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Ghana's Gold for Oil Deal is Not Good for USD- UPDATED

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by VBL
Wednesday, Dec 07, 2022 - 15:57

"[B]anks have been managing their paper gold books with one assumption, which is that states would ensure gold wouldn't come back as a settlement medium."

-Zoltan Pozsar

UPDATE Dec 6: Yesterday, Zoltan Pozsar put out a piece entitled "Oil, Gold, and LCLo(SP)R" Which in his labyrinthian style wove together a tale of how Gold, Oil, the RRP and something called the LCLoR, lowest comfortable level of (banking) reserves are geopolitical puzzle pieces coming together.

In the piece he extrapolates his expertise all the way out to map global geopolitical monetary flows in a cause-and-effect scenario not unlike your favorite falling domino meme.Other than our usual interest, we noted Zoltan's use of a phrase "settlement medium" in describing gold.

Zerohedge sums it all up in their post: Zoltan Pozsar: Gold To Soar...When Putin Unveils Petrogold

This brings us to Zoltan's amazing punchline. "The lesson about the mini-budget and the gilt sell-off that followed is that states sometimes do irresponsible things, or things that seem responsible but may backfire." Russia’s decision to link gold to oil could bring gold back as a settlement medium and increase its intrinsic value sharply.ZeroHedge Post

Settlement medium, or medium of exchange is almost exactly the concept discussed in this post below days prior. We wonder if the recent Ghana announcement had anything to do with Zoltan's post yesterday.  On that note, find below our analysis of the Ghana announcement which includes a detailed explanation of Exchange Medium among the 4 other reasons Ghana's announcement was not good for the USD echoing the rationale if not the potential behavior behind what Zoltan describes and ZH explains in their post.

Gold Returns as Settlement Medium

Authored by Goldfix

Bloomberg reports that Ghana, Africa’s second-largest gold producer, ordered large mining companies to sell 20% of the metal they refine to the nation’s central bank, as the government embarks on a plan to barter bullion for fuel. Here are some thoughts on The Ghana Gold announcement. Why it is good for Gold, what some bears are saying, and one risk worth noting.

1- Less Means Less

Less physical to LBMA2 (or wherever) means less physical is controlled by intermediaries. Paper shorts will be forced to accelerate covering as less metal is available for deals; Consistent with Basel 3 behavior. Somewhat like Nickel collateral shortage but infinitely slower. Commodity scarcity is the rule now as nations pull in the reins on natural resource exports. Gold while not a consumed commodity, is the most reliable store of value for these times on earth. More will be needed.

2- Gold Takes Oil-Deal Marketshare from USD

The seller of refined oil, the most used energy resource on earth, is we’d assume as Ghana represents, telling everyone that Gold3 is acceptable as payment. All that matters is the price-haircut if one exists. It's not who's selling the Gold. We know that is a distressed party. It is who is buying that matters.

3- Global Renegotiation of Dollar Deals at Adverse terms for USD, Better Terms for Alternatives

One definite risk this slightly exacerbates is any country renewing trade deals in dollars may be but more apt to close deals on shorter timelines. Terms for dollar-based deals will shorten from events like this casting future doubt on USD incumbency. If two parties like Ghana and a fuel producing nation are willing, able, and bold enough to publicly accept Gold instead of dollars in defiance of American hegemonic rules, this will encourage more defiance.

4- Virtuous Self-Reinforcing Cycle

Which leads to the positive Network Effect (IPO effect) of increased currency use. If more people have it, then more people will use it. This is the virtuous self-reinforcing cycle in action.5 A growing float (raised awareness) due to organic use from a previously low float means an increasing price, especially when that asset is in limited supply. Growing circulation creates liquidity. Liquidity begets liquidity which creates intrinsic demand in a mercantilist bifurcated world needing a hedge for growing monetary multipolarity. Gold is increasingly being viewed as a currency (at the dollar’s expense), not just a store of value. Or at worst, it is a cumbersome currency whose (lack of) counterparty traits are being valued much higher now.

5- Gold Reemerges as Medium of Exchange

One way to see this better is to think of the world post WW2 between 1944 and 1971 under Bretton Woods as 2 monetary systems. The USA remained on a Gold standard (store of value) while the rest of the world went on the dollar standard (medium of exchange). Post 1971  the dollar became the SOV as well as Gold was successfully demonetized for a while.

The world  between 1944-1971 was pegged to dollars for convenience and on-demand liquidity. The Dollar then was pegged to gold for trust in controlled expansion of the currency supply. In 1971, the US asked the world to trust it wouldn’t debase the USD even without Gold backing. It didn’t. It debased everyone else’s by exporting its own printing. The world is less trustful of the US as a result. Zoltan's Bretton Woods 3 concept is its response to that mistrust.

Now, Gold is being viewed as the SOV it always has been, but the USD may be less needed (electronic/blockchain accounting!) or desired (with its confiscation/sanction risk) for convenience or liquidity. The dollar is being slowly disintermediated this way due to increased ease in gold’s (virtual) circulation.

Bear Arguments So Far

1- The supply/demand argument Gold is being sold while Oil is being bought is therefore bearish Gold and bullish Oil

This is complete nonsense. Ghana is presumably using less dollars to buy the same fuel-oil it always buys. Therefore as a nation, they need to exchange less CEDI for USD to transact their deal.

The principle of reserve currency implies that everyone must have dollars on hand as stores of value so they can buy oil and other commodities they need for survival. If they are using Gold instead of dollars, then that is less local fiat swapped short and USD bought. It is bearish the dollar for sure. Whether it is specifically bullish for Gold in the macro intermediate term is about the terms of the deal. What is the haircut? What Is the loss/gain from the play. Is it in desperation or is it cost cutting?

Mathematically it is bullish Gold if the terms of exchange are better to use Gold than it would have been for them to stick with USD. Also: Ghana isn’t buying more fuel-oil. They are buying the same oil using less dollars.

2- The Gresham’s law argument  that Gold is the “bad money” driving the good money (USD) out of circulation.

Horseshit. Gold is already good money due to it being hoarded by central banks, Even at its nadir between 1971 and now, Central banks owned trillions of dollars of the metal despite its having no application as medium of exchange. It remains undefeated as the best store of value on earth. Now it is being remonetized as a medium of exchange again due to counterparty risks and technological advances. Continues...

 

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