India and U.A.E. Central Banks Discuss Trading in Local Currencies
In November, the central banks of India and the United Arab Emirates discussed potential mechanisms to trade in their local currencies. In May 2022, India and U.A.E. entered a bilateral trade agreement titled the Comprehensive Economic Partnership Agreement (C.E.P.A.). The agreement is like a free trade agreement (F.T.A.) but, as the title implies, is more comprehensive. A free trade agreement tends to focus on goods. Still, the C.E.P.A. includes services, government procurement, investment, disputes, and similar ideas not commonly covered by an F.T.A. Explore the agreement here.
The U.A.E. and India trade nearly $59 billion annually. The U.A.E. is India's third-largest trading partner and eighth-largest investor. The U.A.E. relies on oil, tourism, and import tariffs as the primary sources of revenue. The C.E.P.A. would eliminate the 5% tariff on 97% of Indian products, with special provisions for pharmaceuticals. The U.A.E. does not tax its citizens. Tourists can obtain a work visa within two weeks of entering the country, which has led to a population explosion of Indian workers. U.A.E. abandoning Indian tariffs is highly noteworthy.
What Does This Mean for Precious Metals Investors?
U.A.E.'s agreement with India fundamentally changes and solidifies the economic alliance between India and the U.A.E. Most Indian tourists become U.A.E. citizens. Suppose the U.A.E. is giving up on Indian tariffs and Indian tourists become part of the tax-free workforce. Where is U.A.E. expecting to gain revenue from India? Oil. Building the infrastructure to transact in Rupees and Dirham is about changing the oil trade from the Petrodollar to a basket of BRICS (Brazil, Russia, India, China, and South Africa) currencies. The U.A.E. has been working with other BRICS nations to develop infrastructure to transact outside the Dollar. The U.A.E. just participated in the most extensive cross-border C.B.D.C. test with China.
The U.A.E. is the second-largest OPEC oil producer and a staunch ally of Saudi Arabia. I was on vacation in U.A.E. in September. There are roadway signs in English and Arabic saying "U.A.E. and K.S.A. together forever” with a heart. (KSA=Kingdom of Saudi Arabia). It was a wonderful trip, but I regret not getting a picture of the signs to show people what the news isn’t saying. Whatever Saudi Arabia does, U.A.E. will follow. Saudi Arabia has applied to join the BRICS, and now U.A.E. is working with BRICS nations to trade outside the S.W.I.F.T. system. It seems U.A.E. is acting as a proxy for OPEC to overthrow the Petrodollar agreement quietly.
Most international trade happens in U.S. Dollars through the S.W.I.F.T. (Society for Worldwide Interbank Financial Telecommunications) system. The S.W.I.F.T. system processes nearly 45 million transactions worth about $5 trillion daily. If the Dollar is the king of the world economy, then S.W.I.F.T. is the chamberlain. Nations implement sanctions through the S.W.I.F.T. system. After the world imposed harsh S.W.I.F.T. sanctions on Russia, American friends and foes have increasingly acted to de-dollarize their economies. If international transactions stop happening in Dollars, the U.S. loses international influence. Also, the U.S. will receive a costly reality check.
Trillions of Dollars will repatriate, and the Treasury won’t have any good options. The choices will be accepting civilization-ending inflation or enforcing tyrannical policies to get the cash out of the system. (The most likely action will be mandatory purchases of U.S. Treasuries. After everything we have seen in the last year, would it surprise anyone if they said treason is the charge for failing to comply? If questioning your child's education makes you a domestic terrorist, then failing to do your civic duty to bail out the government must be treason, right? Please pardon my sarcasm, but if you ever hear that type of rhetoric, think back to this article and buy a lot of precious metals from the U.S. Gold Bureau.)
Fighting inflation is like a game of whack-a-mole. Every time too much cash presents itself, the Fed must hit it on the head. During the pandemic, the Fed flooded the system with trillions of dollars and bought bonds (30% of those were mortgage-backed securities, and now we are facing another 2008-style crisis. The loose policy had cash entering the system rapidly. To reel in inflation, the Fed needs to get those Dollars out of the system again. Hence, the Fed is raising interest rates and selling assets from its balance sheet. The Fed is trying to slow down the speed of money and get excess cash out of the system. To understand what will happen in any market condition, ask, "where is the cash?". Does the Fed have the cash or the people (moving in the economy)?
Other OPEC countries will follow if the U.A.E. and India trade outside of S.W.I.F.T. Other non-OPEC countries will follow. If those countries no longer transact in Dollars, they will not need them. The Dollars repatriate. When that happens, ask, “where is the cash?”. If you think the Fed is doing a good job managing inflation, there is no reason to be concerned. However, suppose you are less than satisfied with the government's actions leading us to high inflation and the pain they’ve caused to bring us out of it. In that case, there is a genuine reason for concern when the problem is ten times the size.
U.A.E. is flying under most people’s economic radar. However, Saudi Arabia is on everyone's radar, and they use U.A.E. as a scout to avoid alarm or suspicion. It is easy to dismiss India and U.A.E.'s discussions as background noise. Still, India adds around $1T in G.D.P. every 12-18 months. India is currently the sixth largest economy and is predicted to be the second largest economy by 2050. The U.A.E. is looking to the future economic positions of China and India.
The famous hockey player, Wayne Gretzky, attributed his success to being where the puck was going instead of moving to where the puck was. He looked to the future, not the present, of how to position himself. Gretzky's strategy is the perfect argument for precious metals. U.A.E. and India trading outside the Dollar is another clear and present sign. Fewer international transactions will happen in Dollars. As the Dollar weakens, gold prices go up. Where do you think the economic puck is going, and how do you want to position yourself?
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