denominated in terms of US

Dollars, not the other way around.
Also, the US had convinced Saudi Arabia to price oil in US dollars, which marked the beginning of the rise of the USD as the go-to
currency for global trade. Since you needed US dollars now to buy oil (something which every country needs, and only a very few have), most countries held US
foreign exchange reserves. And since they had faith in the dollar (how could they not when every currency was linked to it?), they kept buying US government debt in
the form of bonds.

Right now approximately, 30% of the US debt is held by foreign governments and more so by foreign individuals.

But Russia’s move has the potential to change this whole game.

How?

Enter , the double headed eagle….

Like we said earlier, Russia’s central bank is buying gold from other

Russian banks at 5,000 rubles per gram of gold.

Why?

Because of the US sanctions that have frozen Russia’s dollar cash reserves in foreign banks, and cut Russia off from the world economy.

It cannot use dollars now to trade with the rest of the world. So, it has

found a new way.

And Russian banks are happy to give the central bank this gold ast hey cannot sell their $ 140 billion gold reserves for love or money,a gain because of the US sanctions.

But this whole system has the potential to mess with the entire foreign exchange and commodities market.

You see, Russia has set its own rate to buy gold. This rate pays no

heed to the exchange rate that is prevalent around the world.

Right now, according to traditional dollar-based exchange rates, you need 82 rubles to buy $1. Also, the price of Gold in USD is $67/gm.

To buy 1 gm of Gold, Russia would earlier need Rubles 82 x $67 = rubles 5,494/gm of gold

But now it has fixed the rate at 5,000 rubles/gm of Gold.

So, by pegging its currency to Gold, Russia has made the effective

ruble-USD exchange rate as:

5,000 rubles (1 gm Gold) = $67 (1 gm Gold).

Or, 74 Russian ruble = $1

What this essentially means is that the countries buying stuff from

Russia will have to shell out only 74 Russian rubles in exchange for $1 (instead of 82 rubles).

And this is just the beginning.

Russia has announced that it considers dollars to be “candy wrappers.”

So, if a country wants to import stuff from Russia, it will have to pay in gold rubles or maybe even Bitcoin (Russia is considering this option)!

Which means oil, at least Russian oil, will now be priced either in rubles or gold which backs rubles.

If European countries choose to import oil, natural gas, palladium (metal used to make semiconductor chips), wheat or anything from Russia, they will have to probably pay in gold.

This will increase Russia’s gold reserves, increasing the power of its gold-backed currency further. And keep on making it stronger against the dollar.

This, in turn, could shake the faith of the world in the dollar.

To be fair, the US is kind of responsible for already having shaken this faith.

By imposing sanctions on countries like Afghanistan and Russia, it has made countries wary of having US foreign exchange reserves as they could be frozen any time the US is displeased with them.

Russia’s move could further deepen this dislike, causing countries to dump the US bonds they hold because of the declining value of the US dollar.

The US cannot function without debt

So, it may have to raise interest rates to find buyers for its debt. This increase in interest rates will slow down the US’ growth as the flow of money in the economy will reduce.

Plus, thanks to countries dumping US dollar bonds, the price of the dollar will also decline, because of an excess supply of dollars in the market.

This could lead to hyperinflation in the US (long shot, but it is possible!).

Also, Russia’s move could convince the world to delink their

currencies from the dollar.

What would happen in such a scenario? If USD would no longer be

the default currency of the world?

The new world order ????

A currency is as strong as the demand for it.Just like anything else,the “supply & demand” theory.Why “The Petro Dollar “ is important? Because it causes a demand for the USD.People don’t realise that over 70% of all the 100$ bills in the world are actually outside of US.There are more 100$ bills in China,than there are in America and the reason for this stockpile is because oil is bought & sold in USD.If oil starts trading in non petrol dollars such as gold or a basket of currencies or in Ruble & Yuan,this demand for USD starts to reduce drastically.

And US takes a body blow

But till time , anyone who threatened “petro dollars” hasn’t fared well.Libyan strongman Gaddafi & Iraq’s supremo Saddam Hussein,paid with their regime & lives.Both of them advocated selling their oil for a different currency.Today the leading spokesperson for advocating an alternative to “Petrol Dollar System” is Vladimir Putin.

The only thing holding US at the top is petro dollar.If “the petrol dollar” dies,so does America as a superpower.

A new world order may emerge,sooner than you think.

It is between the 2 eagles now.

P.S. All rates mentioned in the article were recorded on April 1, 12:30 pm. They might have changed significantly since then.