India-Iran Oil Deal Sets Stage For $12 Billion Move To Gold

Today's big story that doesn't seem to be getting enough attention is the revelation that India will begin to buy oil from Iran using gold (NYSEARCA:GLD) -- not dollars. This is a big story with a couple major points:

1. It shows the exodus from the dollar is gaining speed. How far off is the tipping point? I post it's not as far off as many would believe. With the major economies of the world facing $7.6 trillion in bond payments due this year, I think the tipping point for a shift out of dollars and into a new monetary system backed by gold is not as far off as it may seem.

2. It shows the increasingly harsh economic sanctions the US has placed on Iran, and the geopolitical tensions between the US and Iran in general, have an effect beyond the two countries involved. India is the second largest buyer of Iranian oil, after China; India spends $12 billion USD (over 200 tons of gold) per year on Iranian oil. Because India has some energy dependence on Iran, it is conceivable that India has a greater interest in protecting Iran than in supporting US sanctions. This is the kind of political environment that sets the stage for widespread war, greater trade embargos, rationing of resources, and all the political and economic headaches that come from people fighting and not getting along.

3. India's decision to purchase its oil with gold, along with central banks continuing to accumulate gold, also shows that gold is finding its way back into the international monetary system. The end game for gold bugs that have been holding to their gold for years is when gold finally gets re-monetized, preferably through a new international monetary agreement. There has been much speculation that the IMF would issue and manage Special Drawing Rights as a new world currency; what gold bugs will want to watch for is signs that SDRs will be backed by gold to some extent, or if nation-states reject the IMF's authority here and gold becomes the world currency on unofficial, implicit terms.

The only way gold does not get re-monetized is if some type of agreement between the US Treasury and major Treasury bondholders can be reached in which the debt is partially cancelled and bondholders agree to take the loss. This would also need to be coupled with significant cuts in US federal government spending, so that the budget was balanced and the issuance of additional Treasury bonds were not needed. The odds of this occurring become slimmer with each passing day, and are extraordinarily slim when we consider that this is an election year and presidential candidates outside of Ron Paul are reluctant to commit to significant reductions in government spending that would bring about greater short-term pain.

As for the immediate term, it is increasingly looking like the bottom is on on gold. We have cleared above the 200 daily moving average, and closed last week above the 30 week exponential moving average. The chart below shows the weekly price of gold with the 30 exponential moving average plotted.

These two signs should cause the bears to back off a bit, and their short covering sets the stage for the market go in the opposite direction. Add in the underlying fundamentals and the geopolitical tensions that are exacerbating a run out of the dollar, it becomes clear that gold is still undervalued and has much room to go.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Comments

[pvasa2000]

This is like Gandhis salt tax dandi march, that launched anti-british movement in India when the empire taxed basic necessity like salt.

US foreign policy is bankrupt and Iran and its oil and gas are far too important a commodity for the world. USA has to study the British salt tax and its consequences. I give it 5 years and Iran will beat US dollar while F-22s are still stationed in UAE wasting taxpayer money. The dollar is toast.

Prohibition usually fais and a black market arises.

[Clint007]

I tell you your risk of missing the boat in 2012 is at minimum of 80%.

I wish you the very best 2013. :)

[nicasurfer]

i told you guys gold was going down none listened. I will start buying some january 2013.

Do something else 2012 is gonna suck

[rubberoptions]

pushing Iran into a corner through financial/US$ transaction sanctions may actually backfire on the US.

occurred to me that the Iran/India & possibly China/Iran oil for gold barter trade may actually force the US back into what CNBC'sLarry Kudlow mentioned as the Ron Paul dollar

forcing the US to go back to gold standard; at a time when the US is not in a fiscal position to go back to a gold standard

[Thought Crime]

Did anybody read "The Rogue Dollar and Why Collapse is Inevitable," by Fiver Capital yesterday? If I'm not mistaken, the gentleman's premise speaks to many issues here. I would be interested in hearing you guys opinions.

[Ben Gee]

It make sense that countries will use their own currency for trade.

[goldozone]

what about the stem cell news with eye disease? that should be what we are all talking about

[TERN]

It would make sense for Iran and India trading in Rupees only to use gold for NET settlements of rupees that Iran can't spend in India.
I think Debka file is jumping the gun, possibly to provoke an American reaction.

[Ben Gee]

So you think the US will start invading India?

[TERN]

No.
What I mean is that Debka file, the web site where this story originated, has its own agenda and floating trial balloons like this is intended to seek out indications for possible US policy response..
Such response is more likely to be aimed at Iran than at India.

[kalendjay]

This supposed gold deal is predicated on the idea that Iran will cause an embargo or stoppage of Persian Gulf exports. The price of commodities will skyrocket, but none more than gold, held by Iran and friends. But I beg to disagree with the entire apocalypse scenario.

During the Embargo of '73, US oil consumption fell by 13%. Despite some embarassments like 'freeze in the dark' and cars being pushed to the gaspump, we have more slack now, particularly as gas has replaced oil for heat and electricity, and there are more cars to pool and share, or just keep home.

A proposal has been floated to create an OPIC -- the Organization of Petroleum Importing Countries. The top 35 OECD countries will simply band together and set a maximum price they will pay for imported oil. Since the stakes are financial collapse and loss of US favoritism, OPEC will quickly fall in line. A fuel import tax will be imposed to keep a greater share of oil royalty payments at home, and stabilize treasury debt. OPEC might try to raise royalties in retaliation, but at some point this will reduce demand for their product and reduce their government revenue. Finally a virtual petroleum reserve will be created to allocate and conserve petroleum according to what we need at the refinery in terms of end product, and prevention of hidden bottlenecks. This is more adroit and enforceable than coupon rationing, and more respectful of free market forces

I would not be surprised to see poor Saudi Arabia boosting production as never before, which we thought was impossible for the last five years. Or Chavez begging to make a deal with Exxon Mobile, and cutting free oil to Cuba besides. Or voluntary export quotas announced by China, to stop hemmoraging oil import deficits, because their electricity sector relies on so much oil, and they need to make a deal on Alaska reserves.So let the Cassandras of South Asia figure out what to do next.

[Thought Crime]

Great idea: allowing forgiveness of US debt by the Treasury-holding, dictatorial Chinese for the dubious distinction of being the reserve currency? The buck should stop here.

[Ben Gee]

If the Yuan become a major reserve currency, other countries will start pegging their currency to the Yuan. Then, the Yuan will be much like the US$. Is that what China want? I think not.

[Thought Crime]

If I'm not mistaken, pegging isn't the problem. It's the U.S. debt that makes the dollar's position so precarious. Am I wrong?

[Venkata Subbu]

As I understand it, the idea is that India would trade with Iran, and pay net amounts in rupees. No gold would actually be transferred. I guess gold becomes the valuation metric.

Heh! I never thought I would see the day when the Indian rupee became an international currency!

Late last year they did a rupee/dollar swap agreement with Japan. So Japan is trying to unload dollars...

[Ben Gee]

India is a fast growing country, its population will match China in 2 decades or sooner. By that time, India will also replace China as the center of low cost manufacturing.

[WMARKW]

Ben Gee. Consider the implications of China's one child policy. In only one generation, the population of new children would be half that of the parents. In 2 generations, the population would be 1/2 again or 1/4 of grand parents population. In two generations, the population of china could be less than 500 million people.

[frdm45]

I agree WMARKW, just bring your geiger counter to the dealership!

[Venkata Subbu]

I cannot believe the Indian government is stupid enough to make such a deal - there has to be more to it. Otherwise they would be cleaned out within three years. There simply is not enough gold in their reserves to support anymore. Wikipedia says they have 557 tons, at 200 tons/year that gives them a little over two years worth of purchasing power.

This is generally the problem with using gold as currency. There is simply not enough gold to support the world economy. For the entire mined quantity of gold (165000 tons) to support the world GNP (78 trillion) the price of gold would have to exceed $13000/oz. For an analysis of what it would take to return the US to a gold standard, see:-

http://bit.ly/wcpDCJ

[frdm45]

So, gold is revalued at $13,000/oz, what's the big deal?

[WMARKW]

frdm45....well I would be fine with gold at $50,000 an ounce. So long as I could buy a new Lexus for one ounce.

[Kelbor Del]

Think again! You can't eat the Lexus. Pays no dividends either.

[The Rookie]

Gold spot just went over $1700 today. They say its because Interest rate to stay at 0% untill 2014. I read that was just announced today. I dont buy it. I think its because the storys of India buying oil in gold are true. If China follows, OPEC countrys ( Perhaps Venensuala) will follow. Do you think Arabs want worthless dollars when their neighbor is getting gold. What would happen then? I mean, hey, I'm just a rookie about these things.

[Kelbor Del]

If the jury is divided on whether it is the interest rate story or the India-oil story that's behind the gold's positive performance today, then, maybe it is the proof that the price of gold can go higher on the back of not one but a number of market factors, including but not limited to low interest rates and weak US$.

[Nick1234]

Interest rates are driving this without a doubt! Everyone knows that inflation numbers are doctored and when he says 2 % target I would just times that by 4 or so. That plus the prospect of QE3 coming. We all know it is in an election year and they are going to do QE3. Have already read 3 articles about Obama's support increasing with the optimism of the Economy which means Gold is a Bull!!! Think that everyone that read this story just assumed that it was false?

[Ben Gee]

Iran may just accept Yuan for oil. Iran may need Yuan to buy arms from China and Russia. Russia had started to take Yuan too.

[Clint007]

"The Petrodollar, Iran, and Gold—What You Need to Know"
http://bit.ly/yAxnMC

(Excerpt: )
...There is another downside, a potential threat now lurking in the shadows. The value of the US dollar is determined in large part by the fact that oil is sold in US dollars. If that trade shifts to a different currency, countries around the world won't need all their US money. The resulting sell-off of US dollars would weaken the currency dramatically.

So here's an interesting thought experiment. Everybody says the US goes to war to protect its oil supplies, but doesn't it really go to war to ensure the continuation of the petrodollar system? ...

[WMARKW]

Clint007....I think that's called "dollar hegemony" and the guy I love to read the most on some of this stuff is Henry C. K. Lui.

http://bit.ly/ArUtm3

[frdm45]

Bingo! Give that man a prize!

[WMARKW]

Clint007... there were also stories years ago about "Another" and "Friend of Another" where there was a great deal of discussion about the intent of the middle east to change the sale of oil valued in USD to something different with ultimately gold being a component of that sale or the exclusive method for such payment.

I remember part of the idea being that they understood they were pumping a finite resource and exchanging it for another commodity/currency that was also ultimately worthless. Thus their desire to exchange oil for something that would have some "staying power" as time went by.

The "exchanges" between "Another" and "Friend of Another" were very interesting to read. I don't know that anyone ever determined whether the were true representations of real people's exchanges.

However, that being said, anyone can exchange currency like USD for gold any time. And if I were a Arab oil guy, you can rest assured that I would have been converting petrodollars to a wide variety of other assets as the years have gone by.

[Ben Gee]

India is disparate for oil and so is China. US headed sanction against Iran will not work. Sanctions did not work in the past. If the US start a war with Iran, what if Russia and China back Iran? Will that be WWlll?

[ltsgt1]

If we nuked Iran or multiple nuclear accidents occurred in Iran, the Russian and Chinese will do nothing but huff and puff. However, if we started a conventional war which we cannot afford, it will likely be a long and dragged out event which might turn into WW III.

[Ben Gee]

If the US nuke Iran, the US will be seen as the greatest evil empire ever. Will the US use nuclear weapon in the name of trying to stop the spread of nuclear weapons? I hope not.

[ltsgt1]

I would rather be seen as an evil empire than getting drag into another long war.
By nuking Iran, we would prevent a long and messy war which might escalate to a world war. Btw, most of the world already see us as the great Satan and the Jews as the little Satan.

[nicasurfer]

What will happen to the price of gold is pretty negative in this outcome. I know it is hard to imagine but the last time Gold was pegged to something it had a pretty nasty decline.

Good luck

[youarewrong]

India will be paying with PHYSICAL GOLD not GLD (paper gold). Providing a link and a side bar advert for GLD is bogus to the article. If you want exposure to this new buy PHYSICAL gold or a Sprott trust not GLD paper gold which will only give you exposure to price with no real asset. Read prospectus if you feel the GLD is fully backed and redeamable in PHYS

[youarewrong]

It is not paying with GLD share (paper gold) but GOLD Physical gold bullion! Having a link and add for GLD shares is bogus and infers the that GLD is exposure to physical bullion but is only exposure to the price!

[charles hinton]

If one had read sites such as Golden Eagle or Golden Jackass theses past 12 years one would have had ones fill of "gold is about to go ballistic" talk.
For 12 years it's been a steady 15 percent yearly rise dispute all the fear mongering.
The dollar is legal tender... Gold is not
Purchases,Taxes and debt are paid off in legal tender.that creates a need and a premium that many don't want to understand.

If anything one might expect that repayment of the 7 .6 trillion will suck liquidity out of the market ...effecting all asset classes.
http://bit.ly/z04Kwx

Ps Californian gold diggers were regularly ripped off because of the "legal tender clause"ie gold was worth 8 to 12 dollars /oz when exchanged for legal tender.

It's a good story of bankers ,politicians and greed vs the workers.
Have a look at the private issues out of California in the 1850s
Have a look at the 50 dollar gold assay office ingot.
http://bit.ly/z3HUfe

[Kelbor Del]

"For 12 years it's been a steady 15 percent yearly rise dispute all the fear mongering".

Exactly! And I've been owning gold for that ".....steady 15% yearly rise for the past 12 years". Thank you very much.

[WMARKW]

Charles: "The dollar is legal tender... Gold is not"

A technicality: US mint bullion coins are legal tender. It just so happens that the face value of the coin suggest that no one would be willing to use them in commerce at those values, thus while technically legal, they are impractical for use for that reason.

http://1.usa.gov/wdwpdO

Brings up some interesting issues though. Several years ago, there was a case in Nevada about a company that paid their employees in legal tender gold coins, declaring that they paid them only the face value of the coins. It was an interesting battle in the courts, but, if I remember correctly, the company won the case.