Gold or bitcoin: what will replace the US dollar?
Some interesting developments in the dark world of geopolitics to report on this week.
The currency wars are heating up and it looks increasingly likely that the world is going to start moving away from the US dollar as a reserve currency – gold or bitcoin are the frontrunners to replace it.
The US dollar is about to go out of the way
American economist Pippa Malgrem, who was special assistant for economic policy to US President George Bush and a former member of the president’s working group on financial markets, writes on her Substack that WWIII has already started.
“We are in a hot war in cold places: space, cyberspace, underwater and high places, including the Arctic and the Himalayas, and in proxy conflicts in places that the media gives the cold shoulder to like Africa” (not to mention the Pacific ). A cold war in hot places then, as well as a hot war in cold places.
One cold place Malgrem does not mention is the hot war that is currency. It heats up again.
This week, aiming to limit Russia’s ability to finance the war in Ukraine, the G7 nations, the European Union and Australia set a price ceiling of $60 a barrel on Russian crude oil. This follows the EU’s embargo on Russian crude oil imports by sea, with similar pledges from the US, UK, Canada and Japan.
As you would expect, Russia has said it will not comply with such price caps, even if they have to cut production.
Meanwhile, the world’s largest oil importer, China, appears to be slowly opening up again. Cities are relaxing Covid-19-related restrictions in the wake of recent protests, and it appears the country is set to relax curbs further as soon as today.
I think it’s fair to say that if China hadn’t locked down, oil demand would have been much higher – and therefore oil prices would have gone much higher. The same applies to metals and most other raw materials.
And then we have another piece of the puzzle. Russian President Vladimir Putin did his best bitcoin maximalist impression last week, when he called for an international, independent, blockchain-based settlement network (spoiler alert: it already exists: it’s called bitcoin).
“The technology of digital currencies and blockchains can be used to create a new system of international settlements that will be much more convenient, absolutely safe for users and, most importantly, will not depend on banks or interference from third countries,” he said. “I am sure that something like this will certainly be created and will develop because no one likes the dictates of the monopolists, which harms all parties, including the monopolists themselves.”
Here’s the link to bitcoin.org, Vladimir, in case you’ve self-googled and are now reading this.
Where is all this going?
I have some ideas. So does analyst Zoltan Pozsar, Credit Suisse’s answer to Led Zeppelin.
The new global reserve currency: bitcoin or gold?
“The oil market is tight,” says Pozsar. The price of oil is lower than it might otherwise be, not only because of shutdowns in China, but because of the release of its Strategic Reserves (SPR) by the United States, as well as by OECD countries. But Saudi Arabia now has little free capacity and SPR is limited. “Recent releases have brought reserves down to levels we haven’t been at since the 1980s. The 400 million barrels left in it isn’t much: it could help police prices for a year if we release 1 million barrels per day ( mbpd), half a year if we release 2 mbpd and about four months if we release 3 mbpd”.
Barring a sudden new increase in supply (from where?) or a sudden reduction in demand, oil prices seem to be heading higher.
Russian crude is already selling at a $30 discount to Brent, which is currently at $83, he observes, with China and India the main buyers. “As for India, it is widely understood that Indian refineries are turning some of the imported oil into diesel for re-export. Buying Russian crude at $60 per barrel (pb) and selling diesel at $140pb makes for a nice crack spread, the petroleum market’s equivalent 100 bps spread in country to OIS-OIS bases across currencies India and China thus act as commodity traders with matched books (rather than Glencore or Trafigura), the former trading oil and the latter LNG, keeping commodities in circulation .”
But Russia is happy to sell to India or China at that discount – it will not, however, limit prices to sell to Europe on principle.
In the meantime, the US needs to top up the SPR, especially if it wants to control domestic oil prices. “Gone are the days when the US Deputy National Security Advisor warned India and other countries of sanctions if they bought Russian crude. The change in tune could be a backdoor mechanism to fill up the SPR, and given the $30 dollar discount to Brent that India pays for Russian oil, this would be below President Biden’s target of $75.”
But if Russian oil is exported for the purpose of replenishing the American SPR, Putin is not going to like it either. What to do then?
Only accept payments in gold, says Pozsar, not dollars or rupees.
Does that sound a little fantastic? “No, it’s not”, says Pozsar. “Look at the tit-for-tat measures so far: you invade Ukraine, I freeze your currency reserves; you freeze my currency reserves, I make you pay for gas in rubles; the West boycotts my Urals, I send it east…
…the west sets the price on the Urals, let them, but I make them pay in gold. And if any country re-exports the Urals to the West, I will make them pay in gold as well.”
Predicting geopolitics from my desk in south-east London is probably not a good idea. The pub is a better place for such pontification. But we have long since argued that gold refinancing is the most powerful weapon available in the currency wars and the Eurasian trend towards de-dollarization.
The problem with gold is settlement. You cannot send it over the internet. You have to use banks or gold dealers. If only there was a form of money that you could transfer over the internet from A to B that eliminated the need for trusted third parties…
Oh! It is …
