Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

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

© 2005-2022 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