The U.S. and its allies have administered economic and financial sanction to Russia as a result of the invasion to Ukraine. As part of this comprehensive sanction, US and its allies barred some of Russia’s banks from the SWIFT international payment system. Moreover, the Western countries have frozen most of $630 billion Russian Central Bank’s Forex reserves. French Foreign Minister said the measures aim at asphyxiating Russia’s economy. However, the entire idea of money as a universal store of value risks being eroded with this move. If currency is essentially worthless and can be taken away easily, Moscow and other non-US aligned countries would stop accumulating them. Instead, they will accumulate outside money in the form of oil barrels, gold, and other commodities.
In retaliation, Moscow has implemented two things. First, they now demand the sale of natural gas to unfriendly countries in the form of Ruble. Thus, if the U.S. and its allies want to buy natural gas from Russia now, they must pay in Ruble. Second, Moscow offers to buy Gold domestically at a fixed price of 5000 rubles per gram. The Bank of Russia therefore has linked Ruble to Gold. Since Gold also trades in US Dollars, this effectively sets a floor price for the ruble in terms of US Dollars.
Since the time that Bank of Russia made this fixed price announcement, the ruble has strengthened from 100 to the pre-war level around 80 to the US Dollar. We can do the simple calculation. Gold is currently trading at $1923 / troy ounce which is around $62 / gram. With Bank of Russia pegging 5000 rubles to 1 gram of Gold, this suggests a USD/RUB rate of 5000/62 = 80.5. If the rate deviates from this too much, market and arbitrage traders will get into action to drive the exchange rate and/or Gold price.
So Gold’s price in a way will put a floor to the ruble. But similarly, Ruble will also put a floor to Gold. 5000 rubles / gram with an exchange rate of USDRUB of 80.5 means a gold price around $1930/ troy ounce. One can make a case that Ruble may actually strengthen further. The reason is because as Russia demands unfriendly countries to pay with Ruble for its commodities purchase, demand for Ruble can increase. Let’s take a look at the USDRUB chart below:
USDRUB has dropped back from the 154 level at the height of the war to the 80s pre-war level. If we count the decline from March 7 peak as a simple zigzag (A)-(B)-(C), this will suggest wave (C) can go to reach 35-49 area where wave (C) = 100% – 123.6% of wave (A). If this count is correct, then we can calculate the price target for Gold. With a fixed rate of 5000 ruble / gram, a 49 USD/RUB rate suggest USD $102 / gram of Gold or around USD $3170 / troy ounce Gold.
