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Russia And China Looking To Erode U.S. Dollar’s Supremacy

Over the past two weeks we have mentioned that China and Russia have been working together to erode the US dollar’s supremacy as a medium of exchange. Now they have taken concrete steps toward that end.

Russia’s Gazprom and China’s CNPC have announced, after a decade of negotiations, the two nations have signed a 30-year gas contract amounting to around $400 billion. With the West doing all it can to alienate Russia and to force it into China’s embrace, this is merely the beginning of what will be a far closer commercial (and political) relationship between China and Russia.

This huge deal is a major component in their expressed desire to bypass and supplant the US dollar as a medium of exchange, a process that will only put downward pressure on the value of the dollar. Since gold is priced in dollars, the immediate impact would be higher gold prices. But over the longer-term those who hold dollars will also need gold for pure security reasons, since the dollar is currently the world reserve currency of choice.

Additionally, one of Russia’s largest banks, VTB, has signed a deal with Bank of China to pay each other in domestic currencies, bypassing the need for US Dollars for “investment banking, inter-bank lending, trade finance and capital-markets transactions.”

The replacement of the dollar by two major world powers in international transactions inevitably contributes to a decline in its value. Since gold has historically provided a hedge against a falling dollar, it is an excellent tool for preparing your wealth for the fallout.

Russia on its own has been waging a form of financial warfare on the US; likely in return for the US sanctions placed on Russians for its aggression in Crimea and Ukraine.

In March alone Russia reportedly sold a record $26 billion, or 20%, of its US Treasury holdings. Then the Russian central bank again increased its gold reserves by another 900,000 ounces, worth $1.17 billion, in April.

Should China decide to participate in this activity, the impact on the US economy and financial markets could be alarming.

When Treasury bonds are sold off, their value generally tends to decrease. That puts upward pressure on interest rates in the US. The implications of that are threefold:

1. Rising interest rates are bad for existing bonds, pushing their value down proportionately; all else being equal.

2. Rising interest rates are bad for the stock market because they tend to slow down economic growth, something the US can ill-afford right now.

3. Rising interest rates contribute substantially to the US national debt. A big component of the US debt is interest on that debt. When interest rates rise, it becomes an even larger component; one the Fed can’t control when those rising rates are caused by an exogenous factor.

About all the US can do is hope that China, which holds more Treasuries than any foreign country, doesn’t join Russia in this selling spree.

In other news, economist John Williams of Shadow Government Statistics, has a dire prediction about the dollar:

Williams says, “I don’t see what will save it at this point. . . . Now we are to the point that the dollar has been ignored for years. The federal deficit has been ignored for years. . . . That’s what we are on the brink of disaster with, and that is what has to be addressed now, and that’s not happening.” Williams also contends, “The way I see it, the dollar could go to zero in terms of its purchasing power. You don’t want to have your assets in U.S. dollars.”

How are we going to get there? Look no further that the dismal first quarter gross domestic product (GDP) numbers that officially only eked out .1% growth. This is one of the reasons why Williams thinks a “renewed broad economic downturn continues to unfold.” Williams goes on to say, “We’re turning down anew. The first quarter should be revised to negative territory, and I believe the second quarter will be reported negative as well. That will happen by July 30 when you have the annual revisions to the GDP. In reality, the economy is much weaker than that . . . . Generally, when you adjust for inflation and you use too low of a rate for inflation, that overstates the economic growth.”

Williams says the government rigs the economic numbers and it gives a false impression of recovery.

The latest evidence of the downturn to which Williams refers may have come to us with the latest reports on profits from the retail industry.

Quarterly earnings from a slew of companies showed there is still a lot of uncertainty heading into the crucial second half, crushing sentiment and sending shares sharply lower.

Retailers from T.J. Maxx parent, TJX Cos. to No. 1 office-supplier, Staples Inc. missed earnings expectations.

The 61 retailers, that have reported for the quarter, missed estimates by an average of 2.6%; well below the long-term average of a 3% beat, according to Retail Metrics President Ken Perkins. First-quarter average profit is estimated to be down 2.3%, versus the 7.7% quarterly average profit growth of the past 15 years.

The crux of the problem for retailers is that the majority of Americans are not making enough money to grow their expenditures on discretionary purchases and are either keeping them flat or cutting back.

In other words, consumer spending is not in a position to jump start what can only be described as an anemic economic recovery.

Instead of an economic recovery, the world economy could be getting worse – much worse in fact. That’s the message from one of the most popular books on Amazon.com these days: The Death of Money: The Coming Collapse of the International Monetary System, by James Rickards. Rickards is Senior Managing Director at Tangent Capital Partners LLC, a merchant bank based in New York City, and is Senior Managing Director for Market Intelligence at Omnis, Inc., a technical, professional and scientific consulting firm located in McLean, VA.

In the book, Rickards explains how an executive order raising the gold price to $7,000 will be the only way to break a deflationary downward spiral in the US if money printing reaches its limits and the Fed pulls back, as is happening this year.

According to Rickards, “The purpose would not be to enrich gold holders but to reset general price levels… this kind of dollar devaluation against gold would quickly be reflected in higher dollar prices for everything else. The world of $7,000 gold is also the world of $400 per-barrel oil and $100 per-ounce silver. Deflation’s back can be broken when the dollar is devalued against gold, as occurred in 1933 when the United States revalued gold from $20.67 per ounce to $35 per ounce, a 41 per cent dollar devaluation.”

His conclusion is that, “if the Unites States faces severe deflation again, the antidote of dollar devaluation against gold will be the same because there is no other solution when printing money fails.”

One important thing to note about Jim Rickards is that he’s a respected money manager, not a diehard believer in gold.

There was also an interesting report released in the past week on housing starts here in the US. On face value it looked quite optimistic, but the details indicate otherwise.

A monthly report from the U.S. Census Bureau showed total housing starts up 13 percent month to month, but that was driven by a 43 percent monthly jump in buildings with five or more units. Single-family housing starts rose just under 1 percent for the month.

This is not a sign of prosperity given that it indicates more and more Americans are having to settle for renting, as opposed to home ownership.

The home ownership rate is down to 64.8 percent versus the 2004 peak of 69.2 percent, and the 50-year average of 65.4 percent.

Single-family home construction so far this year is well below last year. Starts were up just 2 percent from January through April in 2014, while they were up nearly 26 percent during the same time period in 2013.

Perhaps not surprisingly, consumer confidence fell this month showing Americans are being shaken by rising grocery bills and elevated fuel costs.

As part of inflation’s comeback, food prices have been climbing for four months in a row – especially meat prices.

According to the latest inflation data from the Labor Department, meat prices spiked by almost 3% in April – the most since November 2003. This is also the 2nd biggest price spike in 34 years!

Gold has historically been an excellent hedge against high inflation. Since we are just beginning to see the signs of inflation appear in the economy, investors should take advantage of this situation by acquiring gold at prices that may well seem low once inflation really kicks in.

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