People say that politics is complicated! Well, it is, but not so much, if you understand market behavior. It has been some time since the President of Russia Vladimir Putin has declared war on the US dollar, preparing to introduce the gold standard again.
Russia is the world’s largest oil producer and lately a big importer of gold. Since oil is quoted in US dollars Putin fears of its devaluation due to the Federal Reserve’s policy of quantitative easing. President Putin and many other economists are fearing of inflation, devaluation and even default for the green currency. We strongly defend the thesis, that market behavior is the force, which defines the state of the economy, not the fundamentals as many economist claim. The myth about the “petrodollar” is that it draws the track of the dollar’s movement. Many will assume the petrodollar is what keeps the US economy going. False. Even with the petrodollar at work, the green currency has been in a long-term bear market. In early 2008 the american currency changed its course and began a new multi-year uptrend.
Charles Dow, the creator of the Wall Street Journal and the Dow theory (first form of conventional technical analysis), states that the primary trend can not be manipulated no matter how big of an institution we talking about.
As Putin comes to power, Russia’s import of the yellow metal starts to increase. But as history shows, institutions and governments are always late on market trends – they sell on bottoms and buy on tops. E.g. the U.K. finance minister sold almost 400 tons of gold in 2002, when the uptrend had just began. Russia bought 181.4 tons of gold in 2013, not realizing the trend had already reversed. These and other countries’ institutions are part of the herd and can be used as an indicator for changes in trends. They will experience massive losses in value, because they do not understand market behavior.
Another question appears, when thinking about the gold standard. Russia has only about 10 percent of its reserves in gold. The other 90% are in other currencies, mainly dollars. If they try to get rid of all paper dollar assets, they will experience a huge lose of value once again, as we said the greenback changed it course to an uptrend movement. The only way to push in the gold ruble is through deflation, reducing the amount of circulating money, because it will be pointless to link the currency with the current price of gold. Deflation will drive prices lower and domestic producers will be forced to fail. This will lead to more imports, reducing the money/gold supply even more . The next big question is how many grams of gold will be exchanged for how many rubles. The small gold reserve makes it impossible for the Russian economy to prosper without going through a deflationary depression. The only way to proceed is to wait for the price of gold to fall at a reasonable price, so the money supply could match the gold reserves of the central bank. Lets not forget the price of gold was fixed during the gold standard, not fluctuating like now. Inflation is a normal outcome during an uptrend. Inflation is the economy’s way to thrive. The economy’s growth or a nation’s needs should not be limited by the amount of gold in the central bank, nor should the central bank pump bad credit in the economy like it does now. Today’s currency is backed up by goods and services and its should stay that way, but we have to understand, there are economic cycles, which are inevitable and can not be manipulated. There will always be economic crisis no matter what reforms politicians try to pass. Gold is no longer a currency, it is a commodity and its price is determined by the market (social mood). Governments and institutions always take wrong decisions in the wrong time.
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