R.I.P. US Dollar

By Jim Rickards – The Daily Reckoning.

The Death of the Dollar has been a long-time prediction of mine…Let’s dig in to what’s going on.

  • R.I.P. US dollar

In my 2014 book, The Death of Money, I laid out the case for the demise of the US dollar as the world’s leading reserve currency, and its replacement with one of two leading contenders – gold or the IMF’s special drawing rights, SDRs.

I expected this process to begin gradually and then accelerate to a sudden climax and possible monetary chaos.

Now in 2017, my forecast is playing out even faster than I expected…

This article describes how China, Russia, and Iran are coordinating a new international monetary order that does not involve US dollars.

It has several parts, which together spell dollar doom.

The first part is that China will buy oil from Russia and Iran in exchange for yuan.

The yuan is not a major reserve currency so it’s not an especially attractive asset for Russia or Iran to hold. China solves that problem by offering to convert yuan into gold on a spot basis on the Shanghai gold exchange.

This straight-through-processing of oil-to-yuan-to-gold bypasses the dollar completely. China also offers gold hedging facilities on the Shanghai futures exchange to cover any FX risk on the conversion of yuan to gold. Importantly, this establishes a yuan-denominated benchmark price for oil at the same time.

This marks the beginning of the end of the petrodollar system that Henry Kissinger worked out with Saudi Arabia in 1974 after Nixon abandoned gold. US investors cannot easily store oil or hold yuan in their portfolios.

The only prudent course to avoid this dollar demise is to do what the Chinese, Russians and Iranians are doing – hold gold.

  • China not only attacks the dollar, it attacks crypto-currencies too

The article above describes a full-scale attack on the US dollar by China’s use of yuan-to-gold conversion facilities. But, China’s not finished attacking rivals to the yuan!

As this article shows, at almost exactly the same time that China announced its plan to purchase oil in gold-backed yuan, it also issued a ban on ICOs.

An ICO is an “initial coin offering,” similar to an IPO or initial public offering of stock in a company on an exchange. The major difference is that the “coin” being offered is just a digital token that gives the buyer access to and use of some new crypto-currency application.

The crypto-currency market is small, but it does pose a threat to China. Chinese citizens have been using crypto-currencies such as bitcoin to get money out of China and avoid Chinese capital controls. China is also a major centre for the “mining” of bitcoins – technically a process of solving math problems with massive computing power to create new bitcoins for the “miners” to sell.

China’s ban on ICOs is not a complete ban on crypto-currency transactions, but it is a significant step in that direction. China is not only running the dollar off the road, it’s trying to crush upstart competitors to the yuan before they even get off the ground.

  • With dollars and crypto both in retreat, savvy investors turn to gold

As the two articles above show, both the US dollar and crypto-currencies are under attack. There are no other major currencies ready to replace the dollar in full.

The nations behind the euro have internal problems with unified fiscal policy that are still unresolved.

Japanese yen are issued by a country with the highest debt-to-GDP ratio of any developed economy by far.

Russian rubles and Chinese yuan suffer from an unreliable rule-of-law. Markets in developed economy currencies such as Canadian, Australian and New Zealand dollars are simply too small to absorb the currency flows that the world needs to hold its reserve positions.

So, if the dollar is being marginalised, crypto is on the run, and no other candidates can do the job, where should major economies and investors park their reserves? One of the savviest global investors has an answer.

In this article, legendary investor Mark Mobius sees a rush into gold.

Mobius is right about the attractions of gold, but investors should consider the implications for the price. The global gold supply increases only about 1.6% per year, and the floating supply of gold has been disappearing into private vaults from Zurich to Shanghai. Refiners cannot find enough “scrap” gold (your discarded jewellery) to produce fine gold to meet demand.

If the kinds of inflows to gold that Mobius foresees do materialise, and I expect they will, there’s only one solution to the shortage of gold supply, and that’s much higher prices.

The time to move into gold is now before the wave of new buyers shows up.

  • It’s not just China. All the BRICs are joining in the attack on the dollar

Some of the articles above describe China’s actions in marginalising the US dollar as the leading global reserve currency in the years to come. China is in the best position of any country to do this because of its large gold reserves, and the fact that it has the second largest economy in the world.

Yet, China is not alone in this effort…

From September 3-5, China hosted the 9th annual summit conference of BRICS nations in Xiamen. BRICS is an acronym for Brazil, Russia, India, China, and South Africa.

These are the leading developing economies that together account for 25% of global output and 45% of the world’s population.

The BRICS summit covered a lot of issues as this article reports including North Korean weapons development and the BRICS development bank.
Importantly, the BRICS leaders announced their support for China’s efforts to price oil in yuan convertible into gold, and went further to support a new “multipolar” world, which is code for the decline of US dollar hegemony.

Russia’s Vladimir Putin said, “Russia shares the BRICS countries’ concerns over the unfairness of the global financial and economic architecture, which does not give due regard to the growing weight of the emerging economies. We are ready to work together with our partners…to overcome the excessive domination of the limited number of reserve currencies.”

That last phrase about “limited number of reserve currencies” was just a polite way of referring to the US dollar.

Putin is putting his money where his mouth is by tripling Russia’s gold reserves in the past ten years. Everyday investors can do the same by adding to their gold allocations up to our recommended level of 10% of investible assets.

  • When in doubt, even the establishment rushes for the haven of gold

I write and speak about gold in various channels including financial newsletters and on financial TV all the time. Readers and viewers are familiar with my positive views of the role of gold in investor portfolios.

But, it’s rare to see conservative wealth managers from Switzerland do the same.

Among super-elite asset managers, gold is not widely discussed because it invites scepticism at best and ridicule at worst.

This is for all the usual reasons such as “gold has no yield” or “gold is a barbarous relic,” etc. (By the way, these repeated criticisms are canards that are completely debunked in my book, The New Case for Gold)

But the times may be changing.

In this article, one of the largest and most conservative wealth managers in the world, Pictet Group, based in Geneva, Switzerland, offers a very constructive view on gold.

Pictet’s strategist, Luc Luyet, says that the Fed will be on hold for the rest of 2017 and most of 2018 because of US disinflation and the failure of President Trump to deliver on his growth agenda. I agree.

With the Fed in easing mode, the dollar will weaken and the dollar price of gold will remain strong.

This is a fundamental case for gold that does not take into account other positive vectors such as geopolitical shocks from North Korea or outright assaults on the dollar from Russia and China.

When a conservative institution like Pictet Group has a kind word for gold, you know the rest of the institutional world will not be far behind.

  • China’s crypto-currency ban is just getting started

The Chinese financial news company Yicai reports that the ICO crackdown explained above is only the beginning of a comprehensive effort to regulate the market. Insiders claim a long list of regulations are being drafted.

Such regulation compromises one of the key benefits of cryptocurrencies – their robustness to government intervention…assuming the crackdown works.

So far it is working. Some projects have returned funds to investors while established coin offering groups work hard to comply with the new rules. Cryptocurrency prices tumbled fast on the news.

  • It looks like the beginning of the end for crypto-currencies

This article discusses the decline of cryptocurrencies thanks to the regulatory crackdown worldwide.

It presents their success as their inherent flaw. The more cryptos are used, the more likely a government crackdown. Tax authorities will simply not allow hundreds of billions of dollars in unregulated and untracked transactions.

Unless their developers come up with convenient infrastructure that bypasses the easily regulated exchanges and bank accounts, cryptocurrencies will be controlled by government and then replaced by government versions.

  • Even the power elites understand that a global money reboot is coming

Recognising that the current financial and currency system has run its course (into a dead end), machinations are underway to plan the new one. This is an implicit acknowledgement of the size of the problem (too big).

It also means that keeping our eyes peeled to institutions like the IMF, G20 and Federal Reserve can give us an edge into predicting the new system. And getting that right will be the key to surviving the reset with your wealth intact.

  • China is seeking a new world monetary order

This article explains more details about China’s new commodity trading exchange based on yuan contracts instead of dollars.

The effect of these new markets could be enormous for Australia.

UK cycles expert Akhil Patel explained in a recent report how Britain will turn to China in the wake of Brexit, abandoning its traditional allies in Europe and the US. Just as the success of Britain’s finance sector relies on this new partnership with China, so too does Australia’s export sector.

Watch for the return of Australian political schmoozing with China to a greater extent than ever.

The question is what they’ll ask of Australians in return for doing business.

And finally…

  • The war on cash shows no sign of abating. In fact, it’s getting worse…

This article shows how the War on Cash, cryptocurrencies and the crackdown on financial freedoms fit together.

For now, it’s a confusing war zone of libertarians, government control freaks and criminals.

Once again, gold is the antidote to this artificial, fiat and uncertain mess.