Friday August 16, 2019
Chris’ note: Stocks got crushed today. The Dow plunged 800 points. That’s its biggest loss in over a decade.
But there’s always a bull market somewhere. And right now, it’s in gold. Gold has trounced stocks over the past six months. It’s up 15% versus a 4% gain for the S&P 500.
It’s a trend we put on your radar in these pages last summer. And as readers of Legacy Research cofounders Bill Bonner and Doug Casey will know, they’ve been predicting an epic bull run for gold… as stocks and the economy slide.
But, as we’ve been showing you, there’s another reason for the gold rally. It’s a plot by China and Russia to dethrone the U.S. dollar as the world’s No. 1 currency… and replace it with gold.
That’s why I reached out to currency expert Jim Rickards. As you’ll learn below, Jim says it’s all to do with a low-level financial war that’s going on between America and its overseas rivals.
Chris Lowe: You gave a speech at the Sprott Natural Resource Symposium in Vancouver last month. And it caught our attention here at The Daily Cut.
You said the world was in a state of “financial warfare.” And you talked about how Washington has been using the U.S. dollar as a weapon against its geopolitical rivals. How do the feds weaponize the dollar?
Jim Rickards: About 60% of global foreign exchange reserves is denominated in U.S. dollars. About 80% of global payments is made or received in dollars. And almost 100% of the energy market is denominated in dollars.
America’s rivals are forced to use dollars to trade with each other. This makes dollar payment systems – Fedwire, the ACH Network, and SWIFT – choke points the U.S. can apply to its rivals’ economies. Without access to these systems, they can’t access the dollars they need to participate in global trade.
That’s like shutting off the oxygen on a patient in intensive care. That person’s going to die.
You can have all the oil and natural resources in the world. But if you can’t sell them… if you can’t get paid… if your wire transfers are being frozen or seized… you’re going to have a big problem engaging in commerce.
Chris: SWIFT is the central nervous system of the international financial system. It’s what allows banks to send and receive payment requests and ensure reliable cross-border transfers. America can flip a switch and shut that down. How long are its rivals going to put up with that threat?
Jim: Not long. If you are Russia, China, Iran, Turkey, Venezuela, or Syria… and you want to get out… you need an alternative to the dollar.
Now, there are no other currencies – including the world’s No. 2 currency, the euro – that can step up and be a new global reserve currency to replace the dollar. The Chinese yuan and the Russian rouble aren’t even close. You have to think about something completely new.
Chris: So what’s the alternative?
Jim: It has to do with the technology behind bitcoin – the distributed digital ledger known as a “blockchain.”
China and Russia are building a distributed digital ledger similar to the one behind bitcoin. They’ll use it to subvert the U.S.-controlled currency payments system.
But here’s the key. The Chinese and the Russians are using what’s called a “permissioned distributed ledger.” You can join it only with the permission of whoever’s controlling it.
Bitcoin is not a permissioned blockchain. I can verify transactions and be part of the network if I want to. So can you.
But the Chinese and Russian blockchain would be members-only. It would be like joining a club. And if you’re not in the club, you’re out on the sidewalk.
Chris: Let’s say China and Russia build the private version of bitcoin you’re talking about. Then what?
Jim: Then the countries in the private club use it to trade among themselves. When they use this distributed ledger system, they won’t pay in U.S. dollars. They will pay with an associated digital token – say the XiCoin or a PutinCoin. They would use these digital tokens on their permissioned blockchain to keep score.
The token would have to be anchored to something tangible to have an ascertainable value. It could be anchored to a basket of commodities. But gold would do. That’s why I call China, Russia, Turkey, and Iran the “New Axis of Gold.”
So now, you have a network where Iran sells oil to China… China sells weapons to North Korea… China sells infrastructure to Russia… Russia sells natural gas to China… and everybody takes a vacation in Turkey.
You’ve got all these payments going back and forth. And everyone’s keeping score in this new digital currency. Then periodically, they settle up in gold – because there’s got to be a real form of money under it.
Chris: Wouldn’t that require them to physically ship a lot of gold back and forth?
Jim: You need a lot less gold to do this if you’re settling up on a net basis.
If you had to pay in gold for every shipment, there almost certainly wouldn’t be enough gold. But let’s say Iran sells oil to China, and then China sells infrastructure to Iran. If you keep score in the digital token on the private blockchain, you can net those payments out.
Then you just settle the net in gold. You could put it on a plane and fly it around between each country. But you don’t have to. You could find an agreed depository somewhere, and then just change the name tag on the gold. That’s what we’ve been doing for 100 years.
Chris: It’s not hard to see what’s missing from this scenario – the U.S. dollar.
Jim: That’s right. Nothing is denominated in dollars here. Nobody uses dollar payments. No message traffic goes to any U.S.-controlled dollar payment system. The new network is secure, encrypted, and permissioned. And it runs on a digital token backed by gold.
Now, if the U.S. wants to impose sanctions on the sale of Iranian oil to China, Iran could just ship the oil to China, get paid in these digital tokens, use them for other things among the participating trading partners, and then periodically settle up in gold.
This is all happening in front of our eyes. In the last 10 years, Russia has tripled its gold reserves. China has more than tripled its gold reserves. Iran’s gold reserves are not known, but it probably has more than 100 tons.
But most people don’t think about it the way I’m describing. They don’t see it for what it is. They are complacent about the role of the dollar.
So these things change. But if you’re weaponizing the dollar, then don’t be surprised when people take measures to get out from under the dollar system somehow.
Chris: Our readers have a lot of their wealth – sometimes all of it – in dollars or dollar-denominated assets. What should they look at now?
Jim: Gold. If I’m wrong about the plans to circumvent the U.S. dollar, gold will still retain value in dollars. But if I’m right, gold will become even more valuable. It will be a foundation stone of a new economic system.
Now, I’m not saying the world is ending so you should sell everything and buy gold. I’ve never said that. I don’t believe it. But we could be entering a new phase of the global economy.
So gold is not just a good store of value. It will act as an insurance policy against losses in other asset classes as some of these things play out.
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This article was originally published on August 14, 2019 via Legacy Research Group.