Be Careful What You Hope For …
Since the beginning of the year I have been of the opinion that the U.S. dollar would be a weaker currency. My main observation is that our new President and Treasury Secretary were actively speaking about the need for a weaker dollar. So far, any efforts that they have made seem to be working. The U.S. dollar has declined by 9% since January. There may be some currencies that it has actually risen against (Venezuelan Bolivar) but against a currency basket it has been declining all year. It has also declined over 15% versus gold as I write this on 9-5-2017.
Some people also attribute the discord amongst our “leaders” in Washington and their inability to seemingly get anything done as another leading cause of our currency’s continued weakness.
While there are likely many reasons for the dollars weak performance there may be another more subtle reason why the dollar has been so weak and may get far weaker as time goes on.
In what I would describe as possibly the most important news you haven’t heard (No Shocker There!) is that China is ready to launch a crude oil futures contract that will be settled in Yuan by the end of 2017.
This could be THE game changer in my opinion. Below I will explain why.
The main reason the dollar has been as strong as it has since President Nixon took any backing of the dollar by gold away in 1971 is that Henry Kissinger arranged for all global oil trades to be settled in US dollars starting with Saudi Arabia. We protected their kingdom- they protected our currency by making an effort to ensure that there would always be demand for dollars as you would need US dollars to buy a commodity that the world is addicted to-oil.
Keep in mind that this has been extremely important to our country. Just months before we invaded Iraq Sadaam Hussein declared he would only take euros for his oil. After the war the Iraqis took US dollars. Muammar Gaddafi in Libya had plans to launch an African gold backed currency. That country went from one of the wealthiest countries in Africa to a virtual hell. There is no gold- backed African currency by the way.
When you think about it we were able to “print” dollars and get real assets for pieces of paper. Today, we don’t even have to print the dollars- a computer entry will do the same job at a fraction of the cost. This has allowed us to run up the dizzying debts that we now are on the hook for.
I have written many times in the past that I thought our using the dollar as a weapon would hasten the dollars demise. The move China is making appears to me to be a direct response to Washington’s threats against China, Russia, Iran and anyone else in their crosshairs. This should allow anyone that wants to bypass sanctions or just bypass using dollars to do so.
Now many may be saying that the Yuan is not even fully accepted around the world so many may not want to take a Yuan for payment. They have already addressed that issue and will let anyone exchange the Yuan for gold. According to Tsvetana Paraskova of OilPrice.com:
“The world’s top oil importer, China, is preparing to launch a crude oil futures contract denominated in Chinese Yuan and convertible into gold, potentially creating the most important Asian oil benchmark and allowing oil exporters to bypass US dollar denominated benchmarks by trading in Yuan, Nikkei Asian Review reports. The crude oil futures will be the first commodity contract in China open to foreign investment funds, trading houses, and oil firms. The circumvention of US dollar trade could allow oil exporters such as Russia and Iran, for example, to bypass US sanctions by trading in Yuan, according to Nikkei Asian Review. To make the Yuan-denominated contract more attractive, China plans the Yuan to be fully convertible to gold on the Shanghai and Hong Kong exchanges”.
I can’t help picturing Vladimir Putin saying to Xi Jinping that we are sending you real assets- we would like real assets back.
If you were producing an asset that took hours of manual labor to discover, drill, pump, transport, refine, etc. would you rather get paid with a dollar that appears to be in a tenuous situation or an asset that has been known as money since the beginning of time. (“Gold is money. Everything else is debt”-JP Morgan) Mr. Morgan couldn’t have been more correct at the time or now in my opinion.
China, it appears to me, is gearing up to become the next dominant world economy with their one-belt initiative that more and more countries are signing on to. If the Yuan has a gold backing of some sort and our dollar does not the dollar could be in for a hasty demise. Could that be the reason that Treasury Secretary Mnuchin was so interested in checking out our gold supply two weeks ago? Interesting times!
Keep in mind that China is the world’s largest oil importer on the planet. This gives anyone exporting oil to them a great incentive to trade in Yuan particularly if it is exchangeable into gold.
What will this do to the oil price? Quite possibly it could stabilize the price globally but could actually make dollar-priced oil far higher because of a declining value of the dollar.
What will this do to the gold price? Back in 2010 when central banks went on a “printing” frenzy my, logical at the time, thought was there is a limited supply of goods and trillions of dollars, yen, yuan, euros, etc. being “printed” so all prices- especially gold and silver should skyrocket. They didn’t. There are plenty of reasons for this that I have covered in past articles. Quoting Dr. Paul Craig Roberts (former Assistant Treasury Secretary) “When supply is limited and demand is growing the only way the price goes down is manipulation”.
I believe this time it IS different than 2010. This time those in charge (those who have been stealthily adding tens of tons of gold to their holdings- China, Russia, Global banks, etc.) need the gold price to be higher. How much higher? I can’t say I know but my intuition tells me that it may be multiple times higher than it is today. ALWAYS watch what they are doing- not what they are saying.
It appears to me that the US-centric world that is the only world our generation has known is coming to a close just like the English, Spanish, Roman, Greek, Ottoman, etc. empires have all ended in the past. It also appears to me it will be for many of the same reasons. Hubris, lack of work ethic, expectations of something for nothing, creating winners and losers and using our political and military power to subdue others. Of course none of this would likely have happened if we had the same moral compass that allowed us to be (in my opinion) the greatest country the world has ever seen.
These changes may also likely usher in a new era in assets that should be invested in or avoided. If you are unsure about whether your assets should be held or avoided it may be time for a chat. It appears time is short- we’ll see.
Mike Savage, Financial Advisor
2642 Route 940 Pocono Summit, Pa 18346
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