If Russia accepts gold for oil, the price of gold will double to $3,600, says Zoltan Pozsar of Credit Suisse

(Kitco News) In a year of “unthinkable macro scenarios,” Credit Suisse’s Zoltan Pozsar said it’s not unlikely that gold will double to $3,600 an ounce if Russia responds to the G7 oil price cap by accepting gold for crude.

In a note to clients, Pozsar said a money market liquidity crisis by the end of the year is unlikely unless Russia decides to accept gold for oil amid sanctions.

While this result may sound out of this world, it’s not far-fetched given some of this year’s geopolitical and macroeconomic surprises, Pozsar said in a note titled “Oil, Gold and LCLo(SP)R.” “Crazy? Yes. Unlikely? no This has been a year of unthinkable macro scenarios and the return of statecraft as the dominant force driving monetary and fiscal decisions,” Pozsar wrote on Monday.

In this scenario, Russian President Vladimir Putin reacts to the recently introduced oil price cap of $60 per barrel by charging one gram of gold for two barrels of crude oil.

At current market prices, the $60 per barrel cap for Russian oil is equivalent to the price of a gram of gold, Pozsar said. Essentially what is happening here is that the US is pegging Russian exports at that price and Russia is pegging it to a gram of gold in return. And this would come at a time when the US is working to replenish its strategic reserves with cheap oil.

In this example, “the US dollar is effectively ‘appreciating’ against Russian oil,” Pozsar pointed out. “But when the West is looking for a bargain, Russia can offer one thing the West can’t refuse: ‘a gram more.’ If Russia counters the $60 peg by pegging two barrels of oil for a gram of gold, the price of gold doubles,” Pozsar said.

Gold can rise from the current $1,794 an ounce to $3,600 an ounce.

“Russia will not produce more oil, but it would ensure that there is enough demand that production does not shut down. And it would also ensure that more oil flows to Europe than to the US via India. And most importantly, gold going from $1,800 to almost $3,600 would increase the value of Russia’s gold reserves and its gold production domestically and in a number of countries in Africa,” Pozsar described.

But gold’s doubling would be a problem for banks involved in futures markets, as most have assumed governments won’t get back to using commodities to pay for goods.

“Banks active in the paper gold market would face a liquidity squeeze as all banks active in the commodities sector typically hold long positions in OTC derivative exposures backed by futures (an asymmetric liquidity position)” wrote Pozsar. “It’s a risk we’re not thinking about enough, and a risk that could complicate the coming year-end turn, as a sharp move in gold prices could force an unexpected reserve mobilization (from the o/n RRP facility to banks) expansions of balance sheets (SLR) and risk-weighted assets. It’s the last thing we need towards the end of the year.”

The price cap for Russian sea oil came into effect on Monday. It is enforced by the G7, the European Union and Australia. Russia, the world’s second largest oil exporter, responded that it would not accept the price cap even if it had to cut production.

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