Financial collapses are always said to have been “unforeseeable” or “impossible to predict”. When in fact the information is staring us right in the face. By the time the main stream media is announcing the panic it is typically at least six months too late. The chess table has already been set, the rooks are staring down your king, and there are no moves available to be made.
Half of the chess board has already been set in 2018. The moves made are set to devalue the US dollar at the hands of our economic enemies.
Is it crazy to think that the US dollar will no longer be the world’s reserve currency in a year? Absolutely. Is it crazy to think that the US dollar will not be the world’s reserve currency in 80 years? Absolutely not.
In the last 80 years we have seen three (to keep it simple) monetary system changes in regards to world currency. The British pound sterling lost its reserve status in 1945. It gave way to the US dollar backed by gold- The Britton Woods system. In 1971 Nixon took the US dollar off of gold standard. In short, Henry Kissenger-US Sec. of State, made a deal with Saudi Arabia to peg to the price of oil in US dollar. This deal created what is known as the petrodollar system. It seems we are getting ready for another change.
The US being the reserve currency is great for America- But terrible for emerging markets. Geopolitical tensions, sanctions, and a strengthening dollar against emerging markets could lead to the end of our current reserve currency status.
Emerging markets are saddled with US dollar denominated debt. As the US dollar has gained strength since 2011 it has become more difficult for these EM currencies to repay the debt once converted into USD. These debts will continue to tighten EM as interest rates continue to rise. In contrast- The US gets more bang for its buck when importing goods from overseas. As much borrowing as the US does today- we would be forced to borrow more if the dollar begins to fall. If the USD begins to fall than emerging markets would be the benefactor.
US sanctions on Russia, Iran (November 2018), Turkey, and Chinese trade war have laid the foundation for these countries to break away from the dollar and enter into new trade agreements among themselves. Breaking away from the US dollar is not easy when China holds $1.3T worth of US treasuries. If they dump the treasuries too fast- their US dollar investments will plummet and they will take a huge monetary loss. So how can these countries leave the dependence of the USD? It seems gold is their answer. Gold and the US dollar move in the opposite direction. As the dollar moves up than gold moves down and vice versa. Emerging markets have recognized that this is the perfect time to buy gold and move away from the USD. Gold is at $1,200 an ounce. Today, gold costs approx. $1,200 an ounce to mine. Therefor leading to an understanding that gold is at a bottom. Take a look at what emerging market countries have done since 2016:
-2016: China’s state owned bank, ICBS, purchased Barclay’s metal storage business for an undisclosed amount. Storage facility holds up to 2000 tons of metals. China currently has 1800 tons of gold.
2016: Russian sanctions lead to an increase of 36% of their gold reserves and releasing 84% of their US treasuries.
2017: Turkey purchased 187 tons of gold. Second most next to Russia.
2018: India bought 15 tons of gold. First purchase since 2009. Indonesia, Thailand, and Philippines followed suit.
2018: Iran leaving US dollar for Euro.
2018: Turkey, Iran, and Russia in talks of vacating the US dollar among their trade.
2018: China purchased 20% of the worlds gold between Jan-May of 2018.
2018: China sold $3B of US treasuries in October 18′. Second US treasury sale in a year. The third in ten years.
2018: March of 2018 China opened trade in oil futures for the first time in Yuan.
The America first policy conducted through sanctions and tariffs has also created a “emerging market vs America” policy. I’m not saying that I know how to conduct better international policy. But it is certainly bringing emerging markets closer together and less dependent on the US dollar. Perhaps emerging market’s are using the low price in gold to release their US dollar dependence.
As the smart Institutional money buys gold at these levels-The retail mom and pop investor should be doing the same. Silver often times moves with gold yet more aggressively. Harder actions upward as well as downward. At www.streetsmarteconomics.com we are buying more silver than gold.