Are Russia And China Hoarding Gold Because They Plan To Kill The Petrodollar?
Will oil soon be traded in a currency that is thousands of years old? What would a "gold for oil" system mean for the petrodollar and the U.S. economy? Are Russia and China hoarding massive amounts of gold because they plan to kill the petrodollar? Since the 1970s, the U.S. dollar has been the currency that the international community has used to trade oil around the globe. This has created an overwhelming demand for U.S. dollars and U.S. debt. But what happens when the rest of the globe starts rejecting the increasingly unstable U.S. dollar and figures out that gold can be used as a currency in international trade? The truth is that it doesn't take a lot of imagination to figure that out. Demand for the U.S. dollar and U.S. debt would fall off the map and there would be a rush into gold unlike anything we have ever seen before. So are Russia and China accumulating unprecedented amounts of gold right now because they eventually plan to cut the legs out from under the petrodollar and they want to gobble up huge stockpiles of gold before the cat is out of the bag? Of course they will never admit this publicly, but there are rumblings out there that this is exactly what is happening.
Not that you can really blame any nation that wants to get into gold right now. News outlets all over the globe are telling us that we are in the midst of a "currency war" as central banks all over the planet race to devalue their currencies.
So why would anyone want to be in paper in such an environment?
And of course the Federal Reserve is one of the biggest offenders. The Fed has been printing money like it is going out of style, and nobody at the Fed or in the U.S. government really seems too concerned that all of this money printing could be endangering the petrodollar.
But the truth is that the Fed is endangering the petrodollar. Just read some foreign news stories about the U.S. dollar. They mock us for our reckless money printing.
In the end, our recklessness will make it very easy for the rest of the world to ditch the U.S. dollar.
At some point, it will happen. In fact, there are persistent rumors that Russia and China actually intend to make it happen.
Many believe that this is the reason both nations have been hoarding so much gold recently.
Just check out how much gold Russia has been accumulating. The following is from a recent Bloomberg article...
When Vladimir Putin says the U.S. is endangering the global economy by abusing its dollar monopoly, he’s not just talking. He’s betting on it.Not only has Putin made Russia the world’s largest oil producer, he’s also made it the biggest gold buyer. His central bank has added 570 metric tons of the metal in the past decade, a quarter more than runner-up China, according to IMF data compiled by Bloomberg. The added gold is also almost triple the weight of the Statue of Liberty.“The more gold a country has, the more sovereignty it will have if there’s a cataclysm with the dollar, the euro, the pound or any other reserve currency,” Evgeny Fedorov, a lawmaker for Putin’s United Russia party in the lower house of parliament, said in a telephone interview in Moscow.
And Russia's gold hoarding appears to have accelerated last year. According to one recent report, Russia added 3.2 million ounces of gold to their reserves in 2012 alone.
But of even greater concern is China. Nobody really knows how much gold China has, because they do not tell us, but all indications point to the fact that Chinese gold hoarding has gone into overdrive. The following is from a Zero Hedge article from a few months ago...
Because while earlier today we were wondering (rhetorically, of course) what China is doing with all that excess trade surplus if it is not recycling it back into Treasurys, now we once again find out that instead of purchasing US paper, Beijing continues to buy non-US gold, in the form of 68 tons in imports from Hong Kong in the month of June. The year to date total (6 months)? 383 tons. In other words, in half a year China, whose official total tally is still a massively underrepresented 1054 tons, has imported more gold than the official gold reserves of Portugal, Venezuela, Saudi Arabia, the UK, and so on, and whose YTD imports alone make it the 14th largest holder of gold in the world. Realistically, by now China, which hasn't provided an honest gold reserve holdings update to the IMF in years, most certainly has more gold than the IMF, and its 2814 tons, itself. Of course, the moment the PBOC does announce its official updated gold stash, a gold price in the mid-$1000 range will be a long gone memory.
As I wrote about the other day, nobody produces more gold than China does, and nobody imports more gold than China does.
Everyone agrees that China seems to have an insatiable appetite for gold, but nobody can agree on exactly how much gold they actually have. One recent estimate put China's gold reserves at more than 7,000 tons of gold, but it could even be much higher than that. Nobody really knows.
So what are Russia and China up to?
Well, for a long time both nations have expressed displeasure with the fact that the U.S. dollar is the de facto currency of the world. Leaders from both nations have suggested the possibility of adopting a new global reserve currency, but up to this point no real contenders have emerged to dethrone the U.S. dollar.
So for now, the U.S. dollar reigns supreme in international trade. Sadly, even though most Americans greatly benefit from the petrodollar, most of them do not even know what it is. For those that do not fully understand the petrodollar, the following is a good explanation of the petrodollar from a recent article by Christopher Doran...
In a nutshell, any country that wants to purchase oil from an oil producing country has to do so in U.S. dollars. This is a long standing agreement within all oil exporting nations, aka OPEC, the Organization of Petroleum Exporting Countries. The UK for example, cannot simply buy oil from Saudi Arabia by exchanging British pounds. Instead, the UK must exchange its pounds for U.S. dollars. The major exception at present is, of course, Iran.This means that every country in the world that imports oil—which is the vast majority of the world's nations—has to have immense quantities of dollars in reserve. These dollars of course are not hidden under the proverbial national mattress. They are invested. And because they are U.S. dollars, they are invested in U.S. Treasury bills and other interest bearing securities that can be easily converted to purchase dollar-priced commodities like oil. This is what has allowed the U.S. to run up trillions of dollars of debt: the rest of the world simply buys up that debt in the form of U.S. interest bearing securities.
And all of this has worked out very nicely for the United States. It has created a massive demand for U.S. dollars and U.S. debt.
But what would happen if the rest of the world rejected the petrodollar system and adopted a "petrogold" system instead? World War 3 !