Opinion: Russia just made a case for owning gold—and nobody noticed

Zavalny spoke last week on the subject of all the economic and financial sanctions being levied against Russia following the invasion of Ukraine. Most of the coverage of his remarks implied that Russia might respond to the sanctions by switching from U.S. dollars to “bitcoin” (BTC) for international trade.

But a look at the transcript being reported shows something quite different. Zavalny added bitcoin only at the end of a long list of other currency and trading options, almost as an afterthought.

(As you might expect. Not only is bitcoin new, ridiculously volatile, widely open to manipulation, and a massive drain on energy in a world facing an energy crisis, but it also offers no guarantee of privacy. Western authorities can track all transactions on the blockchain, with the result, for example, that they can even get back bitcoin ransoms.)

Much more interesting was Zavalny’s main point, even though it has been mostly overlooked. If other countries want to buy oil, gas, other resources or anything else from Russia, he said, “let them pay either in hard currency, and this is gold for us, or pay as it is convenient for us, this is the national currency.”

In other words, Russia is happy to accept your national currency—yuan, lira, ringgits or whatever—or rubles, or “hard currency,” and for them that no longer means U.S. dollars, it means gold.

“The dollar ceases to be a means of payment for us, it has lost all interest for us,” Zavalny added, calling the greenback no better than “candy wrappers.”

What will this mean? Maybe nothing. Or maybe a lot. Especially if Russia’s lead is followed by countries such as China, India and others — countries that may not welcome Washington’s ability to control the global financial system through its monopoly power over the global reserve currency.

And this adds to the argument for having at least some gold in a long-term investment portfolio. No, not because it is guaranteed to rise, or maybe even likely to. But because it might — and might do so while everything else went nowhere, or went down. Like in a geopolitical or financial crisis where the non-western bloc decides to challenge America’s financial hegemony and ”king dollar.”

China already has the world’s biggest economy, by some measures. More than half the world’s population live in Asia. Why should they continue to pay America for the privilege of trading among themselves?

So far this year gold and commodities are up, while pretty much everything else, including large stocks, small stocks, REITs and government bonds, is in the red.

I am gold agnostic. I am neither a fanatical believer or a denier. I have some in my portfolio. But there is no question it has its uses. Gold is completely private. It is completely independent of the SWIFT or any other banking system. And despite the rise of cryptocurrencies, it remains the most widespread and viable global currency that is not controlled by any individual country.

Ten years ago we pointed out here that Vladimir Putin and the Russian central bank were buying a lot of gold bullion.

Recent events show they should have bought a lot more. When Putin’s army invaded Ukraine last month, Western powers froze the foreign exchange reserves that the Russian government held in their banks’ vaults. That amounted to about $300 billion worth, or nearly half of all of Russia’s reserves, according to finance minister Anton Siluanov.

That has left the country’s government struggling for money and the ruble has collapsed. Putin’s foreign minister called the move “thievery” and admitted it was unexpected. 

But had Russia converted all its foreign exchange reserves to gold over the years, and relocated them to vaults underneath the Kremlin, it would have had no such worries. Despite some laughable suggestions that the West might somehow sanction “Russian gold,” there is no way of tracing the identity, nationality, or provenance of bullion. American Eagle coins or South African Krugerrands can be melted down into bars. Gold is gold. And someone will always take it. Carry a Krugerrand to any major city anywhere in the world and you will find people willing and eager to take it off your hands in return for any other currency you want.

Yes, as Warren Buffett has pointed out, gold is a completely unproductive asset, unlike stocks, bonds, farmland or whatever. But so is a suitcase full of yen, dollars, euros, pounds or yuan.

According to data from the World Gold Council, the gold industry’s trade association, the world’s stock of gold is worth about $13 trillion at current prices, which is about 16 times as much as the notional value of all the world’s bitcoin. Heaven knows what would happen to the value — and the price — if it began to rival the U.S. dollar again as a reserve currency. The world’s dollars are valued at somewhere around $37 trillion.

Meanwhile, daily trading volume of gold at current prices is about $160 billion, which dwarfs the bitcoin market, even in today’s boom, by somewhere between a factor of 6 and a factor of 40, depending on whose numbers you believe. 

An intriguing case for owning some gold comes courtesy of Doug Ramsey, chief investment officer at Leuthold Group. His firm monitors, as a form of intellectual exercise, what it calls the “All Asset No Authority” portfolio. It’s what they reckon you’d own if you were a portfolio manager who was told effectively to own all the liquid asset classes and make no other conscious decisions. That AANA portfolio, Leuthold argues, would consist of equal weights in 7 different assets: The S&P 500 index of large U.S. stocks, the Russell 2000 index
RUT,
+0.12%
of small U.S. stocks, an index such as MSCI EAFE
EFA,
+0.05%
of large stocks in developed international markets (meaning Europe, Japan and Australasia), 10 Year U.S. Government bonds, real-estate investment Trusts, an index of commodities…and gold.

Anyone could replicate this easily by owning 7 low-cost exchange-traded funds: the SPDR S&P 500 ETF
SPY,
+0.49%,
the Vanguard Russell 2000 ETF
VTWO,
+0.16%,
the SPDR Portfolio Developed World ex-US ETF
SPDW,
+0.09%,
the iShares 7-10 Year Treasury Bond
IEF,
-1.03%,
Schwab U.S. REIT ETF
SCHH,
+1.33%,
the iShares Bloomberg Roll Select Commodity Strategy ETF
CMDY,
+0.08%,
and Aberdeen Standard Physical Gold ETF
SGOL,
-0.37%.

The argument is that one or two of these assets are always doing well at some point or another. The portfolio, Ramsey argues, minimizes the risk of disaster because there has never been a time when they all failed. (Even in the Great Depression bonds and gold did well.)

(I love the elegant theory behind AANA, though I wonder about its heavy U.S. focus. But what do I know?)

Such investment luminaries as Jeremy Grantham and hedge fund titan Ray Dalio have also made the case for owning some gold in a portfolio.

Another friend, a widely followed investment guru and strategist, told me kept his retirement portfolio for years allocated to just two assets. Two-thirds of the money was in a global stock portfolio, and the other third was in gold, he said. It was a protection against international policy errors and crisis. Gold, he argued, was the one thing that would do well when everything else failed. (Incidentally he later cashed out his portfolio to buy a property.)

In other words, the argument isn’t that we want to own all gold or mostly gold or even a lot of gold, but that we want at least to own some gold, simply for diversification.

(About a decade ago I was at a conference of financial journalists. One of the speakers mocked gold, and said “everybody” was already invested in gold. I interrupted him and asked for a show of hands in the room from anyone who owned any gold at all in their retirement portfolio. In a large room just two of us—the other, a former editor of MarketWatch — raised our hands.)

The case for gold is often undermined by its own die-hard supporters, known as ”gold bugs.” They sometimes ascribe quasi-religious status to the metal or claim it is the only “true” currency. Actually, anything can be a currency, and if we end up in Cormac McCarthy’s The Road I’ll bet we find that food, toilet paper, painkillers and drugs all become widely accepted. (Bitcoin? I have my doubts.)

But gold deniers go to the other extreme and argue it cannot be a currency or a sound investment at all. The current crisis shows just how wrong that is.