Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

A New Challenge to the US Dollar

Currencies / US Dollar Sep 28, 2017 - 05:32 PM GMT

By: John_Browne

Currencies

In a move that was little noticed outside of the financial world, China announced the creation of an oil futures contract (open to international traders) that will be denominated in Yuan and convertible into gold. This move provides the first official linkage of oil to gold, and more importantly a linkage between the Chinese currency and gold. While the contract volumes that will be traded on this new platform will certainly be minuscule in comparison to those in the dominant markets of New York and London (at least initially), I believe the move is the latest, and perhaps most significant, step that China has taken down the path that could lead to a global economic system that is not fully dependent on the U.S. dollar. The move amounts to a direct challenge to the dollar's privileged reserve status and could threaten U.S. dollar price erosion.


The move comes at a time when the U.S is particularly vulnerable to an economic challenge. Given the bold, but not particularly diplomatic, efforts of the Trump Administration to push an America First agenda, the U.S. finds herself somewhat isolated. Add to this the widening political polarity in the U.S.,which will make it that much less likely that Washington can take needed action in passing economic reforms to prevent a looming debt crisis. The dollar has been neglected far too long, and its strength may be far more tenuous than many imagine.

By way of background, the United States emerged from World War II as the world's undisputed economic, financial and military leader. In 1944, at Bretton Woods, the U.S. dollar, convertible into gold exclusively by central banks, was adopted as the world's main reserve currency. This status meant that the dollar was used to price most commodities, used to transact nearly all international trade. This status further strengthened the dollar and helped make Americans the richest people in the world.

Naturally, such privileges engender jealousy, especially when they are abused. But, whereas the Soviet Union challenged the U.S. militarily, no nation was powerful enough to offer an economic or financial challenge. All that began to change, albeit slowly, in the 1980's when after the death of Chairman Mao, China adopted capitalism under the guise of communism. Less than 40 years later, the country has boomed to become the world's second largest national economy with a GDP of some $11.2 trillion in 2016, according to figures from the International Monetary Fund (IMF), or more than that of Japan, Germany and the UK combined. China is currently the world's largest importer of oil with Reuters reporting that some 212.4 million tons has been brought in through the first half of 2017. Russia and Saudi Arabia are its two largest suppliers. In the still somewhat opaque gold market, it is rumored that China is now the world's largest holder of gold. More importantly, China is still growing far faster than the United States, and may likely become the largest economy in the world by the middle years of the next decade. Clearly such an economic change could invite a monetary one.

Many Americans are blissfully unaware that through the power of the printing press (and its digital age equivalents), the Federal Reserve has depreciated the U.S. Dollar against gold by more than 98 percent since the Bank was chartered in 1914. The decline went largely unnoticed because most other governments engaged in the same covert robbery. When President Nixon broke the dollar's last link to gold in August 1971, the debasement accelerated rapidly. And President Trump's just concluded deal with Democrats to suspend the Constitutional debt limit, removes the last road blocks that would prevent even greater dollar depreciation. That deal allowed the U.S. Treasury to borrow a staggering $317 billion, the most ever in a single day, which pushed the official U.S. funded debt past $20 Trillion for the first time.

In October last year the IMF, the central bankers' central bank, expressed concern that non-financial sector debt had risen to $152 trillion or 2.25 times global GDP. The avalanche of computer generated money that has been dumped on the global economy has created the illusion of great stock, bond and real estate wealth. But while the elites bathe in the riches, the underlying reality of declining living standards and social unrest are laying the groundwork for changes. Those nations with surpluses, which have been making loans to the debtor nations, are showing the strains of this open-ended endeavor.

These factors place China in a potentially powerful position versus the United States. According to data from the Treasury Dept., China is the holder of $1.17 trillion in U.S. Treasuries, the second largest stockpile in the world, after the Federal Reserve itself. Like many other surplus nations, China has shown increasing concern over the U.S. monetary debasement policies and has called for an overhaul of the international monetary system.

By moving into the top position as largest oil importer, China has developed the power to challenge the universal dollar pricing of oil that has been in place since the early 1970's. By creating a domestic oil contract denominated in Yuan and traded internationally, China will be able, potentially, to divert the petrodollars now held by oil-producing countries towards its Yuan, thus eroding much of the current crucial support enjoyed by the U.S. dollar. If successful with oil, China could create similar contracts on other internationally-traded strategic commodities (such as copper) to extend its possible attack on the U.S. dollar.

However, the world does not yet trust fully China or its currency. But by making the Yuan convertible into gold, even in this narrow sense, China now presents its currency in a much more attractive light. Many nations with large holdings of depreciating dollars and euros may be tempted increasingly to diversify into gold-backed Yuan, placing it and the Chinese government in an increasingly powerful position in international monetary affairs.

America faces serious problems from North Korea, large deficits and a looming crisis in underfunded social security, Medicare and pensions. Worse still, America faces acute social division. In the civil war, Americans killed each other in large numbers in order to preserve the Union. Today, Americans are divided politically and the gulf seems to widen on a daily basis. Unfortunately, we appear polarized not by a cause, but increasingly by hatred to a degree previously unimaginable. Only last week, a Senate Committee grilled a potential judge about her religion. This week political division even cast a shadow over the national Football League, which had always seemed to be beyond the scope of politics. This is the worst possible environment in which to expect citizens to pull together to endure the hardships of increased poverty from any future possible collapse of the dollar, dollar credit and dollar paper financial assets.

China recognizes our great divide and doubtless seeks to leverage it to advantage. It is said that the greatest use of power is to force your enemy to submit without firing a shot. It would not take much for China to trigger some future collapse of the U.S dollar. Such a move could result in financial and economic strain on the United States, a nation that has grown accustomed to plenty but torn increasingly by social strife. While the United States is locked in a rhetorical battle with North Korea (in a conflict that - save for nuclear weapons - would hardly matter on the world stage), China is taking an important step towards achieving future economic superiority without any open use of military force.

It is with this in mind that we continue to advise prudent holdings with international diversification achieved by means of overseas equity holdings and precious metals based on suitability requirements.

Read the original article at Euro Pacific Capital

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, Michael Pento, and John Browne delivered to your inbox every Monday.

By John Browne
Euro Pacific Capital
http://www.europac.net/

More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc.  Mr. Brown is a distinguished former member of Britain's Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher's government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously pronounced that Gorbachev was a man the West "could do business with."  A graduate of the Royal Military Academy Sandhurst, Britain's version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.

John_Browne Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in