Several Geopolitical Events That Could Prove Negative For The Dollar And Bullish For Gold - Part 3

by: Power Hedge


There have been several geopolitical events that have occurred recently that show an increasing distrust in the U.S. dollar by foreigners.

The large metal producers in Russia currently demand payment from Chinese companies in U.S. dollars or euro, but this may soon change.

China and Russia recently signed an energy deal between them that may threaten the petrodollar standard that has resulted in the dollar being the reserve currency.

There is reason to be skeptical of the official data from the Treasury International Capital report.

Even if that report is accurate, the foreign buying of Treasuries has been in vain.

Click here to read Part 1.

Click here to read Part 2.

Another indication that these two countries are losing faith in the dollar can be found in the comments by the managers of Russia's largest metal producers. On March 24, 2014, Russian Television ran an article on its website entitled "Russian Metal Companies to Redirect to Asia if Sanctions Hit." The fact that these companies would be selling their metals to the various Asian nations instead of the EU due to sanctions should be no surprise to anyone. What is more worrying is that these companies are looking into using the Chinese yuan to settle these transactions instead of their traditional settlements currencies of the euro and U.S. dollar. Take, for example, this statement by Vladimir Potanin, CEO of Norilsk Nickel:

"We have large volume of operations in the Chinese market, but the main payment currencies are dollar and euro. In principle, nobody hinders settlements in such currencies as the yuan for deliveries to China. We decided to explore this issue, to look how it'll function."

The CEOs of Metalloinvest and Mechel made similar comments that their companies are also looking into using the Chinese yuan as their main currency in deals with China. This move by these major metal producers effectively weakens the dollar's (and euro's) position as the dominant currency in international trade. This means that the central banks of both Russia and China will not need to hold as many U.S. dollars to settle transactions between themselves. This not only shows an increasing lack of faith in the U.S. dollar on the part of Russia in particular (and increasing faith in the yuan) but also allows both central banks to diversify their reserves away from the dollar. This will slightly reduce demand for U.S. dollars and, as I stated in my previous article, linked above, the value of any currency is determined by both supply and demand.

Another development that shows that both China and Russia are losing faith in the U.S. dollar is one that could also threaten the petrodollar standard that the United States has been depending on in order to keep the demand for the dollar high. I will discuss this development in much greater detail in a later article, but I will provide a brief summary here. This development is the massive energy deal between Russia's Gazprom (OTCPK:OGZPY) and China's CNPC (NYSE:PTR). In September, the two companies agreed to basic terms for the Russian gas giant to provide approximately 38 billion cubic meters of natural gas to CNPC every year from its fields in eastern Siberia. Unfortunately, this deal has been taking some time to finalize and it has not been signed yet, but Voice of Russia states that the two companies expect to have a final deal signed by the end of May. This will coincide with a visit to Beijing by Russian Prime Minister Vladimir Putin, signaling a warming of the relations between the two nations that have been strained since the Cold War. The two nations signed another deal in June in which Rosneft (OTC:RNFTF) will provide China's CNPC with 300,000 barrels of oil per day in addition to the oil that Rosneft already provides to CNPC. There have been other energy deals between companies in the two nations since that time such as Russia's Novatek agreeing to provide natural gas to China. The reasons that these deals could prove problematic to the petrodollar standard is the fact that this oil and gas will not be purchased in U.S. dollars. Instead, China will be paying for the oil and gas with yuan and rubles. China is the largest importer of oil in the world and Russia is the largest producer of oil and one of the world's largest exporters of oil. The threat to the petrodollar that this move by these two countries poses should be rather obvious.

Despite all of these things showing a lack of faith in the dollar by foreigners, some readers may point out that the United States Treasury continues to have no difficulty selling its securities on the international capital markets. This is true according to the official data from the United States Treasury. However, some of the official data raises questions which Zerohedge picked up on rather quickly. Aside from the curious fact that the U.S. Treasury revised the official data shortly after it was released, the official data shows that a new country is now the third largest creditor to the United States. That country is the small western European nation of Belgium, which has increased its holdings of U.S. Treasury securities by $100 billion in the two month period lasting from November 2013 to January 2014.

Belgium has a GDP of $484.692 billion, a debt-to-GDP ratio of approximately 99.6%, and runs both budget and trade deficits. It is, to put it mildly, highly unlikely that such a country could have increased its holdings of U.S. Treasuries so quickly and by so much. Now, it is possible that these bonds were purchased by the ECB in an attempt to force the euro to decline against the dollar, and this would fit well with what Societe Generale said in Part 1 of this series, linked above. This would represent money printing on the part of the ECB, which is ultimately unsustainable and still somewhat bullish for gold. While the ECB's purchases of U.S. Treasuries would indeed normally be bullish for the dollar relative to the euro, according to Societe Generale, sales of the dollar by other large sellers are overwhelming the efforts of the ECB to buy it. Meanwhile, there is clear demand for physical gold from those same nations that are selling dollars. This demand is applying upward pressure on gold prices.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.