The Fall of
Dollar Dominance?
The “Axis of Gold” Will Drive Gold Higher by the End of 2018
By James Rickards
A major blind spot in U.S. strategic economic doctrine is the increasing use of physical gold by China, Russia, Iran, Turkey and others both to avoid the impact of U.S. sanctions and create an offensive counterweight to U.S. dominance of dollar payment systems.
DYI: As the pressure builds as an alternative to
the almighty buck our government will scream through the highly controlled main
stream press. Hopefully the two
principal players China and Russia will phase this in slowly enough not to precipitate
world war.
Gold offers adversaries significant defenses against these dollar-based sanctions. Gold is physical, not digital, so it cannot be hacked or frozen. Gold is easy to transport by air to settle balance of payments or other transactions between nations.DYI: The other adversary is the American public who is forced into the Federal Reserve’s debt based currency. Since the debt is never paid off but continuously rolled over [behaves just like money printing] inflation is ever present in the system. This is only interrupted during economic deflationary debt default smashes as illustrated during the Great Depression and more recently the Great Recession. Never the less it is recommended having some amount of gold and silver in one’s possession simply to help maintain purchasing power as our government continues to debase the currency. As with any rule there are exceptions when stocks or bonds are on the give – away – table then all precious metals should be sold to buy into a once in a lifetime bargain. This exception is exampled at the bottom of the Great Depression of 1932 for stocks and corporate bonds or 1980 to 1982 for stocks, long term government and corporate bonds as well.
Gold flows cannot be interdicted at SWIFT, the international payment system. Gold is fungible and non-traceable (it is an element, atomic number 79), so its origin cannot be ascertained.
We know that for example, Russia has tripled its gold reserves in the last ten years. It’s gone from about 600 tons to over 1800 tons of physical gold, and is moving very quickly towards 2,000 tons. That’s an enormous amount of gold.
China is also amassing physical gold at an astounding rate. Like Russia, it has tripled its gold reserves, officially from 600 tons to 1,800 tons.
But we have very good reason to believe China actually has a lot more gold than that.
China might actually own up to 4,000 tons of physical gold. We don’t know the exact number because China is highly secretive about its gold acquisitions. But that’s a reasonable estimate. China is also the world’s largest gold producer with mining output of about 450 tons per year.
I’ve warned the Pentagon and the Treasury Department about this threat for years.
But the message has yet to sink in.
The U.S. is still unprepared for this coming strategic alternative to dollar dominance.
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.
DYI: Fed tightening is a blunt instrument not the
fine tuning economic mechanism our central banker’s having come to believe. Most likely event to occur is whether this
will produce a mild or harsh recession depending on how long until the Fed’s
recognizes the on going recession and begins lowering interest rates
aggressively.
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.DYI: Very possible and the most probable scenario for a jump up in the price of gold and other precious metals when the Fed’s drop rates below current inflation [negative interest rates]. This will put the Fed’s back on the path to debasing the currency [inflation] thus taking more and more dollars to purchase precious metals and especially gold.
So….How
do we measure between stocks and gold?
The Dow/Gold Ratio is an excellent tool and can be seen in graph form. See below.
Current Dow/Gold Ratio 5-28-18 is 19 to 1
At
19 to 1 current Dow/Gold Ratio [5-28-18] has precious metals [as measured by
gold] slightly below fair value. DYI’s
averaging formula has precious metals mining companies weighted at 29%. Each asset category [excluding cash] depending
on valuation moves from 0% to 50%. At
29% just a bit undervalued as compared to the long term Dow/Gold Ratio [16 to
1] average for gold.
Updated Monthly
AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 5/1/18
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
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