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    How Does Russia and Iran’s New Gold-Backed Digital Currency Affect the Dollar?

    Russia and Iran just announced a deal to develop a joint, international state digital currency backed by gold. This news is tremendously huge for several reasons we will discuss here.

    Gold

    The most obvious implication of this is the potential effects on gold. Gold hasn’t backed a major currency in years, and for the last 50 or so we have been living off a pure fiat money standard here in the United States. Nixon, as President, removed gold backing for the dollar when European nations were trading in our excess printed currency and exchanging it for our gold at the gold window. Nixon had no choice or face a lack of confidence in the dollar as an international currency while losing our precious gold reserves in the process.

    Well, it appears as though the world is coming back to the barbarous relic once again. At a time at which much of the world seems to be aligning along various geopolitical boundaries on either side of the Russia/Ukraine conflict, it has become clear the weaknesses in the current international dollar system. Simply put, not everyone wants to be on that system anymore. Other countries are exploring options that would free them to make new trade deals and other alliances.

    At the moment, all popular fiat currencies circulate against each other, free from any anchor to commodities such as gold or any other physical items. Therefore, it has been easy for governments to print more of the paper currencies than they were able to pay back from tax receipts, and since then we have been living on borrowed money for way too long. I see this current recession as the most likely trigger point for the financial reset, which will introduce new currency concepts to the world not previously seen.

    And benefitting from that is gold. Not only has it been explicitly called out in Basel 3 regulations used to regulate the Western commercial and central banking system, but now gold takes center stage for one of the world’s most recognizable counties in Russia, along with a notorious one (at least to Western leaders) in Iran.

    Russia Plan a Brilliant One

    Something I outlined on our social media channels some months back was the moves that Russia is making with regard to separating itself from the Western banking system. While the world still depends on technologies such as SWIFT in making International monetary transfers, the development of new systems outside of SWIFT has been coming along in both China and Russia. They both have separate systems that allow communication outside of SWIFT, while also integrating into that network where needed for existing trade pacts and business.

    That was stage one – building separate connecting infrastructure. With that process in place, the Russians are not standing still. They are instead multi-stacking projects in order to hasten in their dollar alternative, which includes their currency the Ruble along with the old stalwart around the world, gold. But the way in which they arranged the new system is cunningly brilliant.

    Russia-Ukraine War as a Catalyst

    The next stage is the development of alternative currencies that will flow through their new infrastructure, allowing deals with their business counterparties completely outside the dollar system. We are seeing this new currency system being put into place now, and in Russia it heavily involves gold.

    The genesis of this system came from the original conflict when Russia invaded Ukraine earlier this year. Nothing galvanizes a political body like war, and boy has the recent conflict with the west over Ukraine amped up Russia’s financial response. When the sanctions were put on Russian exports, including their oil, Russia decided to do something unique. It bet on itself – and forced buyers of Russian oil to pay in their currency, and not the dollar.

    This created a separate and distinct oil market that had not existed before on this scale with a major international producer. There was a tremendous risk to this decision though, and it may not be the one you first thought of.  There was really no way the entire world was going to reject Russian oil, as they are the third largest producer in the world behind the US and Saudi Arabia. Russia produced about 11 billion barrels per day in 2021.

    The opposite effect is what Russia is worried about. Meaning, when countries bought oil in Rubles, which they would have no way of replacing Russian production overnight, the value of the Ruble would begin to rise too fast. And it did, causing Russian exports to become more expensive. This would have dampened not only the oil trade but all of the other commodities that Russia exports.

     

    According to data compiled by OEC.world, Russia exports a lot of materials around the world including partners aligned on the opposite side of the war from them. Not only does Russia export fuel products, but agriculture and metals such as gold. A lot was at risk for Russia, so they decided to put a limiter on their currency in the form of gold.

    Russia announced they would fix the price of gold in Rubles, effectively keeping the Ruble within a trading range. If the Ruble, as a result of all the demand for their resources, were to rise too far too fast, Russia had simply to trade its Rubles for gold in the open market at a fixed price.

    This exchange keeps the Ruble from getting too frothy, or venturing towards hyperinflation, by exchanging them for gold when needed. This also had the beneficial side effect of increasing Russia’s gold reserves. Essentially the Russians were able to barter their exports for gold, while using their paper currency as a conduit, right under the noses of the west. Sanctions are defeated, essentially, as long as Russia has other trader partners. And do they ever.

    Iran

    Iran gets the benefit of a major commodities producer as a trading partner while circumventing their dependence on the dollar in trade. There is now a new Eastern hub for trade outside the dollar, though in its nascent stage. There is much more work to be done, but this deal puts the US on notice that the dollar is quickly on the way out as the international reserve currency of the world.

    Because the new currency is digital, it also allows a way out of the fiat era for not only Russia but the entire BRIC block of countries and their allies. Word on the commercial banking street is that the paper currency era is about over, and each country is developing a digital version of theirs. The US will no doubt call theirs the digital dollar at first, dropping the digital moniker once everyone is used to using it. I am sure other countries will follow.

    Final Thoughts

    There will be benefits for sure in using digital currencies. They can be faster, easier to carry around (versus any type of paper or commodity money), and more appropriate for closing international transactions, especially when used together with smart contracts and digital tokens. However, there are downsides.

    Digital currency can be debased at a much faster rate by governments, and I suspect the first generation of these will suffer from overproduction and perhaps a quick hyperinflation of them. But I also suspect that they are here to stay. And that means that the people will form a secondary market currency, most likely to be a combination of barter money such as gold, silver, and whatever else make sense to trade.

    To wit, several states have set up bullion repositories and many are producing gold dollar notes, which are paper infused with real gold. I see the States stepping up further and offering other currency alternatives to the digital dollar, but that is a subject for another article.

    Right now let’s focus on what is going on overseas and how that will change the acceptance of the dollar here forever. We are entering a new currency world, one in which gold is taking center stage once again.

    Did we really ever have any doubt that it would?

    Rob Kientz is a precious metals industry expert with over twenty years of investment experience in bond, stock, real estate, commodities, Forex, and precious metals markets.

    Disclaimer: All Market Updates are provided as a third party analysis and do not necessarily reflect the explicit views of JM Bullion Inc. and should not be construed as financial advice.

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