Gold - Universal Currency for a Multipolar World

“Pay no attention to that man behind the curtain,” said the Wizard of Oz to Dorothy and her friends in the old movie classic. It turns out much effort was expended to keep up a massive charade, to divert attention away from what was going on. It sometimes seems that way today, with much talk about an impending war between Russia and Ukraine, while the real news might be how many trade deals are happening around the world outside the realm of the U.S. dollar. Russia and China have recently announced new agreements and partnerships to conduct trade between themselves, and China has increased trade with other oil producing regions around the world, outside the realm of the dollar. Today, we will look at how these agreements impact inflation in the United States and how owning gold and silver can reduce these risks.

The language summarizing a recent meeting between Chinese President Xi Jinping and Russian President Vladimir Putin reveals the forces at work to create a new world monetary system. A portion of the statement released in the link above begins as follows: “Today, the world is going through momentous changes, and humanity is entering a new era of rapid development and profound transformation…multipolarity, economic globalization…transformation of the global governance architecture and world order…”. While the United States is not explicitly mentioned in the opening paragraph, it is included implicitly. The U.S. is directly mentioned later in the document, however. Whether we like it or not, change in the world monetary system and financial network is upon us and is likely to accelerate in the years ahead.

One of the most profound changes is in the realm of the petro-dollar. Until recently, oil was traded exclusively in U.S. dollars - even between other nations. If you wanted to purchase oil anywhere globally, it was done in dollars. Until the United States began to sanction nations such as Iran and penalize anyone who tried to trade with them. Eventually, Iran began trading oil for gold or selling it on the black market. Russia began selling oil for other currencies or gold to get around the dollar sanctions imposed by Washington. Today, oil and gas are routinely purchased with other currencies besides the dollar - in Africa, Asia, South America, Latin America, Russia, and even the Middle East.

As a consequence of this, fewer dollar-based reserves are needed for energy trading worldwide. Reduced worldwide demand for U.S. currency or treasury securities is one reason the Federal Reserve balance sheet ballooned to nearly $9 Trillion, as it became the purchaser of last resort for new debt issued by the US Treasury Department. Since much of what we purchase is produced somewhere else, we have to pay ever-increasing amounts of dollars which aren’t as valuable in world markets. Since they aren’t required in many circles to purchase oil anymore, dollars are not as desirable as they used to be as a reserve asset. Dollar reserves have decreased at a rate of 1% per year for the last 7-8 years, to reach the lowest amount in over 25 years (59%).

Ukraine itself does not believe a Russian Invasion is imminent; perhaps they are correct. But instead of being concerned about possible future events 6,000 miles away that may never happen, it would behoove us to prepare for events already happening that are affecting our currency and financial future today. The movement of 100,000 Russian troops near the border with Ukraine is nothing new. They did the same thing in April of 2021. While denouncing Russian provocations publicly, we purchased over 26 million barrels of Russian petroleum products in May - a record high. We continue to purchase historically high quantities of Russian oil today, which seems odd if we believe they are about to start WW3. Perhaps the talk of war is meant to be a distraction; hopefully, it is.

Meanwhile, China's "Belt and Road Initiative" (BRI) continues to expand beyond the Far East and Eurasia into Africa, Latin America, and South America. This year, Argentina leads the Community of Latin American and Caribbean States (CELAC) and recently signed an agreement with China to join the BRI. As with the Russian-Chinese partnership mentioned in the first paragraph, the agreement supports "multilateralism" and the conduct of trade in local currencies (as opposed to American "unilateralism" that requires the use of dollars). China was strategic in developing this partnership, while Argentina presides over CELAC, hoping to expand the reach of BRI in the region using Argentina's influence. Others such as Nicaragua have also recently joined.

China has become one of Africa's largest trading partners in recent years. A similar strategy of targeting the regional leader on the African continent, and Africa's largest oil producer (Nigeria) for BRI membership, has furthered the extent of non-dollar energy trade worldwide. Beyond energy trading, China is also developing Nigeria into a regional hub for non-dollar financial transactions and promoting global acceptance of the Chinese Yuan as several reserve currencies in broader use.

There is often a symbiotic relationship between new corridors of trade created outside the dollar realm by China and new corridors of military assistance provided by Russia, including here in the Western Hemisphere. So there are legitimate concerns of peaceful trade and security that all sides must address. Any conflict between the United States and China or Russia would impact trade and lifestyles worldwide, including here in the United States. There is a reason why most nations worldwide have been purchasing more gold and holding fewer dollars. As the world becomes more "multipolar," with increased levels of non-dollar transactions, it becomes prudent to hold savings in a currency with universal appeals, such as gold (or silver).

For the average American, holding some savings in gold is protection from the loss of purchasing power for an internationally less-loved dollar. It is unlikely we will be purchasing products in the United States using a foreign currency as individual citizens. And not many stores take gold or silver for transactions. But most goods we purchase are currently manufactured somewhere else, which means that someone has to purchase them there before we purchase them here. As dollars become less valuable worldwide, it takes more of them to purchase things. This is one reason why inflation is at a 40-year high here in the U.S. Owning gold allows a person to exchange it for dollars in the future. With a long-term average exceeding 8%, gold preserves the purchasing power of your savings - regardless of how many dollars are needed to purchase the same things in the future.