What if China, Russia Succeed in Going off the Dollar? -- Alasdair Macleod
Alasdair Macleod writes the blog FinanceAndEconomics.Org. His research aims to explain the relationship between the dollar and gold, and to warn investors about the biggest threats to their wealth from macro-economic events.
Besides what the Fed is doing by printing money, there is another big threat to the dollar, said Alasdair. Countries in Asia are banding together in order to rid themselves of using the dollar in international trade.
He also warned that credible allegation of misconduct at the London bullion exchange could accelerate the trend of Shanghai becoming the world’s trading hub for gold.
“There is a thing called the Shanghai Cooperation Organization, an agreement principally between China and Russia, whereby they tie up the whole of Asia as their backyard. Other members are the countries north of Tibet, Tajikistan, Kyrgyzstan, Uzbekistan, and so on. In or soon after September, four new members will join – India, Pakistan, Iran, and Mongolia. That’s almost half the world’s population. The objective of the SCO is basically to settle international trades between these countries without using the dollar. I’m not saying they will necessarily achieve that, but that’s what they want to do. They don’t want to see trade settlements reflected in bank accounts in New York.
“It’s not just members of the SCO, either, that could eschew the dollar. The Middle East, for example, now principally sends exports to China and India, so there’s no pressing reason to use the dollar there.
“You can see that, if they succeed, the whole Asian continent, at some point in the future, will be off the dollar. They’ll use their own currencies, gold, or something else. That’s a very big change, and I don’t think people fully appreciate what that means for the dollar.
“Apart from everything the Fed is doing, there’s an awful lot of dollars held in foreign corporate accounts, principally because they’re required for trade. If the world stopped using the dollar, then those dollars will need to find their way back home.
“What that’s likely to do for the dollar relative to other currencies, I don’t know, but I do think it’s likely to affect the relationship between the dollar and gold.
“While the value of the dollar depends on confidence, gold is different, because gold is accepted everywhere. They might no longer accept dollars in some parts of the world – just like they wouldn’t accept my British Pounds in California – but they’ll accept gold. In Asia, that’s particularly true. People might place a different value on gold depending on the geographic region, but gold is more or less accepted as a form of payment anywhere.”
What do you make of allegations of manipulation within the London Bullion Market?
“It’s an interesting question. The problem with the London Bullion Market is that it’s an over-the-counter market, which means people are free to behave as they like in terms of interacting with the market. That’s not to say people automatically behave dishonestly, but there’s no way to disprove an allegation that someone is behaving dishonestly, and that’s very bad.
“In the 1980s’, during the ‘big bang,’ when they decided to regulate certain types of investments in London, stocks, bonds, futures, and options were all designated as regulated investments. Physical bullion, however, was not considered a regulated investment. You could trade these without regulatory supervision, any way you liked.
“Today, in the LBMA over-the-counter market, nobody knows what’s going on. We have a fix twice a day, which is fairly opaque – you don’t see how it’s carried out. So there is reason to doubt the integrity of the London market, and that’s not good for London. It especially isn’t good for London when other bullion markets have now evolved, such as the physical market in China, which is doing a very large amount of business and is transparent. You can see turnover, and you can see the ten largest traders in each commodity – whether it’s gold, silver, or platinum, for instance. It’s all out there.
“So you can see what goes on in those markets, but you can’t see that in London. It’s even been suggested, based on mathematical analysis of the bullion market, that the London gold fixing process is rigged about 10 to 30 percent of the time. That’s quite an indictment.
“The regulators in London have been told by the politicians to clean up the gold market. I would really be surprised if they don’t institute some major changes. I doubt they’d make it a regulated market, but I can see that they would put pressure on the member banks – which they do regulate. I think they will try to make the London bullion market a lot more transparent. I think the members might scream and kick against it, but there really is no other way.
“If it doesn’t, we’re not going to retain the business that places like China, Dubai, and Singapore want to develop. I’d say that changing the fix is the first step to a long road of reform that London needs to undertake.
“So much gold has already gone from Western vaults to the Far East – China, India – and the Middle East going back to the 1970s’. We probably don’t understand that this is one of the greatest wealth transfers in history. Relative to the amount of fiat currency in circulation, gold is probably as cheap as it was in 2000 or 2001 – incredibly cheap.”
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