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Russia Proposes Its Own Precious Metals Exchange
Challenging the London Bullion Market Monopoly
The London Bullion Market Association
The London Bullion Market Association (LBMA) is currently considered the leading global authority on precious metals, or at least that’s how they refer to themselves.1 In reality, this is true. The LBMA has established a specification2 which sets global standards such as, physical acceptance criteria of precious metals (e.g., weight, dimensions, appearance, fineness, packing, delivery, etc.). The LBMA has approved members that include bullion banks, precious metal refineries, traders, fabricators, transportation & storage firms, and others.
The LBMA’s standard is universally acknowledged as the de facto international benchmark for ensuring quality. Only gold and silver bars that meet the standard are acceptable in the settlement of bullion contract trades physically held in London — known as "Loco London"3 bullion (“loco” being short for location).
But the LBMA doesn’t just set quality standards, they also set prices. LBMA member banks consult among each other on a daily basis to set gold and silver prices to facilitate smooth trading. These bullion banks base their price decisions on their customers’ buying and selling activity in the market. The daily price they agree upon is known as the “LBMA Gold Price” and it’s used as the benchmark for wholesale pricing throughout the global precious metals market.
Well, as anyone would expect, many are skeptical of how honest — or perhaps I should say, objective — the LBMA members are when setting prices. The first red flag is the fact that they used to call this daily set price as the “London Gold Fix” (up until 2015).4 Whoever came up with that name perhaps was fired. Right off the bat, it seems the fix was in, huh? So why did they stop calling it “the fix,” you might ask? Well, maybe because in 2014 the banks got sued — accused by investors of, you guessed it, fixing the price of gold.5
It’s not rocket science to see that those who set the price can easily capitalize on trades. After all, they know what the price will be before anyone else. So, perhaps a little competition to Loco London gold is in order. Well, a competitive threat seems to be lurking just around the corner, and it’s coming from Moscow.
Is Russia Now Going Loco?
Shortly after Russia invaded Ukraine, a barrage of western sanctions was unleashed. The LBMA followed suit and effectively hit Russia with a de facto ban.6 Russian refineries were shutout of the precious metals market. So, it’s only rational to expect that the country would react by trying to decouple themselves from a market that despises them. Hence, the announcement of the Moscow World Standard (MWS).
The MWS is set out to be a new trading standard of precious metals — a global competitor to the LBMA. The Russian Finance Ministry envisions the MWS to be the backbone of “a new, specialized international precious metals brokerage headquartered in Moscow” with its own price fixing committee.
The idea of the MWS is to attract membership from the black-sheep countries such as China, India, Venezuela, and Peru among others. Feel how you will about Russia, but I think a little competition will be good, natural regulation for a precious metals market that is already clouded in skepticism. This is likely another example of western sanctions backfiring.
Western governments are playing a real-life version of the boardgame of Risk, seeking to drive Russia into isolation. But the western strategy seems to be one of shooting themselves in the foot while driving their enemies into alliances. After being shutout of the western market, Russia has significantly ramped up gold exports to China. China imported $108.8 million worth of Russian gold in July — a 750% increase from June and a 4,800% increase from the same month last year.7
Is Moscow going insane in the membrane? It’s as if Putin and Company are channeling DJ Muggs and telling the west, “Who you tryna to get crazy with ese, don’t you know I’m loco?”
The Price of Gold
What does all this mean for the gold price? Well, I don’t know. If the MWS becomes a thing and really manages to challenge the LBMA monopoly, this could drive the gold price to where it naturally should be. But, is that up or is that down?
Well, if you are of the view that the paper gold market is overleveraged compared to the actual quantity of available physical bullion, then the price of gold is being artificially suppressed. More competition in the market is likely to reveal an excess of paper vs. physical supply. This would mean the price goes up.
Keep in mind that there is a very strong incentive for governments and their banking institutions to suppress the gold price — this helps maintain confidence in currencies. As governments around the world are inflating their currencies to kingdom come, holders of diminishing paper will seek refuge in something real, something physical, something gold.