Friday, June 20, 2014

Russia and Saudi Arabia to Meet and Talk

Russia has called for a war on the US dollar this week. Now Russian Foreign Minister Sergei Lavrov will be meeting with Saudi Arabia to "discuss the situation in Syria and Iraq."

The world is a chess board and moves are being made all over it. Russia and China are reaching out to the Middle East in places where the US has had the most influence in the past.

Of course the petrodollar which bases oil trading on the US dollar is an agreement that has been in place for decades now between Saudi Arabia and the US. Will Russia and the Saudi's be discussing that? Here are some quotes from the article:

"During the forthcoming meetings, they plan to discuss the situation in Syria and around it, the state of affairs in Iraq, matters of ensuring security in the Gulf, as well as topical aspects of Russian-Saudi interaction, including a political dialogue and cooperation in the trade-and-economic sphere," the official added."

"The two countries also develop economic cooperation, including in the energy sphere."

We have identified a number of sign posts to watch that can signal that the US dollar dominated system is reaching an end. The Mike Maloney presentation we posted here earlier this week does an outstanding job of creating a visual graph to show how this system is nearing the end of its life cycle. 

Some of the key signposts are:

- the US dollar index which we keep a chart of on the upper right side of this blog. If we see this index take a sharp dive that will be a key indicator

- the bypassing of the US dollar in trade agreements and commerce around the world. This has been steadily ramping up everywhere led by Russia and China who clearly want an alternative to the US dollar. As demand for dollars drops and the supply keeps increasing, the value of those dollars will continue to drop. This especially includes any announcement by the Saudi's that they will sell oil in any currency (not just in US dollars) which would kill the petrodollar.

-the gold and silver markets. We don't discuss them much here, but they are a key sign post for change. We can expect both gold and silver to move much higher when the US dollar system ends (for sure in terms of their price in US dollars). Depending on how the system changes gold may re enter the monetary system in a new and more modern way. We think it will.

-the loss of general prestige of the United States around the world. When a country loses status it is often reflected in the value of its currency. 

The premise of this blog is that the above trends will lead to major monetary system change. This change will involve the US dollar losing its status as sole global reserve currency. What comes next is less certain and what we are trying to follow here. It could be a global reserve currency issued at the IMF (the SDR). It could be that the yuan and ruble will step up to become competing currencies and the world becomes more regional. It could be that the world becomes more regional first and the consolidates after that on a global basis. It could happen over years on a steady pace or rapidly under crisis conditions.

It seems pretty sure that gold will become important again in terms of backing to reserve currencies so that the pubic will have confidence in them. Not a gold standard as used to exist in the US (where you could exchange your paper dollars for actual gold coins at the bank). Gold is still the backbone of the backing for money even though not used in everyday transactions or as legal tender. Central banks gold huge amounts of gold as key reserve assets. 

The IMF owns nearly 3,000 tons of gold. Central bankers understand that gold stored back in the vaults is important to the global monetary system even though many don't encourage citizens to own it. Here is what the IMF says about its gold:

"Gold played a central role in the international monetary system until the collapse of the Bretton Woods system of fixed exchange rates in 1973. Since then, its role has diminished. But it remains an important asset in the reserve holdings of several countries, and the IMF is still one of the world’s largest official holders of gold. "

The Russian and Chinese Central Banks are massively increasing their gold reserves. Middle Eastern countries and other Asian countries are as well. India is a big buyer. 

Don't let anyone kid you that gold is meaningless or that Central Banks think it is useless.

It can be used in a variety of ways to restore confidence in currencies and we think it will play a part in whatever "reset" is eventually done. New technologies may emerge that allow gold (and other assets) to be used in a more modern way to connect regular citizens and Central Banks.

So gold is another key signpost to keep an eye on. We will try to watch them all here.

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