Global De-Dollarization Amid Price Appreciation And What It Means For Gold

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Past Sunday, Russia and China signed an agreement in which Russia would deliver natural gas to China via the so-called “western” or “Altay” route. This will result in Russia supplying 30 billion cubic meters of gas a year to China. Putin commented as follows: “We have reached an understanding in principle concerning the opening of the western route. We have already agreed on many technical and commercial aspects of this project, laying a good basis for reaching final arrangements.”

What is even more interesting about this deal is the following: “Much attention has been paid to the topic of mutual payments in diverse fields … in yuans which will help to strengthen the yuan as the region’s reserve currency.” (source: RIA.ru) That is indeed another nail in the coffin of the Petrodollar reserve system.

That’s not it. In the last few days, China has signed direct currency agreements with Canada becoming North America’s first offshore Renminbi hub. As per CNC: “Authorized by China’s central bank, the deal will allow direct business between the Canadian dollar and the Chinese yuan, cutting out the middle man — in most cases, the U.S. dollar.”

At the same time, China signed also an agreement with Qatar to begin direct currency swaps between the two nations using the Yuan, and establishing the foundation for new direct trade with the OPEC nation in the very heart of the petrodollar system.

All this comes on top of the news of one week ago, in which the Chinese government announced that the renminbi will become directly convertible with the Singapore dollar. That is huge news as Singapore is the top financial district in Asia. Remarkably, the news remained “under the radar” in the Western media, although it was breaking news in Asian media.

As Simon Black correctly observes, everyone is in on the trend. All across the world, the renminbi is quickly becoming THE currency for trade, investment, and even savings. Over the long-term it’s glaringly obvious where this trend is going: the rest of the world no longer wants to rely on the US dollar, and they’re making it a reality whether the US likes it or not.

Global De-Dollarization Amid Price Appreciation And What It Means For Gold

When looking at the U.S. Dollar index, it is easy to observe the huge breakout on the chart. But wait a minute, isn’t the world “de-dollarizing” so shouldn’t the U.S. Dollar index come down?

That is indeed a very fair point and we think the explanation is based on two opposing forces in the economy and monetary system. On the one hand, the U.S. Fed has been significantly trimming down the monetary stimulus program (read: less money printing). That results in a stronger dollar. On the other hand, the de-dollarization should weaken the dollar as demand is coming down. Clearly, at this point, the latter is not having a short term impact on the price.

In our opinion, the price action is screaming evidence of the level of deflation that is inherent in the system. While deflation is good for consumers as they should be able to buy more for less, it is not necessarily a good thing in the context of today’s system. Central banks have distorted asset prices significantly. While some asset prices have gone up, others have come down.

One of the assets that have suffered is gold. Because of the disinflationary trend, i.e. lower inflation expectations, gold has decreased in price. A strong dollar will undoubtedly keep weighing on the gold price. On the other hand, the de-dollarization trend is a fundamentally strong driver for gold.

When putting these pieces together, the key question that arises is how gold will react on both opposing trends. In all honesty, our conviction is that, apart from those trends, the major driver of gold prices is sentiment. You see, in the current market conditions there is no room for a safe haven that has no yield compared to the nicely yielding alternatives (think of shares, dividends, junk bonds, etc). But as soon as investors will get into the “risk off” mode, it will probably coincide with a bottom in the ultra-negative sentiment towards gold.

To put this more extreme, consider the following thoughts and scenario presented by Rick Ackerman in his latest editorial:

“At present, the market for debt instruments continues to function smoothly. This is mainly because a U.S. stock market trading at record highs has provided a psychological barrier against fear. However, if some unforeseeable event were to disrupt normal loan settlements, short-term borrowers unable to roll their debts would be pressed hard to settle up in cash. Given the sums involved, this would be like trying to evacuate Manhattan via the Holland Tunnel in an hour.

As a result, the banking system would lock up overnight, triggering branch closures that could last for weeks or longer. The Fed would be powerless to act, since the fragile trust that currently allows the banksters’ to ply their Ponzi scheme will have been irretrievably lost. Cash would be in ruinously short supply, credit cards would no longer be accepted by anyone, and the economic world would be pushed into a state of barter.”

This scenario is very realistic, it is just not top of mind of investors right now.

As the “easy money saga” continues, the trust towards the dollar remains present. But below the surface, things are fundamentally changing. That will become evident as soon as the risk appetitite among investors will fade away. We believe things will change very rapidly at that point. As a result, the most likely scenario is that gold will become frontstage. It is not a scenario we hope for, it just seems an inevitable scenario with each passing day. The evidence is there; it is a matter of time in our view.

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