There will be a defining geopolitical event next month when India, Pakistan, Iran and Mongolia become full members of the Shanghai Cooperation Organisation (SCO). This will increase the population of SCO members to an estimated 3.05 billion. We should care about this because it is the intention of the SCO to do away with the US dollar for trade settlement.
Gold drifted lower this week, with the price undermined by lack of interest on low volume and a slightly more hawkish tone in the FOMC minutes released on Wednesday.
The chart below, of gold and open interest on Comex, shows how the price has declined while open interest has hardly budged from its historically low level.
The West’s power & influence is on the wane.
It is clearly not in the interests of the long-standing members of the EU to escalate a sanctions and financial conflict with Russia. The European Central Bank will have almost certainly discussed contingency plans with the major regional central banks in the Eurozone, because the banking system might have to make available special credit and financing facilities, i.e. a rescue from a financial crisis if NATO goes much further down the sanctions route.
This is why politicians are walking on eggshells, paying lip-service to America and the scared Eastern fringe members of NATO while hoping this goes no further.
So long as this is the case it is clear that NATO members are powerless to stop Russia from wresting control of all or parts of Ukraine from the government in Kiev. Putin knows this; unfortunately it is not clear to us that the American government does.
Besides what the Fed is doing by printing money, there is another big threat to the dollar, warns Alasdair Macleod. Countries in Asia are banding together in order to rid themselves of using the dollar in international trade.
“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.
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.
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.”
All commodities and near-commodities are priced internationally in dollars, and the dollar is used for over 80% of cross-border trade settlements. Consequently the dollar is the base currency for all countries’ foreign reserves, giving it its reserve status.
However, there are now challenges to the dollar’s hegemony, with Russia, China as well as the other members, dialog-partners and associates of the Shanghai Cooperation Organisation (SCO), taking deliberate steps towards doing away with the dollar entirely for pan-Asian trade.
Recent developments setting up a rival to the IMF by the BRICS nations is part of this challenge.
If you follow the geopolitics, you might reasonably conclude that the dollar’s dominance has peaked and is now declining.
The SCO appears to believe there can be a transition away from the dollar, an idea that could turn out to be dangerously wrong at a time of great but generally unrecognised currency fragility.
At the heart of the issue there is a worrying lack of distinction between the dollar’s reserve function and its function as the monetary standard from when it replaced gold in 1971.
To fully appreciate the importance of the dollar as the standard for all other currencies, we must review the monetary history behind how and why the dollar replaced gold, and the implications for today.
The new daily silver fix regime has begun. It will be run on the Chicago Mercantile Exchange’s platform (the Comex people), and supervised by Thompson Reuters. For the first six months access to the fix for observers will be free, so we can all see how it works.
This is a welcome advance on the old silver fix, where bullion banks negotiate the price in secret. This should be positive in the longer-term, because market transparency tends to lead to wider institutional and public participation. We are a long way from a fully transparent market, but at least the veil of dealing secrecy is being lifted a little.
Imagine you are running a hedge fund. You don’t deal in gold or silver because the physical market is too opaque. Now we have a visible auction process in silver, which you can watch on-line. You can monitor it for a week or two to get better a feel for how much money is required to move the price. It’s not just you, everyone else is also getting interested. Now you can assess your dealing risk far better and will be prepared to deal. And you look forward to the gold market becoming more transparent as well.
We are seeing a very important change in bullion markets to the disadvantage of dealers who hide behind OTC opacity.
Mr. Macleod joined The Daily Coin to discuss the silver fix transformation.
With the London fix now officially history, are we about to see a period of unprecedented volatility in the silver market?
On China Macleod states: “The more we sell our gold down, at a cheap price, and the more China buys it, the more that’s going to turn out to be the biggest wealth transfer we’ve ever seen in history, from West to East.”
The greatest transfer of wealth in history. Let that sink in for a moment.
At the end of July global equity bull markets had a moment of doubt, falling three or four per cent.
In the seven trading days up to 1st August the S&P500 fell 3.8%, and we are not out of the woods yet.
At the same time the Russell 2000, an index of small-cap US companies fell an exceptional 9%, and more worryingly it looks like it has lost bullish momentum as shown in the chart below.
This indicates a possible double-top formation in the making.
Precious metals periodically suffer from coordinated bear raids as the commercial shorts try to level their books. That appeared to be the case in recent weeks when the gold price was sold down from $1345 to $1280 last Friday.
This week gold enjoyed a sharp recovery from the bear raid.
The remaining bulls are obviously resolute, indicated by the sharp upturn in open interest on an equally sharp price gain to $1320 Friday morning. The signs elsewhere are not good for the shorts either, with physical demand in London appearing to have caught that market on the hop as well.
In conclusion, it won’t take much to squeeze the remaining shorts and drive the price materially higher.
June’s FMQ components have now been released by the St Louis Fed, and it stands at a record $13.132 trillion. As can be seen in the chart above, it is $5.48 trillion more than an extension of the pre-Lehman crisis exponential growth trend.
The chart confirms that tapering seems to be having little or no effect on money markets and therefore the growth rate of fiat currency.
Still believe the Fed is really tapering QE?
That was how it felt watching all markets this week until Thursday when they sprang into life.
Gold fell from $1304 at the London opening last Monday to a low point of $1281 yesterday, down 1.8% on the week, while silver fell from $20.60 to $20.35, down only 1.2%.
These moves were relatively small compared with action elsewhere.
Here are the charts showing price and open interest for gold and silver on Comex.
The transformation of an economy from no monetary discipline into one based on sound-money principals is widely thought by central bankers to risk creating a major banking crisis.
The crisis will indeed come, but it will probably have its origins in the inability of individuals, robbed of the purchasing power of their fixed salaries and savings, to pay the prices demanded from them by businesses.
This is called a slump, an old-fashioned term for the simultaneous contraction of production and demand.
Not even zero or negative interest rates will save the banks from this increasingly certain event, for a very simple reason: by continuing the transfer of wealth from individuals through monetary inflation, the cure will finally kill the patient.
With the knowledge that the BIS is not in thrall to Keynes and the monetarists, we can logically expect that Caruana and his colleagues at the BIS will be placing a greater emphasis on the future role of gold in the monetary system. Given the other as yet unstated conclusion of the Mises-Hayek-BIS view, that paper currencies are in a doom-loop that ends with their own destruction, the BIS is on a course to break from the long-standing policy of preserving the dollar’s credibility by suppressing gold.
In this excellent interview with the SGTReport, gold expert Alasdair Macleod discusses Friday’s news that the CME and Thomson Reuters have been chosen to run the replacement for the 117-year old London Silver Fix.
But the new boss is the same as the old boss, because it looks like the new system is little more than an ELECTRONIC FIX – so there will be NO free market mechanism allowed to set the REAL, MARKET price for silver.
We also discuss the startling fact that according to Jeff Christian’s CPM Group, $5 TRILLION of silver circulated globally last year — that equates to $5,000 per ounce silver if all that paper had to be backed by PHYSICAL…
Before Thursday’s rise in bullion prices, precious metals were in corrective mode this week after recent rises.
There were two big stand-out sales of gold contracts on Monday, estimated to be about 5,000 contracts at the European opening, and 15,000 on the US opening. The combination of the two sales drove gold down over $30, and on Tuesday a further sale of 15,000 contracts drove the price down to a low of $1293 for a total fall of $45.
This negative action occurred at the same time as a new banking crisis was developing in Portugal, with Banco Espirito Santo getting into financial difficulties. For many gold traders, this suggested these large sales were price intervention to maintain confidence in the financial system. For this to be true, Open Interest would have expanded on Comex reflecting new opening bear positions.
As the chart below clearly shows this cannot have been the case.