The World Is Creeping Toward De-Dollarization

Authored by Ronald-Peter Stoferle via The Mises Institute,

The issue of when a global reserve currency begins or ends is not an exact science. There are no press releases announcing it, and neither are there big international conferences that end with the signing of treaties and a photo shoot. Nevertheless we can say with confidence that the reign of every world reserve currency has to come to and end at some point in time. During a changeover from one global currency to another, gold (and to a lesser extent silver) has always played a decisive role.

Central banks and governments have long been aware that the dollar has a sell-by date as a reserve currency. But it has taken until now for the subject to be discussed openly. The fact that the issue has been on the radar of a powerful bank like JP Morgan for at least five years, should give one pause. Questions regarding the global reserve currency are not exactly discussed on CNBC every day. Most mainstream economists avoid the topic like the plague. The issue is too politically charged. However, that doesn't make it any less important for investors to look for answers.

On the contrary. The following questions need to be asked:

What indications are there that the world is turning its back on the US dollar?


And what are the clues that gold's role could be strengthened in a new system?

The mechanism underlying today's “dollar standard” is widely known and the term “petrodollar” describes it well. This system is based on an informal agreement the US and Saudi Arabia arrived at in the mid-1970s. The result of this deal: Oil, and consequently all other important commodities, is traded in US dollars — and only in US dollars. Oil producers then “recycle” these “petrodollars” into US treasuries. This circular flow of dollars has enabled the US to pile up a towering mountain of debt of nearly $20 trillion — without having to worry about its own financial stability. At least, until now.

For a long time the basis on which this global currency system rests was poorly documented. Finally, Bloomberg published a comprehensive article in May 2016, which provided detailed confirmation of the agreement that was hitherto only known as a rumor. The fact that this article is published now also represents a subtle clue that there are simmering shifts in the global currency system.

The trend becomes ever more tangible and can be described by the following term: de-dollarization. The world is looking for alternatives to the dollar — and finds them more and more often. At the same time the big oil producers and the largest exporters have stopped accumulating US debt securities. In one sentence: Since 1973 the dollar standard has been based on “usage demand” for dollars — they were needed. But when China and Russia find alternatives for their bilateral trading activity, they need fewer dollars. The same applies to European countries which have adopted the euro since 1999.

There have been many attempts by various nations to undermine the dollar's preeminence in recent decades.

Some were nipped in the bud by US interventions — such as the plan of Iraq's former dictator Saddam Hussein to sell oil for euros.

Or the rumored plan of Libya's eccentric ruler Muammar al-Gaddafi to issue a pan-African gold currency.

Others are less well known, but are indeed continuing to “bubble” below the surface: For example, since 2008, an agreement exists between Saudi Arabia, Kuwait, Bahrain, and Qatar which provides for the creation of a monetary union. The planned new currency is nicknamed — rather unimaginatively — the “gulfo.” “The project is inspired by the European currency union, which is seen as a great success in the Arab world,” according to an article by Telegraph journalist Ambrose Evans-Pritchard. He inter alia quotes Nahed Taher, the CEO of Bahrain Gulf One Investment Bank: “The US dollar has failed. We need to delink from it.” However, it appears the plan has been put on hold in recent years. As recently as mid-2013 a statement was issued according to which the common currency was going to be put in place “by 2015 at the latest.” Today it is no longer even talked about. Moreover, other potential members such as the United Arab Emirates or Oman have so far failed to join the club. One should nevertheless keep an eye on developments in the Gulf.

A clear signal that something is afoot would be the abolition of the Saudi riyal's peg to the US dollar. As recently as April of this year economist Nasser Saeedi advised Middle Eastern countries to prepare for a “new normal” — and specifically to review the dollar pegs of their currencies:

“By 2025 it is clear that the center of global economic geography is very much in Asia. What we’ve been living in over the past two decades is a very big shift in the political, economic, and financial geography.”

While the role of oil-producing countries (and particularly Saudi Arabia) shouldn't be underestimated, at present the driving forces with regard to de-dollarization are primarily Moscow and Beijing. We want to take a closer look at this process.

There exist numerous political statements in this context which leave no room for doubt. The Russians and Chinese are quite open about their views regarding the role of gold in the current phase of the transition. Thus, Russian prime minister Dimitri Medvedev, at the time president of Russia, held a gold coin up to a camera on occasion of the 2008 G8 meeting in Aquila in Italy. Medvedev said that debates over the reserve currency question had become a permanent fixture of the meetings of government leaders.

Almost ten years later, the topic of currencies and gold is on the Sino-Russian agenda again. In March, Russia's central bank opened its first office in Beijing. Russia is preparing to place its first renminbi-denominated government bond. Both sides have intensified efforts in recent years to settle bilateral trade not in US dollars, but in rubles and yuan. Gold is considered important by both countries.

The gradual move away from the USD to a multi-polar monetary order has several important effects, which only make sense when viewed through this lens. Contrary to what is asserted in most mainstream reports, oil-producing countries are not so much interested in a much higher oil price in USD terms, but rather in competition for market share. They are increasingly able to choose in which currencies they want to trade. The most important effect has become evident since 2014: two of the largest holders of US treasuries (China and Saudi Arabia) have abandoned their support of Washington. On the other hand, oil producers have no interest in recycling their revenues as “petrodollars.”

The process of moving away from the dollar - prepared by Europe and triggered by China and Russia - can no longer be stopped. And as a “supra-national” reserve asset, gold plays an important role in it.



realmoney2015 Alok Tue, 09/19/2017 - 12:00 Permalink

Agreed! And replace with a sound monetary system based on real money, gold and silver. These precious metals hold their value for years, decades, and even centuries.  For example, a gallon of gas in 1965 cost two dimes. Today a gallon of gas cost two dimes (if those dimes are made from real money, silver). We are raising awareness and educating people on the importance of real money. That's why we put a silver coin prize in every candle. . It helps people understand the value of real money, while starting/building their stack. Our money should be a store of value. The USD is not. Prepare for the day it loses its reserve status. Help ensure that the new system will be the right one. 

In reply to by Alok

Anteater realmoney2015 Tue, 09/19/2017 - 12:34 Permalink

Actually beer hops have appreciated far, far more than gold or silver.But the only liquidity in the beer hops market is to drink it by yourself,just like there will be no liquidity in GLD/SLV when everyone is tryingto dump their's for cash to buy groceries. Then groceries will outshinePMs. People will drop PMs on the floor fighting over that can of coffee.'Hey, man, pssst, wanna buy some hot GLD/SLV? Oh, and I have somebootleg 8-tracks, if you like The Eagles. What about this Burova watch?'

In reply to by realmoney2015

realmoney2015 Anteater Tue, 09/19/2017 - 12:39 Permalink

Gold and silver dont really appreciate. Really it's just the Fiat currencies, like the dollar losing value. That's how college education, healthcare, or even a beer at Busch stadium stay about the same price when priced in gold and silver. They hold their value. Of course, gold and silver are not food, water or shelter. Those basic needs are more important than money. But the best, most secure, safe, and time tested way to preserve your wealth is gold and silver. In tough times, if I had extra water or coffee, I would be happy to sell it for gold and silver. 

In reply to by Anteater

surf@jm Tue, 09/19/2017 - 11:56 Permalink

A reserve currency that loses 5 to 10 percent of its value annually, while its issuer lies about that fact is no reserve currency.......

mkkby surf@jm Tue, 09/19/2017 - 19:04 Permalink

Every day the same boring gold/bitcoin doom porn article. I've been here longer than 99% of you. Prediction after prediction turns out exactly the opposite.

10% inflation means losing 80% of purchasing power since 2000. Yet, my living costs have gone down. I went galt a few years ago and live comfortably on less than I earned in 1985.

Stick that in your hyperiflationary ass and rotate. Learn to live frugally and quit whining, snowflake.

In reply to by surf@jm

Anteater realmoney2015 Tue, 09/19/2017 - 12:27 Permalink

Gold stopped being money back in 1973, then it stopped be an investmentwith GLD fractional reserve (actually only a hedge on an over-hypothecatedNYMEX contract) fiat toilet paper. Like people still believe there is 'money'in their bank accounts. There's just 1s and 0s. Get to the back of the line. 'Thank you for calling QuikTrade. All our operators are busy at the moment.Your SELL!! order will be processed as soon as the market stabilizes. Thereis a limit on redemptions of $500. The balance of your SELL!! SELL!!  order will be held in a New American Century MM fund until final disbursement.!Mazel tuv!

In reply to by realmoney2015

realmoney2015 Anteater Tue, 09/19/2017 - 12:47 Permalink

Gold has never stopped being money. It is a store of value. You are right, against article 1 Section 10 of the US Constitution, we have legal tender that is not good and silver. The dollar is no longer redeemable for gold and silver. It is backed by nothing. That's why it can be created out of thin air. Even with all of the manipulation, gold and silver have held their value. I don't think of gold and silver as an investment. It may (will) outperform the dollar, especially in the long run. It may not actually gaim value in real terms. It will keep it's value. It will buy the same amount of stuff 10, 50, and 100s of years later. 

In reply to by Anteater

realmoney2015 dark pools of soros Tue, 09/19/2017 - 13:12 Permalink

Tons more if it. Also tons more people and mining cost rise.this is why gold holds it's values. 20 years is not a long time. Gold and silver have been used as money for over 3000 years. 20 years is just 0.5% of that timeline. Said a different way, would you be willing to risk your wealth by storing it in something that has that small of a track record? I'm fairly confident that I will see the day eBay and Amazon fail and cease to exist. If not in my lifetime, certainly in my childrens lifetime (who I plan to pass my wealth onto). 

In reply to by dark pools of soros

Cautiously Pes… Anteater Tue, 09/19/2017 - 12:23 Permalink

Well, I just bought the Charlie Munger   Gold. It's What's for Dinner   cookbook.  He highlights dozens of recipes for some of the tastiest and tantalizing dishes using GOLD as one of the key ingredients.  So, it turns out .... you can eat gold afterall !!!!  Who could have known??I think my fav is Nugget Pie .... mmmmmm.......

In reply to by Anteater

Hanomy Tue, 09/19/2017 - 12:02 Permalink

With all the money printing in the last years and endless unjust sanctions/bombs on the countries that are not carrying the will of the USA regardless of merits ... it's just a matter of time.

Anteater Tue, 09/19/2017 - 12:05 Permalink

Gold is heading to $675.Modi's Indian 'Gold Bond' racket is dumping 10,000,000s of ozsof 24kt melted-down heirloom jewelry onto the London market,faster than the Nazis coild turn your scrotum into a coin purse.If anything, Trump raising the National Debt Ceiling to $30T,then the Pentagon's fake 'Buy American' procurement programopen to 29 foreign countries and MMs of their foreign workers,with re-dollarize the world, spraying jujube's in an arcing rainbowover every continent where we have our 800 military distributionpoints. It's almost like Helicopter Ben in reverse! Americans takethe National Debt up the ass on interest-only repay, and our allieswipe their fat asses with our $100s, working as slow as they can.The only 'de-dollarization' will be in our children's bank accounts,and your social security check. Wake up, time to die! Mazel tuv!'America never existed! There are no Americans!'

burocracy Tue, 09/19/2017 - 12:22 Permalink

"[....]Central banks and governments have long been aware that the dollar has a sell-by date as a reserve currency"there has not been an instance in the past in which a "reserve currency" has expired at the hands of any established organization. First off, we've been in a gold standard for most of humanity's life, and in that case it's self evident that the only agent on a currency is debasing, i.e. loewwring the content in gold for some poorer qulity substitute, Copper or else. As to paper currencies, the same applies as long as any kind of gold parity exist: the quality of a currency sits with the issuer, non on any referee, and the only judges are the users, who do not need central banks to know if a parity has been repudiated.  As to the existing system, where all currencies are essentially paper promises....... the status of reserve currency hinges on any government standing by its promises even when it's not economically convenient for said government to do so. that rules China and Russia out, and blemishes the EUR considerably given that dirigiste France is in that system. Pounds anyone?

Aaron Hillel Tue, 09/19/2017 - 12:25 Permalink

With respect to my learned collegues from ZH, I seriously doubt that USD will lose its reserve currency status anytime soon.The common wisdom is that it would mean an end to Hegemon's capacity to accumulate debt -  and to finance its gigantic warmachine.Which in turn would provoke a possibility of peace breaking in the ME and Ukraine, and accessorily an end to the colonial venture in our Afghanistan.Worse yet, it would seriously impede the capacity of MIC to corrupt various officials, and allow some deplorable people to possibly get to positions of responsibility. The Moneychangers will drag us all to the abyss with them before they let that happen.

msamour Aaron Hillel Tue, 09/19/2017 - 13:33 Permalink

Yes this is currently happening in slow motion. Why do you think the US is rushing to try to orovoke North Korea into attacking? The leaders in the US need a war rapidely, and badly. They know if they don't get one soon the decoupling will accelerate.Hyperinflation beiggins slowly at first, then it snowballs. It's an exponential function. Think Weimar Germany, but 1000 times bigger. I will take some time, but the end is already ensured at this point...

In reply to by Aaron Hillel

Fireman Tue, 09/19/2017 - 12:38 Permalink

The Weimar style IOU petroscrip (no longer) I$I$ backed Saudi Mercan toilet paper dollah is already worthless and the whores on Wall St know it whatever about the idiot political filth in the Washing town thugocracy and their lying presstitutes. China will play the game as long as it can redeem its poker debt and then will pull the plug. The Pentacon Protection Racket is all maxed out as the fat kid in Pyonyang toys with the dead beat "super power". Even Venezuela is laughing yet most USSANS are deluding themselves as they sink ever deeper into unpayable debt peonage.Debt$ R US… 100 million plus joble$$ Nowhere to go but Hooverville