“I would not allow countries to go off the dollar because when we lose that standard, that will be like losing a revolutionary war.”
Donald Trump
On February 10th, 2024, the Chinese zodiac welcomed the Year of the Dragon. This year, according to the adherents, will usher in evolution, progress, and prosperity; it stands as the time for new beginnings and creating the foundations for long-term growth. How fitting, then, that Asian demand is leading a new phase in the burgeoning gold bull market. Prices of the yellow metal, long stagnant in US dollar terms, have seen a remarkable surge in the new year, with prices soaring to new highs.
The East is on the move. China has made significant efforts to forward the goal of renminbi internationalization by forging key agreements with Saudi Arabia and the UAE; it has advocated the use of its currency in oil and gas trade and expanded its Belt and Road Initiative to include new countries and projects. The renminbi’s share of trade settlement, long stagnant below 1% of global transactions, has soared in recent months, as indicated by SWIFT.
Source: Bloomberg, Incrementum AG
Russia has made similar advances. After the invasion of Ukraine and the ensuing sanctions, the Kremlin has renewed efforts for de-dollarization across all aspects of the economic system, drastically reducing dependence on the greenback and forging new alliances instead. Putin, in a powerful interview with American journalist Tucker Carlson, asserted: “As soon as the political leadership decided to use the US dollar as a political instrument, a blow was dealt to this American power.”
The drumbeats of Eastern power sound off in the sands of Arabia as well. The United Arab Emirates has begun reaching out to trade partners, suggesting use of local currencies to settle oil & gas contracts, and Saudi has expanded trade with China, prioritizing the use of renminbi instead of US dollars. Egypt has begun issuing panda bonds denominated in the Chinese currency; and other moves are being made across Northern Africa and the Levant to reduce greenback dependency.
However, these nation-states are well aware they are fighting a formidable opponent: the most dominant military and economic power in the history of man. The dollar’s position as the cornerstone of the world financial system will not be easy to disrupt; and strong forces on America’s side are coming to her defense.
The US dollar is dying a strange death. Despite what many believe, the greenback is not losing market share as a payment and settlement currency. The latest transaction data from SWIFT indicates that the prominence of the US dollar in international payments has reached unprecedented levels. Last summer, greenback-related trades surged to an all-time high of 46%, a significant increase from three years ago.
Source: Bloomberg, Incrementum AG
According to the 2022 Triennial Central Bank Survey by the Bank for International Settlements (BIS), the US dollar was involved in approximately 88% of global FX transactions. This proportion has remained consistent over the past two decades. In comparison, the euro accounted for 31% of FX transactions, a decrease from its peak of 39% in 2010. The euro has also fallen in other arenas. The share of foreign debt issued in euros was 27.6% in 2005 and fell to 20.7% in 2022; the percentage of foreign currency transactions in euros fell from 38% to 31%, and the portion of foreign exchange reserves fell from 23.9% to 20.5% in that period.
As we described last year, the network effects of a reserve currency are extremely hard to overcome. US dollars represent 59% of global forex reserves, around 80% of worldwide inter-regional trade, and over 50% of global trade invoices. They are also the standard base currency for forex and eurodollar swaps. All this usage means the US dollar’s network effect is incredibly strong, making it difficult for the system to switch to a new reserve currency.
In the In Gold We Trust report 2023, we made the following point:
Paraphrasing Mark Twain, however, the obituaries for the US dollar are still premature, because currencies are network assets, and the US dollar, as the No. 1 global currency, enjoys all the advantages of a network asset. Louis-Vincent Gave compares the US dollar to Microsoft Windows. Even though Windows crashes from time to time and has numerous flaws, it is by far the most widely used operating system. A new operating system would not only have to be better but would also have to overcome the disadvantage of not being a network good to begin with. While many similar products can coexist in normal consumer goods, network goods tend to be a natural monopoly.[1]
As Brent Johnson lays out, the US dollar is still the cleanest dirty shirt in the laundry. It isn’t perfect, and of course, the debt problems plaguing the US dollar will eventually prove fatal. But these problems also plague other monetary contenders – none of which have true external demand for their currency. In Brent Johnson’s words: “And based on the design of the system, the US dollar is not going to get inflated away, at least not before all the other currencies get inflated away.”
It is important to note why the US dollar has remained so dominant for so long. The US has significant structural advantages that have supported the dollar in becoming the global reserve currency. These include the deepest and most liquid bond market, the high convertibility of the dollar to almost any currency, the mostly effective rule of law, and settlements being handled by SWIFT. In addition to these economic factors, the US also benefits from its military strength and strategic geographic positioning.
Actually, SWIFT itself is not a payments or settlements system but rather an interbank communication network. Founded in 1973 by a consortium of 239 banks from 15 countries, it quickly expanded and began processing messages, to the point that 10 million messages were processed just one year later. That number grew exponentially to more than 1 billion in 1999 and then reached nearly 3.8 billion a decade later. In 2022, there were already more than 16 billion transactions per year.
It is said that the BRICS nations are working on an alternative to SWIFT, but we remain skeptical about this development. In fact, the alternative solutions are selfcontradictory. As Norbert F. Tofall lays out:
In order to limit currency fluctuations in their own national currencies, the BRICS launched the so-called Contingency Reserve Agreement (CRA) in 2014. The purpose of the CRA is to provide credit lines that allow participating central banks to stabilize currency fluctuations without risking depletion of their foreign reserves. The aim was to create a kind of alternative to the International Monetary Fund (IMF), but this has not even come close to being achieved to date. In addition, the basic structure of the CRA already contradicts the de-dollarization that is actually intended. Since the BRICS countries have strong trade links with the dollar bloc, the CRA’s currency stabilization mechanism is logically based on the US dollar.
China, for example, wants to internationalize its own currency for global trade and is not likely to approve of plans to relink to a gold-backed currency that can restrict its monetary policy goals. Due to its position as a net exporter and a major trade partner with the US, China has significant US dollar reserves and ties to US markets. Cutting itself off from the system would do significant damage to its economy, which would take years to undo.
If China were to infiltrate BRICS, for example, and attempt to convince the major BRICS+ nations that export oil to only trade in renminbi, it would likely face significant headwinds. Why would Saudi Arabia, the world’s third largest oil producer, want a nonconvertible currency that would force it to buy only Chinese goods?
The US dollar’s dominance extends to forex markets. Of the top 10 most liquid and highly traded currency pairs, 9 are with the US dollar, with the only exception being GBP/EUR. Trading renminbi to the South African rand, for example, would be extremely difficult, as there isn’t enough of a market to support a trade whose size is of any importance, not to mention the wide spreads. So, those looking to make such a transaction must first go through a US dollar pair as an “intermediary” currency.
Source: FXOpen, BIS, Incrementum AG
Other BRICS nations would have similar reasons for resisting an international renminbi as a replacement for the dollar. Why trade in renminbi, when their own currency is perfectly suitable? And why de-dollarize and adopt the renminbi, if China maintains its entrenched position in the US dollar system and continues to use US dollars for trade?
Right now, the TINA doctrine is in full swing: There Is No Alternative to the almighty greenback. America simply has the deepest, most liquid markets around, and the dollar’s steamroll continues.
Faced with the absence of a viable alternative fiat currency for international and domestic trade, coupled with the overwhelming weight of eurodollar debt, nations have increasingly found themselves gravitating towards the relative stability offered by the US dollar. Currently, 9 countries officially adopt the US dollar as their primary currency, with an additional 21 countries accepting the US dollar alongside their respective local currencies.
For many years, Argentina has experienced informal dollarization, with the US dollar and assets denominated in US dollars acting as a safe haven due to the diminishing value of the peso. Escalating inflation heightened the urgency of finding a solution to Argentina’s economic woes. Newly elected President Javier Milei’s proposed solutions to addressing the crisis included the somewhat radical notion of “dynamiting” the central bank, slashing social spending, and embracing dollarization. He has also drafted a 10-Point Freedom Plan aka Milei Pact.
Venezuela has followed the same path. The South American nation’s currency stability began deteriorating in 2016 and rapidly descended into hyperinflation, reaching an astonishing 1,000,000% by 2018. In response to the crisis, Venezuela has resorted to using the US dollar as a means of domestic trade and savings. Roughly half of all savings and payments are now denominated in US dollars, with figures soaring to between 60% and 75% in border regions.
Brazil has also heightened its exposure to the US dollar. The Brazilian Treasury announced its inaugural entry into the global debt market this year, unveiling two dollar-denominated bonds with maturities of 10 and 30 years. These bonds yield 6.35% and 7.15%, respectively, drawing substantial demand that reached nearly USD 7bn each.
Benin, a small West African nation, recently debuted a US dollar bond. Upon its release, the country experienced massive demand, exceeding six times the offering receiving USD 5bn in demand but only selling USD 750mn of debt. Remarkably, this occurred within a fortnight of Ivory Coast also launching a USD bond, which also encountered overwhelming demand, surpassing nearly four times the initial offering. This is surprising, considering Ivory Coast’s history of defaulting on dollar debt, especially during the brief 2011 civil war.
However, the US dollar, being the singular reserve currency for the global system, poses significant challenges. In a November 2023 article published on a platform associated with the Chinese Communist Party (CCP) political journal, it was argued that recent US monetary policy decisions have generated a “US dollar tide” that exploits the wealth of other nations and imposes significant economic losses and financial risks on developing countries due to the dollar’s dominance.
These opinions are significant, particularly as the three BRICS invitees, Argentina, Egypt, and Ethiopia, face acute US dollar shortages and soaring inflation rates. In 2023, the shortages in Argentina and Ethiopia were so dire that black market exchange rates reportedly surged to nearly double the official rates. Meanwhile, Egypt faced a record deficit in its banking system’s net foreign assets, signaling a severe shortage of foreign currency, particularly in June 2023. The strain foisted by the greenback onto the global economic system is pushing some members to consider alternatives.
The BRICS summit in Johannesburg distinguished itself by taking significant steps to grow and strengthen the group more than ever before. The summit conveyed the clear message that the long-unquestioned post-World War II order must recognize the new multipolar reality and adapt accordingly to the current era.
Several key points have emerged. First, the five original members of the bloc extended invitations to six additional countries to join: Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates. Of the invitees, all except Argentina and Saudi Arabia have joined. Saudi Arabia is still undecided, whether to join or not, whereas in mid-April Argentina asked to join NATO as a global partner like Columbia, Australia, Japan, and South Korea. The expanded BRICS+ alliance encompasses nearly half of the global population and
just below 30% of global GDP, making BRICS+ a more powerful force than ever before.
Second, the leaders of the BRICS nations announced their commitment to lessen reliance on the US dollar and accelerate the process of de-dollarization in international trade. They discussed alternatives to the US dollar, including the possibility of creating a common currency. Brazilian President Lula da Silva supported the introduction of a BRICS currency, and Russian President Vladimir Putin, via video, denounced the hegemony of the US dollar and the impact of US sanctions on global economic stability, advocating for the benefits that dedollarization would bring to BRICS countries.
The members concurred on increasing their backing for the African Continental Free Trade Agreement (AfCFTA), emphasizing the importance of Africa’s political stability in fostering market confidence. Additionally, leaders deliberated on various strategies to improve dialogue and collaboration to further develop AfCFTA.
Lastly, a significant breakthrough was made with the agreement between India and China to ease tensions along their contested border. Following the summit, the Chinese Embassy in New Delhi shared via Twitter that President Xi Jinping had conveyed a wish to enhance India-China relations, emphasizing that better relations between the two nations would be mutually beneficial. However, a short time later, the Chinese government published a controversial map that included the two Indian territories, Arunachal Pradesh and Ladakh, within its borders. This move raised doubts among Indians regarding China’s true intentions, despite the assurances given during the summit. The division between these two behemoths has often been cited as a flaw in the proposed BRICs+ currency.
However, expectations were very high for the last summit – perhaps too high. In the joint declaration issued on August 24, 2023, the participants pledged to strengthen the Contingent Reserve Arrangement (CRA), encourage the New Development Bank (NDB) to make loans suited for sustainable development, and discuss the BRICS Payment Task Force, whose goal is to create inclusive, transparent, and efficient cross-border payment systems among the member states.
Despite these lofty goals, the results were somewhat meagre. The CRA is basically inactive, as it has been put on hold by the five BRICS central banks. Its scope remains limited, with only five participating members, and its functionality is limited due to a myriad of constraints and protective measures. The envisioned surveillance unit has yet to be created, and no actual balance of payments assistance operations have been conducted; only trial exercises have taken place.
A similar story is seen with the NDB. Initially touted as a competitor to the World Bank, the NDB has fallen astonishingly short of its goals. The bank, in total, has claimed USD 32bn of approved financing over 96 different projects since inception, a fraction of the USD 175bn in loans from the World Bank in 2022.
Source: NDB, Incrementum AG
The NDB itself is hampered by political infighting, weak leadership, and sanctions that prevent transactions. Only 5 countries are members. Contrast this with the Asian Infrastructure Investment Bank (AIIB), established around the same time, which has grown to over 100 member nations.
For the next summit, to be held in Russia, we expect the trend of BRICS expansion to continue. Putin himself claimed this summit would be focused on establishing a “fair world order” and excoriated the current system: “As for the ‘rules-based world order,’ there are no such rules; in reality, they change every day depending on the current political agenda.” BRICS does represent a strong desire to escape the stranglehold that the US holds over the global financial system. This desire is gaining strength, as last year the number of member applications soared to 22, and powerful allies of the US, such as Saudi Arabia, have already been invited to join this coalition.
Current candidates that have applied for BRICS membership include Belarus, Bolivia, Kazakhstan, Kuwait, Pakistan, Thailand, Venezuela, Vietnam and Nigeria. Mexico, Turkey and Indonesia have also expressed their interest in potential membership. With NATO member Turkey and Mexico as the USA’s immediate neighbour, two countries that are of particular geopolitical importance are showing interest in the BRICS.
Membership requirements were one of the agenda items that were covered in the meeting, with the incumbent 5 nations laying out a framework for joining and a set of expectations for other nations to meet once they are accepted. The 22 new-member applications have all come as of 2023, as fallout continues from global supply chain disruptions and the US sanctioning of Russia at the onset of the Ukraine War. The list of interested parties continues to grow, and the diversity of applicants demonstrates that BRICS is no longer simply disaffected pariah states shaking their fists at US hegemony, and instead represents widespread discontent with the current world order and a desire to build something different.
A common BRICS currency would have several structural issues, not the least of which being coherent monetary policy and governance among the coalition, which is made up of many states pursuing disparate goals. A new BRICS currency would also need features that made it superior to the US dollar as a reserve asset, such as a global transaction network, deep and liquid money markets, and Western-style rule of law, which seems near impossible at this point. What is more likely is the increased use of alternatives, such as the ruble and renminbi, as the major nation-states in BRICS attempt to get smaller nations off the dollar standard and onto their own.
China is attempting to raise the renminbi’s status as a potential global reserve currency. Globally, the renminbi represents only 2.5% of FX reserves, but this number is an improvement from two decades ago when the currency was nonexistent on offshore bank balance sheets.
Progress is being made, however. China National Offshore Oil Corporation (CNOOC) and France’s Engie SA have successfully concluded an international LNG transaction settled in renminbi, supplying a shipment of 65,000 tonnes of LNG to CNOOC in November. This comes after a March deal for the same tonnage with another French firm, TotalEnergies. CNOOC also made a deal with a Singapore supplier for a cross-border trade settled in renminbi, along with UAE’s Abu Dhabi National Oil Co.
The Chinese also made inroads into South America in 2023, agreeing with Argentina, for example, that imports to the country will be settled in renminbi instead of US dollars. However, this could just as well be a sign of the country’s dwindling US dollar reserves as it faces a dual fiscal and monetary crisis.
Later in the year, on November 20, 2023, the People’s Bank of China and the Saudi Central Bank formally agreed to a local currency swap valued at CNY 50bn (USD 6.93bn), marking a significant step forward in strengthening relations between the two countries. In 2022, Chinese customs data revealed that China imported approximately USD 65bn worth of Saudi crude, making up roughly 83% of the kingdom’s total exports to the Asian giant.
The Chinese have also been making significant progress with their Belt and Road Initiative (BRI). In October of 2023, China held a Belt and Road Forum in Beijing and began strategically employing loans to advance the international standing of the renminbi, attempting to elevate its share in global payments to new levels. Belt and Road initiatives and investments have been executed in a host of nations spanning Asia, Africa, Europe, and South America. In recent months, the tally of BRI cooperation agreements has surpassed 200, involving over 150 countries and 30 international organizations.
As we noted in the In Gold We Trust report 2023:
As a reminder, BRI is a Chinese initiative launched in 2013 to build a huge multi-country network of transportation, energy, and communication infrastructure to connect China with countries across Asia, the Middle East, Africa and Europe, so as to accelerate economic growth, trade, and investment across this network.
The initiative takes the form of land-based transportation routes, from China through Central Asia to Europe, and sea-based transportation routes from China via Southeast and South Asia to the Middle East, North Africa and Europe. […] Yet again, nearly all of the countries appearing on the top central bank gold buyers list over the last 15 years are also in one way or another connected to the Belt and Road Initiative.[2]
These projects include the construction or enhancement of roads, ports, railways, pipelines, and other trade-centric infrastructure. By financing BRI projects, China has successfully rejuvenated the previously stagnant process of renminbi internationalization.
In September 2023 the renminbi achieved a record-high share of 4.6% in global payments by value, more than doubling from 1.9% in January 2023, as indicated by SWIFT. However, the share remains painfully tiny compared to the dominant position of the US dollar, which still comprises around 47% of global payments.
Individual Chinese banks are leading the charge, with notable examples being EximBank’s loan cooperation with the Saudi National Bank in RMB and the agreements signed with Malaysia’s Maybank and BBVA Peru. In a report released prior to the Belt and Road conference in October, the Chinese themselves noted:
As of the end of June 2023, a total of 13 Chinese-funded banks had established 145 first-tier offices and branches in 50 BRI partner countries; some 17.7 million businesses in 131 partner countries had opened UnionPay services, and 74 partner countries had opened UnionPay mobile payment services. […]
China has signed bilateral currency swap agreements with 20 partner countries and established renminbi (RMB) clearing arrangements in 17 partner countries. The number of participants, business volume, and influence of the RMB cross-border payment system have gradually increased, effectively facilitating trade and investment.
Between 2013 and 2022, the total value of imports and exports between China and its BRI partner nations amounted to USD 19.1trn, with an average annual growth rate of 6.4%. Furthermore, the combined two-way investment between China and its partner countries reached USD 380bn, with China contributing USD 240bn to this total.
Source: Reuters Eikon, Incrementum AG
These developments show the Asian behemoth is on the move with a well-thought-out plan to take on the vaunted US dollar. Their thinking is strategic and calculated. China is involving dozens of banks, financial regulatory agencies, law firms, construction and engineering companies, and government organizations to raise the dominance of the renminbi in offshore markets.
However, while it maintains a closed capital account, China’s ability to internationalize the renminbi will remain limited, as not enough currency will flow out to settle trade and provide new financing for projects, a requirement for reserve currencies. Furthermore, the BRI strategy is not foolproof. Italy withdrew from formal participation in Belt and Road at the end of March.
Nevertheless, China is not the lone Eastern power fighting this battle against American hegemony: Russia is also attempting to shed the US dollar noose that has been tied around its neck.
As a response to Russian aggression in Ukraine, the Biden administration opted in 2022 to suspend Russia’s access to the SWIFT international payment network, effectively barring its central bank from utilizing its foreign exchange reserves as a punitive measure.
As we pointed out in the In Gold We Trust report 2023, “Showdown”, the freezing of Russia’s currency reserves by the US and the EU has highlighted to the world that redemption of US dollar- or euro-denominated reserves may not be guaranteed. This erosion of trust is hard to reverse. Thus, a potential weaponization of gold could have significant repercussions on global cohesion if a universal emergency payment method at the international currency level were compromised.
The full ramifications have not yet been fully felt, as this process of leveraging the global reserve currency in this form of financial warfare can have severely detrimental effects on the world’s trust in their own US dollar reserves. Other nations have expressed discontent over the practice of “weaponizing” the US dollar, and their trust has subsequently eroded. This has contributed to a decline in the US dollar’s share among global reserves from 70 percent to 58 percent over the past two decades.
Source: Federal Reserve St. Louis, Incrementum AG
Russia has responded in kind to the sanctions. Russian Prime Minister Mikhail Mishustin has aimed to get China and Russia to substantially reduce their reliance on the US dollar in bilateral trade. In a meeting in December 2023 with Chinese and Russian officials, Mishustin stated that the vast majority of the trade transactions between the two countries are now conducted in either Russia’s ruble or China’s renminbi: “Mutual trade has increased by almost one third year-to-date. Meanwhile, the majority of payments, over 90%, are made in national currencies, which demonstrates almost full de-dollarization of economic ties.”
Trade between Russia and China saw significant growth in 2023, mainly caused by Russia’s exclusion from SWIFT, which increased its dependence on China for trade. According to Mishustin, the total transactions between the two nations have surged to a record-breaking USD 20bn this year. At the same time, trade between Russia and the US reached a three-decade low, with a total value of USD 277mn, a shocking 90% lower than late-2021 levels.
Russia has also dedollarized outside of its direct trade with China. The Kremlin has shifted away from what it deems “toxic currencies,” leading to a large rise in the renminbi’s share of Russian import settlements from 4% to 23% last year. Right now, these so-called toxic currencies make up just 28% of all Russia’s export revenue and 31% of its import revenue, which is a significant decrease from before the war.
Russia had moved to bolster its own currency after being slammed with sanctions for its invasion of Ukraine in 2022. In March of that year, Russia announced its intention to demand payment in rubles for gas sales to nations classified as “unfriendly.” Putin’s statement was cogent: To purchase our gas, you must use our currency. The extent to which Russia can unilaterally modify pre-existing contracts, originally agreed upon in euros, however, remains uncertain. Approximately 40% of Europe’s total gas consumption is supplied by Russia. Throughout 2022, European Union gas imports from Russia had varied, ranging from 200mn to EUR 800mn (USD 880mn) per day.
In an interview with Tucker Carlson in February, Putin slammed the US for weaponizing the US dollar and claimed that their actions were responsible in large part for the fall in the US dollar’s share of global currency reserves:
Tucker Carlson: How have sanctions, do you think, have changed, the dollar’s place in the world? […]
Vladimir Putin: Nevertheless, it is the main weapon used by the United States to maintain its power across the world. As soon as the political leadership decided to use the US dollar as a political instrument, a blow was dealt to this American power. I don’t want to use any unliterary expressions, but this is stupidity and a huge mistake.
Look at what is going on in the world. Even the United States’ allies are now downsizing their dollar reserves. Seeing this, everyone starts looking for ways to protect themselves. But the fact that the United States applies restrictive measures to certain countries, such as placing restrictions on transactions, freezing assets, etc., causes grave concern and sends a signal to the whole world.
Moreover, Putin obviously understands that the US dollar’s role is fundamental to the US’s global influence. Despite the vast amounts of US dollars circulated globally, inflation rates within the United States remain relatively low due to the constant export of US dollars to the rest of the world via trade deficits.
Putin also lays out his own nation’s push towards de-dollarization. Until 2022, the US dollar was used for around half of Russia’s trade with other nations. However, this figure has now plummeted to just 13%. The decision to move away from the US dollar, Putin claims, was not initiated by Russia but was a consequence of US-imposed restrictions on Russia’s US dollar transactions. From Russia’s perspective, such actions by the USA are counterproductive, harming not only the US economy but also diminishing its global influence.
Previously, Putin points out, transactions in the Chinese renminbi constituted only 3% of Russia’s trade, but they now account for slightly more than 34%, a significant shift. Transactions in the Russian ruble also make up 34%.
In an exciting development for the gold world, the Russian Embassy in Kenya tweeted: “The BRICS countries are planning to introduce a new trading currency, which will be backed by gold. More and more countries recently expressed a desire to join BRICS.” This tweet should be taken with a pinch of salt, however, as managing the interests and power dynamics of multiple countries, especially those as aggressive as Russia and China, could prove to be extremely difficult. And, of course, we are not 100% certain about the strategic significance of the Russian embassy in Kenya…
Amidst the push for de-dollarization, the Middle East emerges as a pivotal player despite the absence of any domestic alternative to rival the greenback. To date, the region has been intricately tied to American markets, with both the Saudi rial and the UAE dirham linked to the USD, tying their monetary policy to the Federal Reserve. This makes depegging from the US dollar extremely difficult, but also means the damage done to greenback hegemony will be greater if the de-linking is successful.
However, the past year has seen a clear move by China to join forces with Saudi Arabia, and this appears to be working in their mutual favor. During a meeting with Arab leaders in December 2022, President Xi Jinping announced China’s intention to purchase oil and gas using renminbi. This strategic move is in alignment with Beijing’s objective to promote its currency on the global stage and diminish the dominance of the US dollar in international trade. However, the majority of Saudi Arabia’s assets and reserves are denominated in US dollars, including over USD 110bn in US Treasuries held by Riyadh.
Source: US Treasury, Incrementum AG
Not only have we witnessed Saudi Arabia’s bilateral agreements with China and other trade partners, but we’ve also seen an undercurrent of resentment towards the US in this last year.
Saudi Crown Prince Mohammed bin Salman wielded economic threats towards the US in 2023. Behind closed doors, any retaliation against oil cuts would invite profound repercussions, promising a seismic severance of the longstanding US and Saudi alliance. President Biden, facing mounting pressure amidst soaring energy prices and the 2024 election, has yet to impose any consequences on Saudi Arabia.
This was not the only move against the US made by Riyadh. Also in 2023, the opening of two new Chinese state-owned bank branch offices in Saudi Arabia coincided with the signing of memoranda of understanding and agreements between Chinese state-owned banks, major Saudi firms, and Saudi government entities. These initiatives were geared towards expanding the internationalization of the renminbi.
The UAE, another powerful Arabic player, added to the dedollarization intrigue through extending their currency swap with China for 5 years. Khaled Balama, UAE Central Bank governor, explained that the deal “reflects the depth of the relationship between the UAE and China, embodying the Central Bank’s commitment to solidifying the partnership with our Chinese counterpart in financial, trade and investment fields.”
The nations signed a pact seeking to enhance collaboration between the UAE Central Bank and the Digital Currency Institute of the People’s Bank of China in the realm of financial technology. China was not the only partner. The UAE expanded the initiative to de-dollarize by allowing their central bank to formalize similar swap agreements with Turkey and Egypt.
In an attempt to deepen its economic alliances, the Middle Eastern nation is also seeking to revamp payment mechanisms for oil transactions. The UAE is reaching out to countries like China, Russia, India, Egypt, and more, proposing the use of local currencies for oil settlements, and has already made tangible progress. Furthermore, Saudi Arabia has declared its willingness to accept local currencies for oil deliveries. The Kingdom is reportedly exploring the option of receiving payments in other regional currencies as part of its strategy to diversify its reserves.
India’s central bank, the Reserve Bank of India, published a paper in July 2023 outlining a plan for the internationalization of the rupee. The paper included extensive in-depth discussions on the use of swap lines, integrations of offshore markets, an approach to increasing INR liquidity in forex markets, and more. Their desire and plan for a multipolar global monetary system are coming to fruition.
In a landmark move last year, the UAE shipped over 1mn barrels of oil to India, settling the payment in rupees in September 2023. This is the first time India has paid for energy products in her own currency. UAE gold exporters have also begun transacting large sales of bullion in rupees, shipping gold to wealthy buyers in Mumbai.
This is possible due to the new bilateral agreement between India and the Arab nation, signed in July 2023, where the UAE agreed to settle trade in rupees in order to reduce transaction costs by eliminating dollar conversions. The Reserve Bank of India also announced that India’s Unified Payments Interface (UPI) would soon be linked with the UAE’s Instant Payment Platform (IPP). These types of agreements, which are becoming more common in Asia, result in reduced payment processing costs.
The gradual decoupling from the US dollar is also taking place on the continent of Africa. In July of last year, Kenya’s President William Ruto urged African leaders to transition away from reliance on the US dollar by advocating for the adoption of a Pan-African Payment and Settlement System. Banks and payment service providers have the opportunity to connect directly to the system, facilitating secure and immediate transactions in local currencies.
We also need to facilitate trade by making it possible for businesspeople to be able to transact their goods, their services without the unnecessary complications of changing currencies. That is why we want the PanAfrican payment system.
One of the Senior Advocates of Nigeria, Femi Falana, has been a strong supporter of a move to shift away from the US dollar as the currency of exchange for oil commerce in the country. By doing so, Nigeria could bolster its currency and assert greater control over its economic affairs, thus mitigating the risks associated with the global dominance of the greenback.
In another important development, for the first time, Egypt has issued bonds denominated in Chinese renminbi as part of its efforts to repay its foreign debt amid financial challenges. The three-year bonds are valued at CNY 3.5bn (USD 479mn) and maintain a 3.5% interest rate, which is, surprisingly, lower than what would have been associated with US dollar bonds.
These moves are representative of the slow and steady erosion of US dollar hegemony that has gripped the neck of the global monetary system for over half a century. An even more interesting trend is developing, however – and it could have huge consequences for the future of gold.
A new attack vector on the greenback’s dominance is developing, and it is coming from a sector that most in the traditional financial system would not expect: gold. The World Gold Council reported that in 2023, gold demand surged to unprecedented levels due to ongoing geopolitical tensions and economic struggles in China, driving investors towards the safe haven asset. Last year, the total demand for gold amounted to 4,899t, up from 4,741t in 2022.
Culturally, Asian countries have had an enduring love for gold, and as globalization buoyed economic growth in the 1980s and 1990s, these nations started to become more important players in the gold space. In fact, anonymous gold blogger FOA mentioned that a large trader out of Hong Kong was responsible for the initial large physical drain out of the UK in 1997 that eventually forced a BIS meeting and a halt to the practice of selling gold certificates backed by stores in central bank vaults.[3]
The global demand picture is shifting east. If we include India in the Asian region, nine out of the top 15 consumers for gold fabrication are situated here. Economic growth in this region has been rapid in the last few decades, and due to several constraints, including capital controls and limited investment opportunities, gold has been an attractive investment for capital allocators looking for a stable asset with reliable returns.
In an excellent article, Alasdair Macleod mentions several factors pointing to a burgeoning gold standard in the East, and for the nations that are associated with it:
First, Putin emphasized his vision for moving towards stable currency values anchored in commodities, such as gold, as opposed to relying on dollars and euros. He highlighted that the latter currencies could be used as economic weapons by the United States and its allied countries within their sphere of influence.
Next, Sber, Russia’s leading bank, has launched digital financial assets backed by gold, underlining the anticipated monetary role of gold in the country. This is timed perfectly with the publication of an article by Sergey Glazyev in Moscow’s Vedomosti business newspaper. Glazyev is at the helm of a project developing a new trade currency for the Eurasian Economic Union (EAEU). Glazyyev states:
In conditions of unprecedented sanctions pressure, the task of Russia is not to learn how to play according to the ‘curve rules’ of the West, but to build transparent and mutually beneficial rules of the game with friendly countries, create our own pricing, exchange trading, and investment systems. And gold can be a unique tool to combat Western sanctions if you recalculate the prices of all major international goods (oil and gas, food and fertilizers, metals, and solid minerals).
Glazyev’s advocacy for the ruble to adopt a gold standard provides a strong indication of his approach as the leader of the EAEU committee in shaping a new trade currency, and he is a key proponent of the proposal to establish a new gold exchange in Moscow. It seems unlikely that Middle Eastern oil exporters would agree to be paid in currencies other than the US dollar without strong guarantees about the future value of these payments compared to the petrodollar. The option to hedge the renminbi into gold likely had a significant role in this consideration.
Russia’s effort to decrease its reliance on US assets led to gold accounting for a larger portion than the US dollar of its USD 583bn international reserves in early 2021
Source: Bloomberg, Incrementum AG
Initially, Russia and China’s strategy to phase out the use of dollars for commodity pricing, cross-border trade settlements, and most foreign exchange transactions was primarily defensive. They allowed the US to take the lead in geopolitical maneuvers and strategic missteps. However, the imposition of sanctions against Russia dramatically altered the situation. Facing significant pressure, Putin has been compelled to adopt a more confrontational approach.
At the St. Petersburg International Economic Forum in June 2023, attended by 81 official foreign delegations, Putin sought to undermine the Western financial system by openly criticizing the US dollar and the euro. His strategy to eliminate US influence from Eastern Europe encompasses both military and financial tactics and centers around convincing other heads of state to remove both currencies from their own reserve balances.
Perhaps more concerning for the US is the slow and steady erosion of US Treasuries as the de facto safe haven reserve asset. After China’s entry into the WTO, it began buying US government debt hand over fist, and continued to do so throughout the 2008 financial crisis. Other countries followed China’s lead and were large net buyers through the early 2000s and into the 2010s. In fact, from 2008 to 2014, foreign central banks purchased roughly 71% of all new US debt issued.
Source: Federal Reserve St. Louis, Incrementum AG
This trend stalled in 2015, as noted by Luke Gromen:
So, like what we’re watching right now in the US and around the world is the bursting of the global sovereign debt bubble […] And US authorities have all had a lot more leeway to deal with it by virtue of being the reserve currency issuer and having all these piles of money that once foreign central banks stopped buying this stuff, they could regulate others into buying it.
From 2018 to 2021, foreign central banks slowed their purchases, only buying a measly 14% of the debt issued. The US fiscal situation was getting increasingly worse, and in Q3/2021, as Luke Gromen noted, if you combine gross interest expense and entitlements, on a base case, you are already at 111% of tax receipts. True interest expense is now more than total federal income. The federal government is already bankrupt – the market just doesn’t know it yet.
That same quarter, another striking event took place: Foreign central banks stopped buying US Treasuries on a net basis. According to TIC data from the Treasury itself, this trend has only worsened with time, with China, for example, seeing a decrease in holdings of USD 51bn in just 12 months, from December 2022 to December 2023.
This trend may be the true de-dollarization we are looking for, or at least the first stage of it. The divestment from US Treasuries is the first nail in the US dollar’s coffin, eliminating the easy source of offshore funding that America has benefited from for the last 50 years since Nixon closed the gold window and Kissinger flew to Saudi Arabia to help give birth to the petrodollar.
Source: US Treasury, Federal Reserve St. Louis, Incrementum AG
Overall, this should be worrying to US policymakers, as it means they will have to find other sources of demand for government bonds. Several actions have already been taken in the last 10 years to alleviate the issue, including money market reform and Basel-III regulations that forced institutions to hold more government debt. Banks loaded up on so many bonds that in 2020 the Supplemental Leverage Ratio (SLR) was temporarily modified to exclude Treasuries, to prevent banks from holding capital against their assets. In March of 2024, US banks again asked the Federal Reserve to change the SLR so USTs would not be counted.
To us, it is no surprise that foreign central banks are on a rapid goldbuying spree. Gold was a shunned asset during the Great Moderation. In sum, the yellow metal collapsed from a massive 80% of foreign reserves to only 15% in 3 decades. However, now a heel-turn is taking place: For the first time since the late 1980s, gold has rotated back into becoming a favored asset among central bankers, no longer vilified. For reference, a heel-turn is when a villain turns into a hero in a dramatic change of character. It is widely used in professional wrestling, and actors such as The Rock and John Cena have performed heel turns to the gleeful surprise of the audience.
Source: Crescat Capital, Reuters Eikon, Incrementum AG
Could these foreign officials be hedging against inflation? Or against the devaluation of their own currencies? Perhaps. However, the more worrying implication is that US Treasuries, and perhaps the US dollar itself, are losing reserve status, and gold is returning to its rightful spot as the global neutral reserve asset. If this is true, it will have massive significance for the future gold price and the funding mechanism of the Treasury itself.
If the US dollar does lose reserve status, then excess US Treasuries built up overseas would come back to roost, causing interest rate hikes domestically. No currency has as many external liabilities as the US dollar, and the unwinding of these positions would be disastrous. The Fed would be forced to respond with a new, colossal wave of QE, likely much bigger than anything seen up to this point. We would shift violently from a unipolar world to a multipolar one, and gold would rise as the medium against which all fiat currencies are judged.
What is encouraging on this note is the role of the yellow metal in the new global monetary system. Gold serving as a neutral reserve asset doesn’t just fix Triffin’s Dilemma, it obviates it completely. Without a single central issuer of the global currency, there is no dilemma because there is no stark contrast between interior vs. exterior demand and supply. The TINA doctrine would now be replaced by TIAA – There Is An Alternative – and the alternative is gold.
To expand on the Triffin Dilemma, in 1959 a Belgian economist by the name of Robert Triffin gave a presentation in front of the US Congress on what he saw as a fatal flaw in the Bretton-Woods global monetary system. The flaw he presented came to be known as the Triffin Dilemma or the Triffin Paradox, and it would, he asserted, destroy Bretton-Woods over a long enough timeframe. In the words of a 2017 BIS study:
The most common version of Triffin shifts his thesis from the capital account to the current account. It posits that the reserve currency country must run, or at least does run, persistent current account deficits to provide the rest of the world with reserves denominated in its currency […]. ‘In doing so, it becomes more indebted to foreigners until the risk-free asset ceases to be risk-free’.
The Triffin Dilemma boils down to this: As the US dollar is the global reserve currency, there is international demand for it. These funds are needed to settle global trade, held as reserve balances by central banks, and to satisfy offshore dollar debts. All these countries borrow, save, and trade in a currency they cannot print.
The implications of this dilemma are extensive. In order to satisfy the international demand for the reserve currency, the issuing country must be prepared to perpetually export more of its currency than it recoups through trade surpluses. This can lead to a diminution of confidence in the currency if markets perceive that the balance between international liquidity provision and domestic economic stability is not being effectively managed.
Source: econdatus, US Census Bureau, Federal Reserve St. Louis, Incrementum AG
The US must choose whether or not to satisfy this demand. If they elect not to, a deflationary crisis could develop, as there would not be not enough US dollars to satisfy global trade and finance needs. If they do, then the constant outflow of greenbacks would create more dollars than is otherwise justified, eventually breaking the Bretton Woods gold peg of USD 35 an ounce. Triffin gravely warned Congress that this outcome was essentially inevitable – and it was.
John Maynard Keynes had initially created a solution for the dilemma, which he termed the bancor. In the plan that he outlined at Bretton Woods, they would establish a global central bank known as the International Clearing Union (ICU), which would aim at addressing international imbalances. This bank would introduce a new international currency called the bancor for settling such imbalances. Under this plan, each country would be granted a restricted line of credit to prevent balance of payments deficits, while also being incentivized against running surpluses by being required to remit excess bancor to the Clearing Union.
The bancor was not adopted, however, as it was deemed unwieldy and idealistic in a world of competing nation-states and financial powers. The ICU and bancor settlement currency would need international cooperation on issues with competing interests vying for control.
However, today, gold can still replace USTs as the de facto reserve asset. In this scenario, the trend of the last few years will accelerate rapidly. Foreigners dumping Treasuries would replace them with gold reserves held in their own vaults, demanding physical ownership rather than custody. The self-balancing nature of the gold standard would return; any country issuing too much paper currency versus their gold would see their reserves drained, eventually causing devaluation and restrictive monetary policies to correct the issue.
This aligns closely with the writings of the anonymous bloggers ANOTHER and FOA (Friend of Another) in the late 1990s and early 2000s.[4] These two mysterious insiders hypothesized that Saudi Arabia was acquiring gold by hiding sales through the massive petroleum markets – swapping barrels for a combination of dollars and bullion. They claimed that eventually the oil-producing nations would gain the upper hand and be able to force the repricing of gold in US dollar terms, demanding physical settlement for delivery of energy products.
Source: “20 Years later – a Freegold Project: Interview with FOFOA,” In Gold We Trust report 2019
Nations would then be forced to choose: Buy gold on the open market and deliver it for oil, or face imminent energy shortages. This ultimatum would shock the global financial system, and many nations would scramble to acquire bullion at whatever price necessary. A massive bid would open. As our friend Lyn Alden says: “The first rule of running a developed economy is to not have an energy crisis. The second rule is to not have an energy crisis.”
Gold revaluation would then be forced, which could actually be profitable for central banks that hold a significant portion in something called a gold revaluation account (GRA). As Jan Nieuwenhuijs lays out, this has been done several times in the past, by the Netherlands in the 1930s and Italy in 2002, and it can be used to recapitalize a central bank, as Switzerland did in 2000.
Source: Brent Johnson, Santiago Capital, Incrementum AG
The gold price level would then depend on each country, its particular M2 composition, and its real gold reserves. This possibility could explain why foreign central banks are gobbling up the precious metal in record amounts. They are preparing for a reset of the global monetary system and a reintroduction of gold as the neutral reserve asset, replacing USD 7trn of US Treasury bonds. The bullishness, in this case, for the gold price cannot be understated.
Even if this scenario sounds far-fetched, one thing is clear: The East is back in the driver’s seat for gold markets. Clearly, Eastern demand has begun pushing prices up and has reignited the bull market in precious metals, long thought dead by dollar proponents and bond traders. Crucially, as some Asian traders note, gold prices in China have soared, and this has caused dislocations in the West. On March 6, 2024, for example, spot gold on the Shanghai exchange traded at up to USD 2,189.59 an ounce, far above the USD 2,159 level seen on COMEX that day.
Analysts such as VBL’s Ghost, the writer of GoldFix, have pointed out that this delta represents a massive arbitrage opportunity for traders, and a mechanism that will drain gold reserves out of the West and into the East. The price differential between the two exchanges must be eliminated by gold prices moving up to meet the ripping Asian bid – lest we face another run on gold, akin to 1971.
Actually, this may be starting to take place already: Gold prices in Shanghai closed at record highs on April 1st, well above where gold trades in the West. Bai, the CEO of an investment company in China, tweeted:
April 1, SGE/SFE gold opened and hit ATH again.
SGE gold=$2286.22/oz;
SFE gold=$2296.78/oz.
For reference, gold futures in the US reached a record high of USD 2,265 before paring gains and retracing, closing at USD 2,249.89. The USD 36 and USD 46 price differential for the spot and future markets, respectively, may not seem like much, but by leveraging this up, traders can make a killing by pulling physical gold out of Comex and dumping it in Shanghai.
This has been going on for months. The average spread has hovered between USD 30 and USD 40 for the last few months, and at times is even higher. On September 20th, 2023, for example, the spread was USD 88. As this has continued, gold has consistently drained out of Comex. The arbitrage opened – or widened to be material enough – in July 2022.
This is being driven by record Chinese gold demand, as investors flee Chinese stocks and real estate. Housing markets in China are struggling as leveraged investment funds and property managers are defaulting on bonds and trust products, and contractors are left unpaid. The misallocated capital from these markets is now flowing into gold.[5]
Although the US dollar is fighting hard to defend its position as the bedrock of the global monetary system, last year we saw significant progress by players such as China and Russia to undermine the greenback’s dominance. Crucial players like Saudi Arabia and the UAE have joined the fray, and the rumblings of a shift to a multipolar global order are beginning to be heard.
BRICS has expanded more than ever before, and China’s push to internationalize the renminbi is coming at the expense of entrenched dollar support everywhere. The rallying cry to escape the dollar system is spreading to new ears and growing louder by the day. Soon, it will be a cacophony.
The East is rising, demanding bullion for fiat and leading the charge in a new gold rush. The complacent West, long thought to be the undisputed champion of the global monetary system, is standing in awe as the gold price enters new heights.
Welcome to the Year of the Dragon.
[1] “Quo vadis, aurum?,” In Gold We Trust report 2023
[2] “The Rise of Eastern Gold Markets: An Impending Showdown with the West,” In Gold We Trust report 2023
[3] See also: “My View of the Nixon Shock – Exclusive Interview mit FOFOA,” In Gold We Trust report 2021; “20 Years later – a Freegold Project: Interview with FOFOA,” In Gold We Trust report 2019
[4] See also: “My View of the Nixon Shock – Exclusive Interview mit FOFOA,” In Gold We Trust report 2021; “20 Years later – a Freegold Project: Interview with FOFOA,” In Gold We Trust report 2019
[5] See chapters “The Status Quo of Gold Demand” and “China’s Economic Situation and Its Consequences for Gold
Consumption” in this In Gold We Trust report
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