Gold and the Weaponized U.S. Dollar
- Washington uses the dollar as a weapon…
- … and Russia’s gold is like a missile-defense shield
- Sanctions are on, sanctions are off: How can a company make plans?
- Recipe for more market mayhem — impeachment is coming
- Fed says corporate debt won’t cause a crisis (uh-oh)
- Another punk housing number… a giant gold nugget… America’s rare earth bounty (there’s a catch)… and more!
Behold, a Russian defensive weapon more powerful than a battery of anti-aircraft missiles…
Yesterday was the 20th of the month — when the Central Bank of the Russian Federation releases an updated figure on its gold reserves. Last month the Russkies stacked another 15.6 metric tons — or about 500,000 troy ounces.
Russia’s total reserve is now 2,183.4 metric tons. Officially that’s good for No. 5 among world powers. (China’s official figure is lower, but its real figure is almost surely higher — more about that shortly.)
But as a percentage of its overall economy, Russia is tops in the world — by far. The Russian gold stash equals 5.6% of Russia’s GDP.
And that’s a powerful defense against the weaponized U.S. dollar.
“The U.S. uses the dollar strategically to reward friends and punish enemies,” Jim Rickards reminds us.
“The use of the dollar as a weapon is not limited to trade wars and currency wars, although the dollar is used tactically in those disputes. The dollar is much more powerful than that.
“The dollar can be used for regime change by creating hyperinflation, bank runs and domestic dissent in countries targeted by the U.S. The U.S. can depose the governments of its adversaries, or at least blunt their policies, without firing a shot.”
That’s what the Obama administration did with Iran in 2012–13… and the Trump administration is doing again with Iran in 2018–19.
But… “as the U.S. wields the dollar weapon more frequently, the rest of the world works harder to shun the dollar completely,” Jim goes on.
We’ve been warning for five years now about a joint Russian-Chinese effort at “de-dollarization.” The endgame is what Jim describes as “a new financial system that does not depend on the dollar and helps them get out from under dollar-based economic sanctions.”
Iran’s government is keen to join the effort, and so might Turkey’s be — its membership in the NATO military alliance notwithstanding.
It’s Russia, however, that’s leading the charge.
Not only has its gold reserve tripled in 10 years, but Russia has also reduced its holdings of U.S. Treasury debt to nearly zero.
“This combination of fewer Treasuries and more gold puts Russia on a path to full insulation from U.S. financial sanctions,” Jim explains. “Russia can settle its balance of payments obligations with gold shipments or gold sales and avoid U.S. asset freezes by not holding assets the U.S. can reach.
“And Russia is providing other nations a model to achieve similar distance from U.S. efforts to use the dollar to enforce its foreign policy priorities.”
Which brings us to China — which has likewise tripled its gold reserves in the last decade.
“Despite its present weakness, China is still the second-largest economy in the world and the fastest-growing major emerging market,” Jim says. “Like Russia, China is amassing gold, and likely has far more gold than it officially lists. It has also been helping to suppress gold prices so that it can buy gold cheaply without driving up the price.
“The fact that Russia and China have been acquiring gold is old news,” Jim allows. “Still, there are practical problems with using gold as a form of currency, including storage and transportation costs. But Russia is solving these transactional hurdles by combining its gold position with distributed ledger, or blockchain, technology.”
Blockchain, you say?
Follow along with a thought experiment here: “Russia and China could develop a new cryptocurrency that would be transferred on a proprietary encrypted ledger,” Jim posits, “with message traffic moving through an internet-type system not connected to the existing internet.
“Other countries could be allowed into this new system with permission from Russia or China.
“The new cryptocurrency would be a so-called ‘stable coin,’ where the value was fixed with reference either to a weight of gold or another standard unit. Goods and services would be priced in this new unit of account. Periodically, surpluses and deficits would be settled up in physical gold.
“Such net settlements would require far less gold than gross settlements (where every transaction has to be paid for in real-time). This type of system (also called a ‘permissioned blockchain’) is not pie-in-the-sky, but is already under development and will be deployed soon. But you can count on the U.S. government being the last to know.
“The development of a gold-backed digital currency is just one more sign that dollar dominance in global finance may end sooner than most expect,” Jim concludes. “And we may be getting dangerously close to that point right now.”
[Ed. note: Jim is extending an unprecedented offer right now to Agora Financial readers like you. For a limited time, you can secure access to his most popular high-end research at a substantial savings.
And we do mean limited: This offer comes off the table tomorrow night at midnight.]
What sanctions took away from the markets yesterday, exemptions to the sanctions are giving back today.
Yesterday the Nasdaq tumbled 1% after Google announced that it would cooperate with a Washington blacklist of Chinese tech companies — shutting off Huawei from the most current Android apps for Huawei smartphones. Much of the tech sector, especially the semiconductor makers, were making similar plans — and suffering similar drops in their share prices.
And then last night came word: Washington was granting temporary exemptions to the blacklist. Thus, Google put a halt to its plans. Business as usual — at least until the temporary exemptions expire. As we write, the Nasdaq is up 1%.
We interrupt our recitation of the daily market numbers for an observation about “regime uncertainty.”
“Regime uncertainty” is a phrase coined (near as we can tell) by the economic historian Charles Kindleberger. Basically it means, “Business owners have no idea what damn fool thing the government will do next.” The rules change from week to week. It’s impossible to plan.
Regime uncertainty was one reason the Great Depression dragged on for so long — there was no telling what FDR and the New Dealers would do next. Under those circumstances, why bother trying to grow a business and invest in the future?
That’s got to be at least some of the conversation in the C-suite right now at Google parent Alphabet. Ditto for the Missouri nail maker Mid Continent Nail. We updated you on its plight last week: The firm shed hundreds of jobs last year, groaning under the weight of U.S. tariffs on imported steel. A few weeks ago, Mid Continent was granted waivers from the tariffs — for which it will have to reapply later this year.
On the one hand, sanctions and tariffs. On the other hand, exemptions and waivers — but they’re only temporary. It’s the worst kind of top-down central planning — federal officials making it up as they go along the moment they discover their actions have unintended consequences.
Anyway, the market’s up today. Hooray. The Dow and the S&P are lagging the Nasdaq.
Notable earnings reports come from the retail sector today. Kohl’s is down 10% after “guiding lower” for the rest of 2019. Home Depot is down slightly after missing analyst estimates for same-store sales.
Gold is down to $1,273 — testing a $1,270 level that’s held for more than a month now. Crude is off a bit at $62.88
The big economic number of the day is another punk housing figure. Existing home sales fell 0.4% from March to April — way more than the “expert consensus” was counting on. The year-over-year drop is 4.4%… which is actually an improvement on last month’s 5.4%.
We’d better get this on the record, because it will surely impact markets and maybe the economy: The impeachment train is leaving the station.
This morning’s Washington Post tells of a “contentious” meeting among House Democrats. Speaker Nancy Pelosi is still resisting impeachment, but at least five members of the Dems’ leadership team did a good job wearing her down. Meanwhile a senior House Democrat tells Fox News that Pelosi “isn’t going to be able to hold off on impeachment much longer. It is coming to a head.”
Our fave political reporter, the freelancer Michael Tracey, has seen this coming for weeks. His take today…
If you throw impeachment into the stew of tariffs and sanctions, it’s only that much more uncertainty for the markets.
For sure, it’ll be nothing like the Clinton impeachment in 1998–99. Hell, no sooner did the Senate acquit than Clinton started conniving with congressional Republicans on repealing the Glass-Steagall Act — deregulating the big banks and setting us up for the Panic of 2008.
Speaking of the Panic of 2008, and a possible recurrence…
Since late last year we’ve sounded an alarm bell about corporate debt. For most of the post-2008 era, corporate debt has been growing twice as fast as corporate profits. Not sustainable.
At present, about one-third of corporate debt is considered “junk” because it’s so risky. Another third is rated BBB — theoretically investment grade, but really only one notch above junk. That leaves only the final third that can be considered “quality.”
Only two weeks ago we fretted that Wall Street was now turning chunks of this risky corporate debt into “synthetic collateralized debt obligations.” Basically it’s the same playbook that was used with craptastic home mortgages around 2004–06 — bundle ‘em into securities and sell ‘em to pension funds and other institutional investors.
But no worries, says Federal Reserve Chairman Jay Powell.
“The parallels to the mortgage boom that led to the global financial crisis are not fully convincing,” he said last night at a Fed confab in Amelia Island, Florida. “The financial system today appears strong enough to handle potential business-sector losses, which was manifestly not the case a decade ago with subprime mortgages.”
Got that? Don’t worry. Corporate debt is not — absolutely not, and anyone who says otherwise is a conspiracy kook — a threat to the system.
Hoo boy. We’re filing this one away in the same drawer as Ben Bernanke’s proclamation in July 2005 that “we’ve never had a decline in house prices on a nationwide basis.”
It happens a few times a year in Western Australia, but it still takes your breath away…
$69,000 of gold, found with a metal detector (Photo from Finders Keepers Gold Prospecting)
“He walked into my shop and showed me the nugget in his hand with a big smile on my face,” says Matt Cook, owner of a shop that sells supplies to gold prospectors. “It just a bit bigger than a packet of smokes,” he tells the BBC, “and the density of it was incredible, so heavy.”
The man behind the find wants to remain anonymous for now, but Cook says he’s an experienced hobbyist — who turned up the nugget a mere 18 inches below the surface.
Forty-nine ounces it weighs; brings new meaning to the term 49er…
“Huge mothballed rare earth mine in California,” a reader writes after yesterday’explored how a U.S. attack on Iran could prompt China to choke off America’s supply of rare earth elements.
“Mountain Pass, it’s called: 1.9 million tons estimated of potential refined ore.
“There is a minority Chinese company shareholder. They will be toast.”
The 5: Mountain Pass has been on our radar for more than a decade here at The 5. A while back it was owned by an outfit called Molycorp. Our Byron King recommended the company in late 2010… and got his readers out with a 178% gain in five months.
Then it all fell apart. Costs spiraled out of control. By 2015, Molycorp filed for Chapter 11. “Turns out that Mountain Pass doesn’t have the ‘right’ kind of minerals in the ore body to deliver a profitable mix of REE products,” Byron explained.
But in January 2018, new owners figured they’d give it another try, and they formed a company called MP Materials. The majority stake is owned by an outfit called JHL Capital Group, but it’s true — a Chinese company holds a 10% stake.
As it happens, China buys some of the company’s output of semiprocessed product for further refining in China. But thanks to the trade wars, Beijing is laying tariffs on that product.
“The 10% tariffs provide a real challenge, and the prospect of 25% is daunting,” JHL’s CEO told Bloomberg last fall.
Tangled web, huh?
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