Russia’s Gold Hoard Soars As Trust In Dollar As Reserve Currency Diminished

Ian Thorpe
May 27, 2018 · 9 min read
Leaders greet each other at the St Petersburg Economic Forum (Source: Bloomberg)

In spite of the presence of many close US allies, including Japanese Prime Minister Shinzo Abe, French President Emmanuel Macron, China’s Vice President Wang Qishan and IMF chief Christine Lagarde, Vladimir Putin dominated Russia’s annual economic showcase.

The Russian president in an unusually outspoken performance, expressed concerns over the erosion of trust and the specter of a global crisis brought on by Washington’s disruptions. This probably has a lot to do with the recent launch of the long planned Russian / Chinese alternative to the Petrodollar as a medium for cross border trades.

“The free market and fair competition are being squeezed by confiscations, restrictions, sanctions,” Putin said, in a clear reference to the use of sanctions by the USA to bully smaller nations into accepting Washington’s diktat.

“There are various terms but the meaning is the same — they’ve become an official part of the trade policy of certain countries. The “spiral” of U.S. penalties is targeting “an ever larger number of countries and companies,” undermining “the current world order,” Putin said.

Macron — who seemed more enamored with Putin than the rest, replied: “I fully share your point of view.”

Putin also expressed frustration at lack of contact with US Preident Donald Trump, blaming the investigation into alleged collusion between Trump’s campaign and Russia to influence the 2016 U.S. election. “We are hostages to this internal strife in the United States,” Putin said. “I hope that it will end some day and the objective need for the development of Russian-American relationships will prevail.”

As Bloomberg reports, the panel had its prickly moments. After Putin suggested that Europe depended on the U.S. for its security, and told Macron there was “no need to worry” because Russia would help, the French president shot back:

“I’m not afraid, because France has an army that knows how to protect itself.”

However, the most ominous signs were from Putin himself as he referred to changes to the unipolar order. In his opening statement at the plenary session, Putin said the global economic order is being undermined and that breaking the rules is becoming the rule of the game. The Daily Stirrer has been reporting on the currency wars being waged by Russia, China and Iran against the USA in reponse to increasing US military belligerence.

Coming a only day after Russia’s Finance Minister Anton Siluanov said at the St. Petersburg International Economic Forum that settlements in US currency could be dropped by Russia in favor of the euro, the significance of that threat was unequivocal.

“As we see, restrictions imposed by the American partners are of an extraterritorial nature. The possibility of switching from the US dollar to the euro in settlements depends on Europe’s stance toward Washington’s position,” said Siluanov, who is also Russia’s first deputy prime minister.

“If our European partners declare their position unequivocally, we could definitely see a way to use the European common currency for financial settlements, such as payments for goods and services, which today are often subject to restrictions,” Siluanov added, dangling the bait of a possible way to save their beloved single currency in front of Merkel and Macron as the EU confronts new problems in Italy and Spain.

The global economy is facing a threat of a spiraling protectionist measures that can lead to a devastating crisis, Vladimir Putin warned. Nations must find a way to prevent this and establish rules on how the economy should work.

Simply put, Putin concluded:

“US sanctions hurt trust in the US dollar as the world’s reserve currency.”

All of which appears to confirm many conspiracy-theorist’s reasoning for why Russia is stockpiling gold faster than any other nation on earth…

How Russia has piled up the gold — Source: Zero Hedge

The writing was on the wall for The Petrodollar when the old Iraqi tyrant Saddam Hussein, seeking a way to give Washington ‘the finger’, in contravention of an international convention, declared that Iraq would accept payment for its oil in the newly minted Euro, (itself not looking too healthy these days) any of a range of stable currencies. Washington and the global merkets did not like that of course, and the result was the second Gulf War which saw Saddam and his sons killed and Iraq plunged into chaos. The old rogue may yet disrupt our lives from beyond the grave it seems, because his action showed that the Petrodollar trading system could be challenged. Knowing what we do of Saddam it’s likely his move to ditch the dollar was made in a fit of petulance. Maybe, however, some Iraqi economists did know the true state of the western economies when they advised their president to demand payment in Euros for Iraq’s oil. The U.S.A. far more than any other nation except perhaps Switzerland depended on the strength and stability of its currency. Exports were weak, the national debt was (and sill is) out of control and trade deficits are insupportable. If the dollar had not been the currency the world trades, the U.S.A would be, if not quite a basket case of African levels then certainly in no better economic shape than “walking wounded” like Brazil and Mexico.

The American economy has since the 1970s been both beneficiary and victim of the fact that the dollar is the world’s reserve currency. Whatever nations buy from across national borders they must pay for in dollars and whatever they bring to the world market to trade they want to be paid in dollars for. So it does not really matter how big the US deficit on oil, steel, foodcrops and coffee may be because what Uncle Sam is really selling in the world market is the dollar. This means the Federal Reserve Bank can print dollars to buy whatever the consumers demand.

The situation had persisted since the British economy crashed and burned in the early nineteen — sixties. The pound is still a trading currency but mostly within the British Commonwealth. In the world market a wodge of British wonga no longer begs the question “how much of our stuff would you like, sir?” but “how many dollars will that monopoly money buy us, schmuck?” No matter, we own enough of America to ensure we have a ready supply of dollars flowing in through our holdings in the Caymans, Bermuda, The Channel Islands, The Isle of Man etc. World trade is truly wonderful.

The happy situation of dollar supremacy would have continued but for the push towards European integration. After the fall of the Soviet Union certain economists and political philosophers (mostly in France and Germany) decided that to have only one superpower would be bad for the world community. Another trading bloc was needed and the European Union could easily be adapted to fill the void.

It is easy to follow the reasoning, around 70% of the world’s currency reserves are held in dollars which of course means that essential commodities, particularly oil, are valued in dollars. While the U.S.A. controls the money supply in effect it gets imports for free. As a bonus most of the dollars that other nations have worked hard to earn have to be invested back in the U.S. economy. It is so smart we should be surprised the Mafia did not think of it first.

In spite of its recent enlargement the European Union’s economy suffers from none of the systemic weaknesses of the American economy. This being so, the Euro is the only serious competitor to the Dollar as a world currency. There we have one of the true, but unmentionable, reasons why The White House was so anxious to bring about regime change in Iraq. Now American interests control Iraq’s oil it is once more priced in dollars.

The lesson has not been lost on people who are not friends of America however.

The nations of the Middle East do more trade and have better political relationships with Europe, the EU imports more oil and the European economies are cashflow based rather than debt based and so are more sustainable in adverse trading conditions. There have already been rumblings from within OPEC (the Organisation of Petroleum Exporting Countries) that a switch from dollars to euros for pricing oil could be a serious option. Should Europe’s two main oil producers, Britain and Norway adopt the euro it could well be the tipping point at which a switch by OPEC becomes not possible but inevitable.

Are We About To Return To The Gold Standard

It was not long after the 2008/9 financial crash that rumours about a return to the gold standard becan to circulate. Such a realignment of the global trading system was unlikely but soon the truth beneath the rumours began to emerge. The first hint was that China and Russia were stockpiling physical gold. The alt_superpowers, it emerged, were planning to launch a new reserve currency to challenge the dollar. This made sense for China, which aims to surpass USA and become the world’s top trading nation, and for Russia which has vast, untapped oil reserves and is alread a major oil exporter. Both these nation resent the ability the dollar’s reserve currency status gives America to influence their economic affairs.

The current global monetary system based on fractional reserve banking is insane — the idea of letting unelected, virtually unregulated central bankers pull as much new money as they can imagine, that money being underwritten by unsecured debt, out of thin air is simply irrational. But some fiat currencies have a more solid base than others. If you want to understand the health of a currency, you must look at the ISSUER of that currency, i.e. the central bank.

As with any business, one of the most important measures of its financial health is its level of solvency. In particular we look at the capital (i.e. net assets) as a percentage of the total balance sheet.

The US Federal Reserve, according to the latest statistics at the time of writing, only had a basic capital ratio of 1.26%, razor thin in real terms. (This was down from 4.5% in 2008, after eight years of Obama’s loonytoons economics.) That means if the value of the Federal Reserve’s assets declines by only 1.26%, the issuer of the world’s dominant reserve currency becomes insolvent.

Meanwhile back in Moscow, the Russian central bank’s basic capital ratio is 12.5%, a much healthier figure than the Fed’s.

A comfortably positive capital ration is much like us ordinary punters having a stash of rainy day money. When the brown smelly stuff hits the fan it’s what keeps you afloat. You might be able to keep on living hand to mouth for a considerable time, or even accumulating debt by borrowing against future expectations, but only until your car breaks down, or the domestic boiler blows up and you need a new heating system, for example. Then all of a sudden, your lack of capital can become a serious issue.

As it happens Russia is one of the most financially healthy nations in the world. Thus as they, along with China, have been leading a move to abandon the $US by concluding bilateral currency deals with their main partners, we must assume they have prepared for some response. Being the owner of the reserve currency has kept the American economy afloat for thirty years, they were never going to surrender that position lightly.

So where will this all end? I suggest you look at a central bank’s GOLD reserves as a percentage of the money supply, i.e. how much gold backs the money supply, because all the indicators suggest we will move back to a gold based global currency (why else would China be hoarding gold?).

In Russia, gold reserves are 6.2% on the money supply and rising. Last year it was 5.5%, and the central bank is continuing to heavily stockpile more.

How much gold backs the dollar? Precisely zero point zero percent. All that gold Bruce Willis and Samuel L Jackson prevented Jeremy Irons stealing from the vault at the Fed did not belong to the Fed, the Fed doesn’t own gold it merely looks after it for other people. It loudly proclaims this on its own website: “The Federal Reserve does not own gold. Eff off Irons, there’s nothing here for you.”

What the Fed holds is paper. Its capital is‘certificates’ which are redeemable for US dollars. But there’s not a single ounce of gold backing the US dollar.

So… with no gold and pitifully razor thin solvency levels, it really wouldn’t take much of a shock to topple the dollar.

By comparison, the ruble and the Yuan are much better capitalized and actually have something backing them. Which is why the recently launched Petroyouan oil futures contract, recently launched on the shanghai stock exchange is denominated in Yuan and redeemable for physical gold. And it is why Vladimir Putin is talking about failing trust in the US dollar becoming a problem for world trade.

RELATED POSTS:

Currency Wars

Iran, oil and the dollar

Russia and China declare all out war on the Petrodollar

Petro-yuan: China To Launch Renminbi As Reserve Currency & Take Down Petro-dollar

Holy City (slam poem about financial markets)

Ian Thorpe

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Opted for comfortable retirement before I was fifty due to health problems and burn out. Now spend my time writing and goofing around. Home: northern England..

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