New "Red Gold Standard" Threatens the Dollar

Today we explore a recent report on economic developments in Asia that have huge global consequences. Both Russia and China, notable geopolitical adversaries of the U.S. seem determined to create their own, gold-based monetary system – which would, at a stroke, dethrone the dollar and cripple the U.S. economy…

New Red Gold Standard Threatens the Dollar
Image CC BY 4.0 courtesy of

From Peter Reagan at Birch Gold Group

This week, Your News to Know rounds up the latest top stories involving gold and the overall economy. Stories include: Credit currencies no more, how a $300 jump in gold could happen this autumn, and money managers' pros and cons of owning gold.

Are we looking at a rebirth of the gold standard under an Asian Bretton-Woods?

This recent analysis of Russian and Chinese economic developments caught my eye. An in-depth review of the current state of the global financial system, combined with speculation regarding the ultimate goals of the latest agreements between Russia and China, leads us in uncomfortable directions.

As we know, sanctions have punished the West without stopping Russia's invasion of Ukraine. This is not debatable – it’s simply fact. The U.S. has seen diminishing returns from levying financial sanctions against unfriendly nations for decades now. Sanctions are a form of economic warfare that don’t put soldiers’ lives at risk, that cost a fraction as much as military action and are far more politically palatable than armed conflict.

But they’re not working any longer. Rather than denying our adversaries resources, we’ve made them more resourceful.

With that in mind, it’s unsurprising that Russia may be preparing an Asian Bretton Woods-type financial pact with China. This effort, which has apparently been in the works for a while, rests on a few factors. Despite the ineffectiveness of Western sanctions, the world now knows that the U.S. dollar’s role as a global reserve currency can be turned into a weapon against any nation at any time.

And if a nation can completely evade sanctions by simply not using the U.S. dollar, how long until other players in the financial system start getting ideas?

We don't need to tell you what the establishment of the ruble and the yuan as global reserve currencies would do to the West. That one spells itself out. But perhaps it's worth going into the how of it all.

Their methods aren't pretty, but there is no arguing that China is the most powerful economy in the world. Anyone who wants to argue this point in favor of the U.S. or Germany needs only reach for their nearest piece of electronics. While Russia doesn't really have much in the way of economy, it has managed to form a junkie-dealer relationship with Europe, getting much of NATO hooked on Russian energy exports.

No more elements are needed to usurp the greenback, but we know that gold is going to end up being even more important in this scheme. After all, Bretton Woods wasn't so much about economic strength or exports as it was central bank gold holdings. The original agreement was quite simple: it guaranteed convertibility of any participating nation’s currencies for U.S. dollars, and convertibility of U.S. dollars to gold. Bretton Woods meant the values of all currencies were connected to gold.

These days, we're hearing that Russia holds 12,000 tons of gold and China holds 25,000 tons of gold. That’s some 4-5x more than the current U.S. gold reserve.

If we truly see this attempt to return the world’s #2 and #11 economies to a gold standard, it will be the economic equivalent of shooting the hostage. I expect we’d see 1971 in reverse – with nations around the world scrambling to peg their currencies to gold once again, just to stay current in the new world of sound money.

Such a move would grant massive economic benefits to early movers, and effectively render all unbacked fiat currencies obsolete. Gold would return to its historic role as money.

RBC: Gold’s price doesn’t rely solely on crisis

Gold's peculiar trading continues, as the metal heads towards its fifth consecutive monthly drop. Uncertainty is peaking, currencies are eroding. Even though everyone is worried about the U.S. dollar's inflation, or hyperinflation, it remains the main downwards driver for the metal. Perhaps the only one.

RBC Capital Markets' Christopher Louney explains how the importance of U.S. interest rate hikes is not to be underestimated. For all the concerns, the reality is nonetheless the same: right now, the U.S. dollar is sitting very strong. Gold's intraday price in regards to this isn't determined on the dollar's foundations, but rather its real or perceived strength. And there is no denying either of the two these days.

Louney's firm is currently working with two scenarios: more rate hikes and a strong U.S. dollar where gold averages $1,773 this year, or safe-haven inflows that put gold to an average of $1,944 for the year. That would mean the metal falls to $1,663 in the first scenario and hits $2,036 in the second. It's also worth noting that RBC's base scenario involves only a mild recession in the U.S.

As we have previously pointed out, there are times when gold investors should want higher prices and there are times when they should clamor for lower ones. In this case, a persistently higher gold price will mean that something has gone awry with the dollar, the U.S. economy, the global economy or all of those.

If gold stays around or below $1,700, it will still be quite a bit higher than three years prior and not fallen off by much from its ATHs. Unfortunately, strange as that might sound coming from Birch Gold, everyone seems to be betting on gold exploding within a year or two due to calamity. Some firms believe calamity could only be months away, if nowhere else but in perception.

"This is the outlook where the geopolitical risks come to the fore and become the driving principles of how the gold price discovery process is done, such as more safe-haven flows into the ETFs and other gold assets. If the market becomes more concerned about the geopolitical risk or the broader risk faced by the economy, our high scenario is a fair bet," said Louney of the higher-end forecast.

Is gold really an inflation hedge and a safe haven? Professional money managers weigh in

The Globe and Mail spoke to some Canadian money managers who have somewhat differing views on gold as a hedge or safe-haven asset. Is there a case against gold? Well, Robert Sneddon, founder, president and chief portfolio manager of CastleMoore Inc finds the metal a bit disappointing. As he outlines, it has not protected investors against the 2000 tech crash, the 2008 stock crash or the recent inflation.

Now, there is no denying this point when we analyze gold's short-term performance, the shorter the better, in those periods. But who is claiming that gold is a short-term investment?

Despite the idea some might get, gold isn't bought in February to protect against July's inflation. It can be, if the goal is to avoid altogether disaster. "It's a meltdown hedge. In other words, if things are going really badly, it hedges against that," said Bill Harris, partner and portfolio manager at Avenue Investment Management Inc.

To enjoy or appreciate gold's performance, nothing but a long-term chart is necessary. "You have to take a 40-year view on your portfolio, which people hate doing," said Harris.

Why do “people hate” taking a long-term view? Simple: short-term movements are much more exciting! Watching an asset’s price grow in real-time tickles the reward centers in our brains. Pundits and stock bulls are all too eager to tell you why history is irrelevant, that only today matters. Speculators live in a feverish, eternal present, fixating on minute-to-minute price movements and trading in a frenzy. Who has time to take the long-term view?

Only the prudent, the wise, the cool heads who’ve seen speculative frenzies surge and collapse keep their eyes above the day-to-day churn and look to their own long-term prosperity.

As favorable as gold looks on that chart, it’s hardly needed to go back that long. It’s interesting that Sneddon picked 2008 as an example of gold “failing” in its protective role. How many 2008 entrants to the gold market were, or are, disappointed in their investment?

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