by Keith Weiner
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The headline reads “Moscow World Standard to Destroy LBMA’s Monopoly in Precious Metals Pricing”. Wow! Could it be? Is this it?! The gold revaluation we’ve all been waiting for! Someone, who has the power, will give us a venue in which we can sell our gold at its true price… how does $50,000 sound, eh?
Not so fast.
Betting Against the Incumbent?
For one thing, there are sanctions. If you’re a citizen of a Western country, there is a legal barrier between you and a brokerage account in Moscow. And even if you’re not, Russia has capital controls. Who would send their gold and cash there? Russia is a net exporter of gold; gold is always leaving the country anyways.
Leaving that aside, let’s look at the economic problem before we get to the actual news under the headline.
Basic market theory teaches that, if the price in the Moscow market were higher than the price in London and New York, then it would attract all the sellers. But the buyers would stay away. The idea of a market which prices higher than another one is unworkable. Like a magnetic monopole, it is missing one of two required sides.
There are two ways to destroy an incumbent market player. One is beat them at their own game. In the case of an exchange, that means providing better liquidity, tighter bid-offer spreads, and greater capability to absorb large orders without moving the bid or offer. This is almost always a fool’s errand, as these are precisely the incumbent’s strengths.
The other is by disrupting the incumbent. Amazon did not offer even bigger-box stores to lure customers away from the big-box stores. It went where those stores could not go—online.
We certainly have not seen any mention that Moscow intends to try to disrupt London in this way. That’s not the sort of innovation for which politicians, bureaucrats, or diplomatic communities are known.
Color us skeptical.
The LBMA vs Russian Central Banks
The actual news is fairly prosaic. After the Russian invasion of Ukraine, the US and its allies imposed sanctions on Russia. This caused the London Bullion Market Association (and the New York based COMEX) to strip the accreditation from the Russian gold refineries on March 7, 2022. Just like that, Russian-made gold bars were not marketable. Western buyers can’t touch them.
On March 25, the Russian central bank announced that it would buy gold from Russian banks for 5,000 rubles per gram. That was around $50 per gram at the time, or about $1,555. As gold was trading around $1,950, this was a big discount to the world market price. Therefore, it was either a scheme to loot the banks and gold miners in Russia, to fund the war effort. Or else, a buyer of last resort at unattractive prices.
Keep in mind that the same voices who, today, are declaring that the new Moscow exchange will destroy the LBMA said, back in March, that this gold-buying scheme was really a gold-backed ruble which would destroy the dollar. We advise caution when given advice by someone who has called hundreds of the past 0 dollar collapses.
Regardless of whether Putin’s intent is altruism or avarice, the fact is that the Russian gold miners cannot sell their product at the world market price. We assume that their gold would be treated the same way that conflict gold or narco-terrorist gold would be treated. It would sell for perhaps a 10% discount (in gold, that is massive).
The Net Result of Moscow’s Scheme
Enter, this new Moscow World Standard, which is intended to be akin to the LBMA Good Delivery List.
One thing is clear. Russia wants the clout to accredit its refineries. This may help these refineries sell their bars—but only to countries that ignore sanctions against Russia. China and India would likely be buyers of such accredited bars. Although, we assume they’re already buyers of discounted gold—with or without accreditation.
There is also a new Moscow International Precious Metals Exchange. Westerners won’t be given the choice whether to trust Russia not to employ its capital controls to trap investor cash and gold. Perhaps some Indian and Chinese market participants will risk it. Such economic powerhouses as Argentina and Iran are rumored to be signing up.
What will the net result be? Not the kind of liquidity it will take to beat the LBMA, that’s for sure. It will have wider spreads—lower bids and higher offers. Relatively small sell orders will press the bid, and buy orders will lift the offer, more than market participants are used to, in the London market. And that’s without the currency exchange rate spreads. The dollar exchange of each currency is the most liquid. What is the liquidity of rupee-ruble or rupee-yuan? Lesser. How about their liquidity in a Moscow exchange?
We emphasize that gold is a dollar market. Gold is priced in dollars. All market participants perform their calculations related to gold—in dollars. Changing this fact is not even on the table for Moscow, even in their most optimistic scenarios. This means that a yuan-paying buyer of gold from a rupee-paid seller will bear the costs of this second currency exchange spread.
The Moscow International Precious Metals Exchange may fail to deliver on its promise, due to such execution challenges.
Russia is not in a position to somehow make the gold price go up. This leaves Russia to hope for two things. One, to be able to sell its gold at the LBMA market price, and not have to give it away at a discount. Two, to spread some propaganda to Western citizens who are fearful of skyrocketing energy prices. This won’t have any real effect. But perhaps Russian propagandists believe, as so many others do, that the economy is driven by animal spirits and the dollar is propped up only by unwarranted belief.
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