Last Updated on December 20, 2023
The Moscow World Standard is a proposal by Russia to create a new precious metals pricing standard to rival the London Bullion Market Association (LBMA) and the Commodity Exchange (COMEX).
The argument is that the LBMA and COMEX are using leveraged shorts to suppress the price of gold. As a major exporter of gold, Russia would have a significant interest in the fairer pricing of gold.
Whether this succeeds or not remains to be seen but it is part of the broader de-dollarisation trend as BRICS nations and others seek to remove themselves from the financial hegemony of the United States and her Western Allies.
The Background To The Moscow World Standard
As a result of Russia’s invasion of Ukraine in early 2022, the West imposed significant sanctions on the aggressor including freezing Russian foreign exchange reserves held offshore.
In an attempt to defend the rouble, the Russian Central Bank made a commitment to buy gold for 5000 roubles per gram.
This created a media storm and there was plenty of talk about how Russia was creating a new gold standard.
But is Russia on the gold standard?
No, they are not.
For a true gold standard a currency needs to be freely convertible from paper money into gold. That is, they can’t just buy gold with paper, they also need to be able to allow people to redeem paper for gold. A central bank must buy and sell gold at the fixed price.
Additionally the supposed fix of the rouble to gold was quickly abandoned. The “peg” was below the market price and the demand for gold in Russia because of the war meant there were big premiums. Nobody would sell to the central bank at a reduced price when they could get a better price on the open market.
Nevertheless the move worked and the rouble was stabilised.
There was one other significant ramification, which is closely tied to the Moscow World Standard. The linking of gold at 5000 roubles to the gram put a floor under the RUB/USD exchange rate and, because gold is price in USD, a floor under the USD gold price.
“By offering to buy gold from Russian banks at a fixed price of 5,000 rubles per gram, the Bank of Russia has both linked the ruble to gold and, since gold trades in US dollars, set a floor price for the ruble in terms of the US dollar.
We can see this linkage in action since Friday 25 March when the Bank of Russia made the fixed price announcement. The ruble was trading at around 100 to the US dollar at that time, but has since strengthened and is nearing 80 to the US dollar. Why? Because gold has been trading on international markets at about US$62 per gram which is equivalent to (5,000 / 62) = about 80.5, and markets and arbitrage traders have now taken note, driving the RUB/USD exchange rate higher.
So the ruble now has a floor to the US dollars, in terms of gold. But gold also has a floor, so to speak, because 5,000 rubles per gram is 155,500 rubles per troy ounce of gold, and with a RUB/USD floor of about 80, that’s a gold price of around $1,940. And if the Western paper gold markets of LBMA/COMEX try to drive the US dollar gold price lower, they will have to try to weaken the ruble as well or else the paper manipulations will be out in the open.”
Manly’s last point is the critical one. Russia was sending the message that they would not tolerate manipulation of the gold price in the paper markets.
That is why their next step is to create a competing price discovery mechanism – the Moscow World Standard.
How The Gold Price Is Currently Determined
The gold price used to be set by a mechanism known as the London Gold Fix, which was established in 1919. Five member banks would come together twice a day to agree upon the price of gold.
This long running process came under scrutiny after the 2008 financial crisis due to fears over the potential for market manipulation.
In 2015, the LBMA, which had been founded in 1987, established the LBMA gold price auction. This was designed to be a more transparent and auditable process and takes place electronically.
The LBMA is considered the benchmark price for gold, however the COMEX also has a significant role to play as well. The COMEX is a futures exchange where traders exchange contracts to buy and sell gold at a predetermined price and date in the future. Activity in the futures market provides market participants with supply and demand data points which can have an influence on the price of gold in the physical market.
There is also the Shanghai Gold Exchange (SGE) which is a significant hub for the trading of physical gold in Asia. Such is the demand for physical gold in China that activity at this exchange can also have a significant impact on the price of gold.
What Moscow is proposing is to create a new institution that will exert influence over the price of gold and hopefully replace the LBMA as the industry benchmark.
How The Moscow World Standard Is Proposed To Work
The exact nature of the proposal is unclear as all that we have is bits and pieces of news reports that can be cobbled together to form a picture.
Ronan Manly has done a great job of trying to piece it altogether and make sense of the developing situation.
He summarises what it would look like:
“This infrastructure would take the form of:
– a Moscow World Standard (MWS) for precious metals trading, akin to the London Good Delivery List of the London Bullion Market Association (LBMA)
– a new international precious metals exchange (trading venue) headquartered in Moscow based on the MWS, and known as the Moscow International Precious Metals Exchange
– a Price Fixing Committee, with price discovery and new precious metals price fixings based on the MWS, and reference prices derived in the national currencies of participant countries or in new international settlement units.”
Involved in the proposal, alongside Russia, are the member states of the Eurasian Economic Union. These are Armenia, Belarus, Kazakhstan and Kyrgyzstan.
Significantly, the documents also note that the price fixing mechanism will either be in the currencies of those nations or in a new unit of international settlement, such as a proposed BRICS currency.
Why Is The Moscow World Standard A Big Deal?
If successful this could be the end of the LBMA and COMEX price fixing monopoly and all the geopolitical and economic advantages that come with it.
Quoting Russian news sources, Manly notes:
“The Ministry of Finance believes that the creation of a new structure:
- can destroy the LBMA monopoly,
- create a powerful international association of participants in the precious metals industry,
- and ensure the stable development of the industry both in Russia and around the world.”
If the LBMA is using leveraged shorts to suppress the price of gold, and if the Moscow World Standard resulted in a fairer pricing mechanism, then it is probable that we would see a much higher gold price.
In a September 2022 video interview with Kitco News, Matthew Piepenburg of Matterhorn Asset Management suggested that the rouble price of gold would suggest that the USD price might be $2500.
Conclusion
The Moscow World Standard is a proposal by Russia to create a new precious metals pricing standard to compete with the LBMA and COMEX.
Details are a little opaque and there is no way to know whether or not this succeeds.
But this is a clear challenge to the Western nations and the supremacy of the US Dollar and could send major shockwaves through the financial world.
Image Credits
Moscow by Alex Zarubi on Unsplash
