We Are Facing a Period of Incredible Change

As we’ve outlined previously, we’re in a period of incredible change.

Disinflation has been replaced with inflation.
Interest rates are now rising, ceasing a 40-year trend in falling rates.
The Fed is now removing liquidity from the economy which could push us over the edge into a recession.

These shifts are significant and will continue to have a profound impact on investor portfolios.

But as seismic as these changes may be, no change could be more important than the subtle shifts taking place in the world currency markets.

As we discussed last week, the US has benefited from the US Dollar’s (USD) distinction as the world’s “reserve currency” – in large part due to the fact that global energy markets have traded exclusively in USD, giving the USD a “petrodollar” backing.

As the “world reserve currency,” the US has been allowed to “export” its dollars around the globe, despite running enormous deficits and producing little capacity.

But recently, several headlines and stories have caught my attention… and I’m shocked I find very little coverage of these stories in the mainstream financial press.

Back in late April, this headline I came across on ZeroHedge, jarred me.

In the weeks preceding this headline, there was already news about Russia and China taking big steps to remove themselves from Western monetary systems.

But Israel? Does Israel see the writing on the wall of what may be about to happen?

Let me explain…

When the US makes a purchase of goods or services, those are “exchanged” for USD.

As time goes on if the US buys (imports) more than it sells (exports), the country the US is doing business with will accumulate a reserve of USD. As long as there is a “belief” in the soundness of the currency, it’s “business as usual.”

But, if confidence is shaken, there can be problems.

The announcement by Israel’s central bank was the biggest change to its allocation of reserves in over a decade. To understand a possible motive of why Israel would do this, we need to back up a few weeks.

As a direct result of US sanctions cast upon Russia as a result of its invasion of Ukraine, Russia made the announcement that the Ruble would be backstopped by gold.

Further, it was announced that the backstopping of the Ruble with gold can come in many forms and doesn’t have to be a direct peg from the Ruble to gold – it can also include the far more likely scenario of accepting payment for oil, the country’s most ubiquitous and valuable resource, in gold.

By doing this, it linked the Ruble to Russia’s biggest resource – oil. In doing so, Russia has created a currency similar to the decades-old OPEC USD agreement.

And following this announcement, the Ruble is back to a two-year high versus the Eurodollar.

After small shocks lower in Russian markets and in the Ruble, things have stabilized relatively quickly – except now, Russia has used the opportunity to make clear that they do not want to be participants in the global fiat system any longer.

And now it looks like China (and likely India) feels similarly situated.

When the US announced that it was seizing Russian-owned FX reserves, it sent a message that any USD FX assets were no longer safe.

This has propelled the need to find an alternative monetary system – and it seems Russia and China could be leading the charge to create a new gold and commodity-backed multilateral currency system.

If you are China, and you produce everything that the US uses – and if you are Russia, and your produce a meaningful amount of energy – then the question is how long do you sit back and take it as you watch the US-run its reckless monetary programs.

I think we’re finding out…

What Russia realizes is that it still has the oil – it’s needed.

The potential for this is the world becomes divided between those that have assets (like gold and other commodities) and those that do not.

Should the perception of the USD change, there could be an alarming disruption to the American lifestyle.

As this chart shows, the US produces less and less relative to its consumption.

What will the US trade for if not USD?

When the dollar is viewed in terms of gold prices, we get a much different view of the value.

What this chart demonstrates is the degree of monetary debasement relative to gold.

Given the amount of monetary inflation, gold would need to be $42,000 per ounce to get to the 1980 peak of 55%% coverage of M1.

As I wish to stress again… we are facing a period of incredible change.

And nothing could be more disruptive than a change in the global demand for payments that favor those countries with hard assets versus those without.

While how this plays out is far from certain, it appears for the first time in decades that we have entered a period of competition against the USD as the premier currency.

This needs to be watched closely, so stay tuned…

Until then…