Credit Suisse’s Zoltan Pozsar discusses Russia’s response to the G7 oil price ceiling by accepting gold for crude, in a year of ‘unthinkable macro scenarios’. Pozsar says it is not unlikely that the gold price will double to $3,600.
“In this scenario, gold prices double”
In a note to clients, Pozsar says the year-end money market liquidity squeeze is unlikely unless Russia decides to accept gold in exchange for oil in light of sanctions. Pozsar makes the following evaluations in his note titled “Oil, Gold and LCLo(SP)R”:
This conclusion sounds out of this world. That’s not overstated, however, given some of this year’s geopolitical and macroeconomic surprises. Is it crazy? Yes. Is it improbable? No. This was a year in which unimaginable macro scenarios and statecraft returned as the dominant force driving monetary and fiscal decisions.
In this scenario, Russian President Vladimir Putin is responding to the recently fetched oil price of $60 per barrel by asking for 1 gram of gold for two barrels of crude oil. Pozsar says that at current market prices, the upper limit for Russian oil of $60 per barrel is equal to the price of one gram of gold. What’s essentially happening here is that the US fixes Russia’s exports at this price. So, in return for this is Russia pegging it to a gram of gold. And this would happen at a time when the US was trying to replenish its strategic reserves with cheap oil. In this example, Pozsar explains:
The US dollar is actually revaluing against Russian oil. But if the West wants a bargain, it is possible for Russia to give something the West cannot refuse. That’s 1 gram for more. Gold prices would double if Russia countered the $60 price anchor by offering two barrels of oil per anchor.
How does this move affect the market and banks?
This shows how gold can move from its current level of $1,794 to $3,600. Russia will not produce any more oil. But it will ensure that there is enough demand so that production does not stop. It will also ensure that more oil goes to Europe than goes to the US via India. And most importantly, gold approaching from $1,800 to $3,600 will increase the value of Russia’s gold reserves. It will also increase gold production in its home country and various countries in Africa.
But gold doubling could be a problem for banks interested in futures markets. Because many acted assuming that governments would not go back to paying for goods. Pozsar makes the following assessment in his note:
Banks active in the paper gold market tend to have long OTC derivative receivables that are hedged by all banks futures active in commodities (an asymmetric liquidity position). Therefore, they will face a liquidity shortage. It’s a risk we haven’t thought about enough. It’s also a risk that could complicate next year’s turnaround. Because a sharp movement in gold prices will lead to an unexpected reserve mobilization. Moreover, it will lead to expansions in balance sheets and risk-weighted assets. That’s the last thing we need by the end of the year.
On Monday, the Russian offshore oil price cap went into effect. cryptocoin.com As you follow, the G7, the European Union and Australia have started to implement it. Russia, the world’s second-largest oil exporter, said it would not accept a ceiling price even if it had to cut production.
