Help me understand, if you can:

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    • #480819
      snot
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      I’m seeing claims that Russian rubles are now “backed by gold” because Russia has announced that it will buy gold for a certain number of rubles.  It seems to me that all that means is that Russia won’t be buying any gold unless someone else thinks rubles are worth enough to pay Russia’s offered price in rubles.

      To me, “backed by gold” would mean that Russia would sell me a certain amount of gold for a set price in rubles; i.e., rubles would be convertible into gold at a set price in rubles.

      Am I missing something?

      (I’ve seen similar claims w.r.t. an announcement by Russia that its oil would have to be paid for at a set price in rubles.)

      Destruction is easy; creation is hard, but more interesting.

    • #480821
      GZeusH
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      Back when the U.S. was on the gold standard, it was $35 per troy ounce of gold.  The way to understand it is as more of a floor under the currency.  When the dollar was in great demand, maybe you would be willing to get $34 for the ounce of gold in your pocket.

      Today, the ruble is at 83.6 to the dollar, and gold is at $1922.88 per ounce.  A troy ounce is 31.1 grams, so the gold price in dollars per gram is $61.83.   Multiplying it out, we can see that your ounce  gram of gold will buy 5169 rubles today, so only getting 5000 is not a good deal (not today).

      However, if Uncle Sam tries to crash the ruble, the fact that Russia is always willing to give you 5000 rubles for your ounce of gold means that it can’t fall below that very much or for very long.

      This may be a temporary step, until the Eurasian Economic Union comes out with their commodity backed currency, which, since it will be backed by not just one commodity (gold) but a basket of them, will be on firmer ground yet.

      Hitler 1944: Kiev is to be held to the last man.
      Biden 2022: Kiev is to be held to the last Ukrainian.

      • #480822
        djean111
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        • Total Posts: 8,711

        .

        America is not a country, it's just a business. (Brad Pitt, Killing Them Softly)

        "Sometimes when I try to understand a person's motives, I play a little game. I assume the worst. What's the worst reason they could possibly have for saying what they say and doing what they do? Then I ask myself, 'How well does that reason explain what they say and what they do?'" GRRM

        A YouTube comment – we need new conspiracy theories – the old ones have all come true.

      • #480852
        Jim Lane
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        • Total Posts: 1,061

        @gzeush

        I think @snot had it right: To back the ruble with gold, the Russians would have to offer to exchange gold for rubles, not the other way around.

        The math in your example is correct except for what I assume is a typo. You write, “Multiplying it out, we can see that your ounce of gold will buy 5169 rubles today, so only getting 5000 is not a good deal (not today).” Actually, you’d need only a gram of gold, not an ounce, to get 5,169 rubles today. That’s based on what you gave as the current exchange rate of 83.6 rubles to the dollar (making the ruble worth about 1.2 cents). Your basic point is correct. Selling a gram of gold for dollars and converting the dollars to rubles would get you 5,169 rubles, so letting your gold go for only 5,000 rubles would be a bad deal.

        But that’s not a floor on the price of the ruble. It’s a floor on the price of gold (expressed in rubles). And a floor on the price of gold, expressed in rubles, equates to a ceiling on the value of the ruble, expressed in gold.

        You write:

        However, if Uncle Sam tries to crash the ruble, the fact that Russia is always willing to give you 5000 rubles for your ounce of gold means that it can’t fall below that very much or for very long.

        Even correcting “ounce” to “gram” (to reflect the actual Russian offer), this is still wrong. Suppose the ruble crashes from 1.2 cents to 1.0 cents, i.e., an exchange rate of 100 rubles to the dollar. After such a crash, selling your gram of gold for dollars and converting the dollars to rubles would get you 6,183 rubles. Russia’s offer to pay you 5,000 rubles is still meaningless, because, either at the current exchange rate or at the rate after the ruble has crashed, you wouldn’t accept that offer.

        That’s why I said that the offer isn’t a floor on the value of the ruble – it’s a ceiling. Suppose Putin would like the ruble to rebound very strongly to be worth 2.0 cents, i.e., 50 rubles to the dollar. That would mean that someone holding dollars could buy gold at the current price of $61.83 per gram, sell that gold to the Bank of Russia for 5,000 rubles per gram, and then exchange those rubles for $100.00. That’s obviously not sustainable. Anyone who has dollars and wants rubles, and is willing to pay 2 cents per ruble, will be deluged with people willing to sell rubles at that rate. People paying 2 cents per ruble will quickly run out of dollars and be up to their eyeballs in rubles. This kind of arbitrage works (at current gold prices) whenever the value of the ruble exceeds 1.24 cents. (The break-even point is where the ruble, currently trading at 83.6 to the dollar, strengthens to 80.87 to the dollar.)  Therefore, given the current price of gold, the ruble can’t go above 1.24 cents as long as this Russian offer is in effect and is being honored.

        The Bank of Russia is holding a lot of gold.  If it made a standing offer to sell that gold for rubles at a specified price, then that would put a floor on the value of the ruble.  It’s a floor that would last only as long as the Bank of Russia was willing to continue the deal, though.  If market forces would otherwise drive the ruble down, then the Bank of Russia’s rescue effort would result in a steady drain on its gold reserves.

        • #480856
          GZeusH
          Participant
          • Total Posts: 5,508

          Yes, you do have to look at it from the right direction.  I said floor, because if people trying to manipulate the market try to push it lower, they can’t push it under 1/5000 of a gram of gold, not with this current offering price.

          I imagine that this figure will get revised as market conditions develop, but this process of tying the currency to a basket of commodities is a good one, and it will not be good for the ultimate in fiat currencies, the U. S. dollar.

          Hitler 1944: Kiev is to be held to the last man.
          Biden 2022: Kiev is to be held to the last Ukrainian.

          • #480868
            Jim Lane
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            • Total Posts: 1,061

            @gzeush

            You write:

            I said floor, because if people trying to manipulate the market try to push it lower, they can’t push it under 1/5000 of a gram of gold, not with this current offering price.

            Sure they could (assuming that by “it” you mean the value of the ruble, expressed in gold). Suppose, without this Bank of Russia offer, the market (be it free or manipulated or somewhere in between) would value the ruble at 1/6000 of a gram of gold, which is significantly less than the supposed floor of 1/5000 of a gram. The Bank of Russia offer wouldn’t affect that. Nobody holding gold is going to sell it to the Bank of Russia for 5,000 rubles per gram when the seller could get 6,000 rubles per gram on the open market.

    • #481256
      snot
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      • Total Posts: 1,517

      @jimlane, the “floor” of 5,000 rubles per gram would become relevant if others were selling gold for less than 5,000 rubles – that’s why it’s a floor.

      It seems to me that such a floor would stabilize the price of gold if that were falling; but I don’t see how it helps the ruble or Russia.  In an environment in which the value of the ruble is threatened by sanctions and the value of gold is likely to increase because of inflation, what I would think Russia needs is a ceiling on the price of gold in rubles – but the only way I understand to do that is to make the ruble convertible into a fixed amount of gold.

      Destruction is easy; creation is hard, but more interesting.

      • #481259
        Jim Lane
        Participant
        • Total Posts: 1,061

        @snot

        You write:

        @jimlane, the “floor” of 5,000 rubles per gram would become relevant if others were selling gold for less than 5,000 rubles – that’s why it’s a floor.

        Yes, it’s a floor on the price of gold, expressed in rubles. But that does nothing to shield the ruble from devaluation.

        You go on to write:

        It seems to me that such a floor would stabilize the price of gold if that were falling; but I don’t see how it helps the ruble or Russia.

        Precisely correct. The Bank of Russia offer would stabilize the price of gold in rubles, if that were falling, but does nothing to stabilize the price of rubles in gold, if that were falling.

        This is why I don’t think @gzeush has it right. He apparently believes that the BoR offer puts a floor on the value of the ruble. That’s also the tenor of the RT video he posted in another thread (link). That’s just wrong. The ruble is currently worth about 1.2 cents (using his figures). It could crash to being worth a tenth of a cent and this offer by the BoR would have no effect on that collapse.

    • #481261
      snot
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      • Total Posts: 1,517

      @jimlane!

      Destruction is easy; creation is hard, but more interesting.

    • #481287
      Ohio Barbarian
      Moderator
      • Total Posts: 24,981

      The Russians have managed to stabilize the ruble with promises like this one that I don’t entirely understand, by guaranteeing sales of Russian gas and oil will eventually be converted into rubles, and by countries like Hungary flat-out buying Russian gas in rubles. The Russians have also negotiated some trade deals with both China and India in a matter of weeks.

      It’s almost as if they had it planned out.

      Never let your morals stop you from doing the right thing.--Isaac Asimov

      The United States is also a one-party state but, with typical American extravagance, they have two of them.--Julius Nyerere

    • #481963
      eridani
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      • Total Posts: 11,935

      The value of all the gold in the world is less than 10% of world GDP.

      The total market value of gold worldwide in 2018 amounted to nearly eight trillion U.S. dollars
      https://www.statista.com/statistics/1125923/global-market-value-of-gold/

      World GDP is 85.9 trillion
      https://www.statista.com/statistics/268750/global-gross-domestic-product-gdp/

      Jesus: Hey, Dad? God: Yes, Son? Jesus: Western civilization followed me home. Can I keep it? God: Certainly not! And put it down this minute--you don't know where it's been! Tom Robbins in Another Roadside Attraction

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