Time for a Post-Petrodollar Investor Profit Play

By: Money_Morning

Peter Krauth writes: Beware of unintended consequences.

That's the advice I'd give Western leaders when imposing sanctions on Russia over the Ukraine crisis.

You see, Putin's been racking up his air miles, hastening the pace to replace the petrodollar.

It's a topic I recently discussed here, along with an investment idea for a "counterattack."

At the end of Putin's two-day trip to China last week, the two nations signed a landmark natural gas supply deal, driving another large nail in the dollar's coffin.

Amid Tensions, Russia Turns East

On the first day of meetings, VTB Bank, one of Russia's largest, inked a deal with Bank of China whereby they will pay one another in domestic currencies, sidestepping the dollar for everything from trade finance to inter-bank lending, and even investment banking.

But by the end of day 2 came the whopper. Gazprom signed a 30-year deal to supply natural gas to China at a rate of about 38 billion cubic meters annually, valued at a monstrous $400 billion.

Putin called it an "epochal event." And he was right...

It's a progression that's leading to larger and more frequent deals between these neighbors, as well as other BRICS members and even beyond.

Russia is clearly not sitting idly by.

As reported by the Voice of Russia, "on April 24th the government organized a special meeting dedicated to finding a solution for getting rid of the U.S. dollar in Russian export operations. Top level experts from the energy sector, banks and governmental agencies were summoned and a number of measures were proposed as a response for American sanctions against Russia."

Wait. Could Russia be shooting itself in the foot?

After all, China's been accused of manipulating the yuan through devaluation. But that's not news; it's a tactic nearly every other central bank is guilty of, including, most notably, the Federal Reserve.

Thanks to these banking agreements, payments from China for Russian exports will likely be made in ruble, and, in the other direction, in yuan.

As trade between the two grows, the more potential exchange rate risks will diminish.

It's an accelerating trend away from the petrodollar that's being further cemented with each passing deal.

A New Era Dawns

At the summit Putin commented, "Our countries have done a huge job to reach a new historic landmark.... China has firmly settled in a position of our key trade partner... If we sustain this pace the level of bilateral trade of $100 billion will be reached by 2015 and we'll confidently move on."

In 2013, China was the largest automotive manufacturer in the world, producing 22 million units - twice the number of the United States, its nearest rival.

With emission standards tightening, palladium is in high demand for catalytic converters. Meanwhile, Russia happens to be the world's largest producer of the crucial metal and is located right next to its leading market.

As the largest exporter of natural gas and second-largest exporter of oil in the world, Russia has plenty of the resources others need.

The Best Post-Petrodollar Play

This is a clear secular trend that's accelerating. So how can you benefit?

The most obvious would be to short the dollar, which you could easily do through the PowerShares DB US Dollar Index Bearish Fund ETF (NYSE: UDN). I certainly expect the dollar to experience significant weakness as time goes on. And the push to "de-dollarize" by BRICS members and others is not going away.

But I wouldn't bet against the dollar in the very short term. Here's why...

Right now, a bet against the euro appears safer. The European Central Bank is likely to soon start its own mega bond-buying program to counter persistent deflation and high unemployment, a topic I addressed recently. That would weaken the euro, which makes up 57% of the U.S. Dollar Index. So a weakening euro will likely translate into short-term strength in the dollar.

So rather than shorting the dollar right now, consider shorting the euro through the ProShares UltraShort Euro ETF (NYSE: EUO). This fund aims to generate twice the inverse daily returns of the dollar price of the euro, potentially doubling your gains on the euro's downside.

The bottom line is the petrodollar's demise is well on its way. Sanctions imposed on Russia for its intervention in Ukraine are only increasing the blowback.

It's true that pricing details of the China-Russia natural gas mega-deal are (for now) a "commercial secret" according to Gazprom's CEO.

But based on what we know and where all the signs are pointing, it would seem a pretty safe bet that China won't be paying for that gas in U.S. dollars.

Just watch out for those nasty unintended consequences...

Source : http://moneymorning.com/2014/05/27/time-for-a-post-petrodollar-profit-play/

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