by Tom Luongo, Tom Luongo:
I don’t think everyone has yet caught the significance of Russia announcing they are putting a floor under the price of gold. But, to be clear, Russia just broke the paper gold suppression scheme.
On Friday the Bank of Russia announced:
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THE RUSSIAN CENTRAL BANK WILL RESTART BUYING GOLD FROM BANKS AND WILL PAY A FIXED PRICE OF 5,000 ROUBLES PER GRAM BETWEEN MARCH 28 AND JUNE 30 pic.twitter.com/Q1kTSfzAIm
— Gold Telegraph ⚡ (@GoldTelegraph_) March 25, 2022
RUB5000 to the ounce at an exchange rate of 100 RUB/USD implies a $1550 per ounce gold price.
For a few days previous to this announcement, which they knew was coming, The West was running around with multiple bits of legislation to try and keep the Russians from selling their gold.
The G7 think the sanctions are hitting so hard that Putin will be forced to sell his gold to evade sanctions to pay for things. They are literally running a script in their heads that is not actually playing out in the real world.
But, whatever, Neocons never met an ugly stick that they didn’t want to use to beat someone over the head with. Too bad all they’re doing is hitting a rubber tire.
Because here’s the gig, Russia won’t be selling any gold. They’re buying it.
These are supposed to be the architects of the global monetary system and you would think they are the ones that understand it the best. But, clearly they do not.
What they think they understand is that they still control the flow of commodities around the world through price suppression schemes on the CRIMEX, LBMA and ICE.
They do not.
Ultimately, ‘outside money’ trumps ‘inside money.’
Austrians, like myself, have always understood that eventually Inside Money [money that exists within the financial system] fails because it is ultimately nothing more than a Ponzi Scheme built on top of Outside Money — money that exists outside the financial system, like commodities and bitcoin.
Money, It’s a Hit!
Let’s start with the basics. Why do we create money? To act as a way to mitigate the time risk between selling what we have and buying what we want. So we sell our labor today to buy gasoline, printer paper or blow jobs tomorrow. In the meantime we hold money.
It is a way to turn thought and personal application of energy and time into a token which can procure for us real goods in the real world.
With that in mind, now think about the current financial system where all inside money is created by first selling a debt instrument to someone willing to hold it for a vig.
Back to the ruble and gold. Because once I lay out the new incentive structure it will be clear as to why the G7 has no friends in this fight anymore.
Davos’ power rests on the ability to create credit and sell it at a positive interest carry to commodity producers. Since base commodity production in any kind of efficient market should be a very low margin enterprise, think 1-4% real annual return, selling them debt to extract oil or gold out of the ground at higher rates than that ultimately sucks all the profit out of the venture.
Free markets when allowed to function properly grind out profit through competitive arbitrage. It is both brutal and the spark of new innovations and efficiencies.
It is the desire for higher profits over baseline that does this.
In base commodities that is difficult, at best, to do. Why? Because they aren’t anything more than a second order good. First order would be the ore or timber harvested. Second order would be the ingot or lumber produced. The higher order the good, the more specialized it is and the higher opportunity for profit through product differentiation on something other than price emerges.
That’s most difficult to do in improving resource extraction because, it follows, most of the major gains in efficiency occurred in the past when the economy was less specialized.
Confusion Over ‘The System’
If the banks are on both sides of the trade setting the price of money, then they ultimately control who wins and who loses while this goes on. And let’s not mince words, it’s them. The profit rolls up to those that produce the highest order goods with the most complex supply chains.
The banks plough the profits from getting interest on the original debt into the very companies producing the higher order goods needed to ensure the lower order goods produce no wealth through the grinding out of profit via arbitrage throughout the supply chain.
Don’t believe me? Ask cattle farmers.
In this respect the current financing of these industries is nothing more than a virtualized version of the colonial economic model of the 15th through 19th centuries.
Instead of using physical men to subjugate the locals through superior weaponry and bribes to get them to extract the mineral wealth which the colonialists take back home, today we use the post-WWII institutions to run that same system through debt issuance for capex and the interest payments (in this case pure economic rent – unearned wealth).