Is A Move Against the Dollar Inevitable?

Will King Dollar be dethroned?

Bullion.Directory precious metals analysis 19 March, 2015
By Christopher Lemieux
Senior Analyst at Bullion.Directory; Senior FX and Commodities Analyst at FX Analytics

The dollar is shinning bright, trading well above the FOMC-lows from yesterday. Will King dollar be dethroned by the East’s thirst for gold? The flow of gold from debtor nations to their creditors continue, and signs for “de-dollarization” are becoming more pronounced.

The idea of a gold-backed yuan has been floated around for a while. Nobody really knows if this is a possibility, but what is known is that China has a lot of gold; and the People’s Bank of China (PBOC) is keeping a lid on exactly how much. Hard numbers are hard to get out of China, but some estimates have been as high as 30,000 tons of the yellow metal.

A gold-backed yuan may or may not be in the cards, but ANZ Chief Economist Warren Hogan co-authored a study that suggests the demand for gold out of Asia will continue to grow in the future. He also believes the move to hoard gold within China will allow the yuan to be unpegged from the dollar. Mike Finger put out an article on SchiffGold underlying Hogan’s thoughts on the potential for China to move away from the dollar. It also revisits comments Peter Schiff said following the Swiss National Bank’s decision to stop the EURCHF peg.

According to Schiff:

In the case of China and America, you have poor people in China subsidizing the American middle class. How long can this go on? How many more dollars are the Chinese going to buy, before they give up just like the Swiss? Before they surrender? When you surrender in a currency war, your people are victorious. They win. You never want to win a currency war. You want to lose. Unfortunately, a currency war is the war the Americans are going to win to our own detriment.

Now, when China does this, I don’t know if they’re going to float the Hong Kong dollar separately from the yuan, or maybe peg the Hong Kong dollar to the yuan and then float the yuan. But I think what the catalyst is going to be is QE4.

In a Bloomberg interview with Hogan (featured on the SchiffGold article), Hogan said that he was unsure whether it was just the PBOC buying all the gold or if the broader community is involved. It is well-know the East has a culture that holds gold dear; but, the idea of owning gold by the broader community is also perpetuated as a way to limit the volatility of the yuan.

There is Russia, too. There is no doubt that Putin wants to rid the country from dollars and has reduced the number of US Treasury holdings for over 20-straight months. The Bank of Russia has also been the most active gold buyer within the last year. The East is expanding their gold strategy and is ready to get out of bed with the dollar – a currency of debt.

Since 2000, US base money has increased by 534 percent, M2 money supply by 150 percent, Treasury securities by 384 percent and the lovely credit-default swaps (CDS), we’ve known to love in 2008, by a whopping 670 percent.

Commodity-back currencies are not perfect by any means, but they hold an inherent value.

What is the dollar backed by? The “full faith and credit” of the US Treasury. Well, with $18.157 trillion in public debt and $92.615 trillion in unfunded liabilities, faith is diminishing quickly. 

This is not even accounting for the push by the White House to stop allies from joining China-led Asian Infrastructure Investment Bank (AIIB). This is monumental because it is an alternative to the International Monetary Fund (IMF) and World Bank.

It would allow financing in non-dollar terms and side-step the US financial system completely.

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