US Dollar Collapse, Beijing, Moscow & The Ascendancy Of Gold

With global stock markets mixed, and crude oil trading near $103, today a man out of Europe who has been extremely accurate with his calls on the gold market sent King World News a tremendous piece which discusses a U.S. dollar collapse, Beijing, Moscow, and the ascendancy of gold.

By Ronald-Peter Stoferle, Incrementum AG Liechtenstein
March 5 (King World News) – US Dollar Collapse, Beijing, Moscow & The Ascendancy Of Gold

Silent Farewell To The Petrodollar?

“When the dollar collapse comes, it will happen two ways: gradually then suddenly. That formula, famously used by Hemingway to describe how one goes bankrupt, is an apt description of critical state dynamics in complex systems. The gradual part is a snowflake disturbing a small patch of snow, while the sudden part is the avalanche. The snowflake is random yet the avalanche is inevitable. Both ideas are easy to grasp. What is difficult to grasp is the critical state of the system in which the random event occurs. Jim Rickards, Currency Wars

As already discussed in my previous pieces, the voices critical of US dollar hegemony have become increasingly louder.

It seems that many countries want to cast off the shackles of the US dollar. China, Russia, India, as well as Japan, intend to increase the share of trade invoiced in their own currencies so as to circumvent the US dollar. This clearly marks a paradigm shift, not least because more than two-thirds of all US dollars are held abroad.

A financial attack against the U.S could destroy confidence in the dollar and US treasuries. This was clearly confirmed by Russian presidential advisor, Sergei Glazyev, recently who announced what the Russian response to John Kerry’s “crippling sanctions” might be. He mentioned that “authorities should dump US government bonds in the event of Russian companies and individuals being targeted by sanctions over events in Ukraine….We hold a decent amount of treasury bonds – more than $200 billion – and if the United States dares to freeze accounts of Russian businesses and citizens, we can no longer view America as a reliable partner…We will encourage everybody to dump US Treasury bonds, get rid of dollars as an unreliable currency and leave the US market.”

We are absolutely certain, that the axis of Beijing-Moscow should gain further clout. The two countries intend to only use their own currencies for bilateral trade transactions. At the end of 2010 the renminbi was listed at the Moscow Interbank Currency Exchange (MICEX). This was the first listing outside of China or Hong Kong and confirms that the speed of internationalization is increasing on a daily basis. The Shanghai Cooperation Organization (SCO) will be gradually assuming a bigger role in this context. The goal is to promote cooperation in politics, trade, and economic affairs. As an interesting side note, the region accounts for a significant share of global gold production.

Russia wants to attach greater importance to gold in the international currency system. For example, Arkady Dvorkevich, former Chief Economic Advisor of the Kremlin and currently Deputy Prime Minister, maintained that Russia would support the inclusion of gold in a weighted basket of a new global currency. The SDRs of the IMF should be the basis of the new currency. He also said it was logical for the ruble, the yuan, and especially gold to be given higher levels of relevance. We regard most of the suggestions with respect to a more intense utilization of SDRs as little practicable, given that they would be met with a very limited welcome. SDRs are derivatives on derivatives, which is why we believe that they would not amass a sufficient level of trust.

“People only accept change when they are faced with necessity, and only recognize necessity when a crisis is upon them.” Jean Monnet

At the moment, we can see a slow progress towards a remonetization of gold. We sincerely believe that the foundation for a return to sound money is currently laid.

Gold, as antagonist of uncovered paper currencies, remains an excellent hedge against worst-case scenarios. Low real interest rates and high counterparty risk provide the perfect environment for gold. Both are clearly the case at the moment, and we expect this scenario to last. At the current real interest rates, gold is an obvious alternative to short-term government bonds, current accounts, or time deposits. After many years of a chronic low-interest-rate policy, we do not believe that interest rates, along the lines of Paul Volcker’s, would be possible without the system collapsing.