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Axis of Gold: Countries Could Undermine Dollar Dominance Using Yellow Metal

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Last week, we explained how economic sanctions on Iran could boost the price of gold as Iranians turn to the yellow metal as a way to skirt restrictions. In a recent article published by the Daily Reckoning, financial expert Jim Rickards put this in a broader context. He described an evolving “axis of gold” as a number of countries, including China, Russia, Turkey and Iran increasingly use physical metal to create an offensive counterweight to the dollar.

This gold-based payments system will dilute and ultimately eliminate the impact of US dollar-based sanctions.”

As Rickards points out, while the US and other western countries can effectively lock out countries from the dollar system, they have very little control when countries start doing business in gold. Since gold is physical, not digital, there is no way for it to be hacked, frozen or electronically diverted. It cannot be interdicted through SWIFT, the international payment system. Gold is fungible and non-traceable, and the yellow metal is relatively easy to transport.

SWIFT – the Society for Worldwide Interbank Financial Telecommunication – is the key to dollar dominance. The system enables financial institutions to send and receive information about financial transactions in a secure, standardized environment. Since the dollar is the world reserve currency, SWIFT facilitates the international dollar system.

Last fall, US Treasury Secretary Steven Mnuchin threatened to lock China out of SWIFT if it refused to go along with sanctions on North Korea. The Americans have used SWIFT as a stick before. In 2014 and 2015, it blocked several Russian banks from the system as relations between the two countries deteriorated. As a result, countries including China, Russia, Turkey and Iran have been working to develop a payment system outside SWIFT. Gold plays a key roll in these plans.

All of these countries have been buying gold, and lots of it.  For instance, Turkey went on a gold-buying spree in 2017 and that trend continued into 2018. Last month, Turkish President Recep Tayyip Erdoğan suggested international loans should be made in gold instead of greenbacks in order to prevent exchange rate pressure on economies.

I made a suggestion at a G20 meeting. I asked, ‘Why do we make all loans in dollars? Let’s use another currency.’ I suggest that the loans should be made based on gold.”

Meanwhile, Russia has tripled its gold reserves in the last ten years. And according to Rickards, Iranian gold bar and coin purchases more than tripled during the first quarter of 2018.

Rickards said the evidence that these countries are working to free themselves from dollar dependence using gold is compelling.

So that’s the Axis of Gold. Again, evidence for this Axis of Gold is overwhelming. I have contacts in the national security industry community who have, in their own roundabout way, been able to confirm that to me, so it’s very clear that’s what’s happening. This is the type of information you don’t see in the headlines. This is very granular, but it’s all going on behind the scenes.”

How will this play out practically?

Here’s an example.

China is the biggest customer for Iranian oil. And of course, Iran needs hard currency from its oil exports. If sanctions make it impossible for Iran to receive dollars or euros for oil, it will have to find other payment channels. The Chinese would gladly pay for oil in yuan, but as Rickards points out, the Iranian appetite for yuan is limited. The obvious solution for both China and Iran is for the two countries to settle their payment accounts in gold.

Rickards explained what this means for the larger gold market.

The Axis of Gold will create enormous demand for physical gold as an alternative to dollar payments vulnerable to US sanctions. At the same time, the Axis of Gold creates huge embedded demand for gold as the Axis nations build out an alternative to the dollar payments system. But right now gold mining output is flat, western central bank sales of gold have ceased, and acquisition of gold by the Axis is increasing. With limited output, limited western sales, and huge eastern purchases, it’s only a matter of time before a link in the physical gold delivery chain snaps and a full-scale buying panic erupts. Then the price of gold will soar regardless of paper gold manipulations. Meanwhile, Fed tightening combined with weak growth will push the U.S. economy to the brink of recession later this year. That will cause the Fed to reverse course and pause in their path of rate hikes. The pause will come possibly in September, and almost certainly by December. The perception of the Fed flipping from tightening to ease will remove a major headwind to higher gold prices and create a tailwind. Future Fed ease combined with strong demand for physical gold will result in much higher gold prices by year end. The next few months could still be a bumpy ride for gold, but late summer and fall look promising for much a push to $1,400 per ounce or higher.”

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