I’ve been going back and forth with some Milkshake disciples, and I can’t answer back in 140 characters. I need to explain the mechanics of this, or my head is going to explode. First and foremost, I do not doubt that there can be a 130 or 150 DXY coming. I just don’t care, as of about the last month I have now determined that this will be an irrelevant factor in rising gold and metals (and energy) commodities prices.
“But Nate, if the DXY goes up, the dollar is stronger and gold goes down”. It can, yes. What I’m trying to say is that the measure of the DXY is the dollar against the Euro, JPY, CAD, GBP, etc.
I don’t see Yuan, rubles, cedi, or anything else in there. I don’t see gold either. What I essentially have done is call this group of currencies the G7+ friendly currencies. In a world where we have dominant markets where we set prices AND we have agreements to have oil priced in USD, it makes sense that all countries in the world to hold some reserves in USD. Given a lot of countries also issue debt in USD and they have to pay this debt back in USD, it also makes sense.
Most do not realize that over the last 11 years, the percent of world reserves in USD went from 65% to 60%. Maybe in another 11 years, it goes to 55%. But – it’s still less. My contention since we shoved Russia off of SWIFT and stole hundreds of billions of their reserve USD is that any and ALL countries now are working to REDUCE their exposure to the USD. I am NOT asserting the USD will go away. But perhaps you look at $200B you have in reserves in USD and say, “hey, maybe I should reduce this by half to hedge the risk that these dollars can be seized”. This might lead them to holding some gold or even Yuan or some rubles.
What I’m suggesting is that the move from 60% to 55% is going to be hella lot quicker than 11 years, and am suggesting we are on a glide path here, under current circumstances to get down to perhaps 40% or even 25% inside of a decade. I’m not suggesting this will happen tomorrow.
The milkshake guys can be right about the 130 or 150. I don’t care. If they are FX guys playing this trade, I’m rooting for them to take it to the man. The problem is, they are missing the 50,000 ft view in that as the world reduces their dollar holdings the most they can, this doesn’t mean dollars disappear from the system. It’s just less demand they have to hold them. Imagine you are potentially 50-100 countries who want to perhaps exchange some dollars held for gold or other BRICS+ currencies to diversify your holdings.
I grabbed this picture from 2018 which shows BRICS+35 at the time, and their spheres of influence.
This article had 13 more wanting to join last year. This article had 5 more next year wanting to join (this year now) with Saudis, Turks, Egyptians, etc.
Overall, what you potentially are seeing is over half of the world’s population starting to side against the G7+ friendlies and aligning with BRICS+ friendlies. Look at those sphere of influence above.
The dollar isn’t dead, but it’s about to get punched
The mechanics here are that CBs and others are buying a lot of gold.
We can also see them stocking up over the last decade or so since the GFC in 2008.
At issue here is that just about any gold analyst out there tells you that they think China actually has between 25,000 and 40,000 tons and has under reported this number for decades.
But what do you do with all of this gold? Part of what I’ve learned with my resource investment over the years is that the futures exchanges is highly efficient at driving down commodities prices over a long period of time. If you are a producer in the US and labor prices are too high, but a company in India can sell below your price, the company in India will get the contract and put the US company out of business. It makes sense. It’s a GLOBAL instrument to find the BEST prices worldwide.
But man, when I really got into gold and silver investing, I learned about how really bad a lot of these jurisdictions are. This currently is where they have attractive projects that haven’t been mined – probably due to jurisdictional risk, but the labor costs here are far lower than the places with better jurisdictions so commodities producers are driven here.
My contention is that they cannot drive these prices down further than they have, and all of these massive institutions with all of these massive spec short positions that always have a means of buying back lower after they wash people out, are now at a point where the commodities cannot be delivered for these prices. We have now seen this over the last few years, but nickel might have driven a stake through the LME. Anyone who is a silver nut knows the lack of supply coming from miners and how primary silver miners no longer really exist. The clock is now ticking as we are seeing ETFs being drained, the COMEX being drained, and demand for EVs and solar continue to march higher – AS investment demand is picking up due to understanding what happens in these situations.
Overall, I believe there will be some blowups with metals over the near term, and believe that the exchanges that have been stood up over the last decade or so – that are physical exchanges – are primed to take over price discovery. Metals, specifically.
I did this research and posted in some articles last week, but take a look at how little of world’s supply of metal we make – and why at these low prices, it may stand to reason that suppliers will be pulled to physical-based exchanges.
To me, I can see a reality in the next few years where perhaps Shanghai is the price SETTER for all of these metals. Not in USD. You can go back hundreds or thousands of years and you can find how these metals have relationships with gold.
I believe, in my deepest of hearts, that the game plan 5-10 years out is to price things in gold grams on an exchange.
How this will work:
- You buy gold in whatever currency you want and deposit into a BRICS+ exchange. Shanghai, Saudi Arabia, India, Russia, etc. If you are Ghana, you can use this gold on an exchange.
- If you are a COMPANY, you can also buy gold in whatever currency you want and place it on this exchange.
- Metals/energy would be priced in g of gold for a contract. The price could be expressed as like a BRIC$ dollar. The BRIC$ is minted into existence when you buy in to the exchange. The exchange may be willing to accept local currencies for gold there if you do not want to deposit your own.
- You have x amount of BRIC$ and you can buy whatever metals contracts you want. The supplier is paid in BRIC$ to their account.
- The supplier now has BRIC$. They can then use this to buy whatever else they want on the exchange. IF they want to cash out, they can then “destroy” their BRIC$ currency and take the gold out. There can never be a situation where there are more BRIC$ than gold as they are minted into existence with deposits of gold and destroyed from the system when redeemed.
- Many countries may not want to haul the gold back to their vaults, so they might sell gold in one of 100 currencies, including their own. It could be USD.
The COMEX will continue to operate in dollars and be friendly to the G7+ countries. Look at all of the food the US creates!
You could then potentially see a day where Shanghai then starts to list food contracts on their exchanges in gold as well. In my opinion, what has happened was that the high frequency algo trading, along with full globalization, has led to the USD being THE world reserve currency that grows AGAINST local currencies – and is thus favored to local shit currencies. With prices continuously driven down over the years in USD, and forever rising costs, producers even at the hell hole ends of the earth are stressed and cannot keep up with production.
I believe the beginning of the end of globalization is here. What this means…
- Nationalization or regionalization of sourcing commodities will drive prices up. Banks are not positioned for this reality.
- Producers will pick sides as to where to supply. If producers can get more on Shanghai, they will send their products there.
- Lack of product at LME/COMEX will deteriorate confidence that any paper contract will be fulfilled. I believe we are at or NEAR the point where people who legit need the metals will be cashed out, and this will drive them to buy on Shanghai.
It is easy to see this, in reality
It has been my contention that gold is the center of the financial universe. You can go back 5,000 years to get a gold to silver ratio at something like 15:1. In this type of reality, you can see a physical-based exchange eventually getting to this type of ratio again, and perhaps vary by 25% or so at most due to mining issues or demand issues. We had this blown out to 125:1 a few years back in a perverse system where a few banks short the shit out of stuff into oblivion, then after they rinsed you out, they buy back and pocket the physical.
Think about that – you are a speculator that the price of silver will go up. You make a bet, buy a futures contract, and the next day the banks and HFT smash the price. You are stopped out. They buy their shorts back at a lower price than you speculated at. It’s criminal, and many banks have been fined for this over the last few years.
What I BELIEVE is that many producers have felt this is UNFAIR, but they have no voice to protest. Until NOW. Now, they can source a more “fair” exchange.
Think about today with the gold to oil ratio. I have stipulated here that the price of oil, give or take, has been roughly 1.2g of gold per barrel for about 70 years. There is a relationship there. One big reason for this?
If energy prices go up, so does the cost to mine. Or use diesel in a tractor to get corn. Or ship anything. Energy is the economy, and with this, you can potentially see the costs of things, as expressed in energy, are a big driver of their prices. If there was no diesel for rock trucks, ok. We might then have to mine like we did 150 years ago, with picks and axes and shovels. What kind of ridiculous labor costs would that be? We couldn’t produce it for $1900 an ounce. Probably not even $10,000 an ounce.
Now, we are seeing the end of the Petro Dollar. Our president called MBS a thug, and he went gangsta on us and said “piss off to your petro dollar” and is now essentially about to have OPEC+ accept a lot of other currencies.
What is clear to me, is that the G7+ continued to expand East with NATO, provoking Russia. In January 2022, Harris talked about Ukraine joining NATO. A few months later, Russia invaded. In 2014 or so, I believe we helped depose a Russian-friendly president and installed a G7+ friendly president. This caused the Eastern Side of Ukraine to not be happy, and Russia annexed Crimea due to the military installations they had there. Our push and expansion of NATO is the root cause. Were we justified to expand East? We had promised in 1991 we would not, but then this is what we did…
All of those countries in red above used to be part of the Warsaw pact or former Soviet Union and are now NATO. Could many of these countries begged to be part of NATO to protect against a future Russian invasion to reunite the Soviet Union? Sure. But when you look at those in blue, who are not NATO, you can Ukraine is right up against Russia and a few hours from Moscow.
I had read somewhere a few years back that Ukraine was sort of created to be a buffer state between Europe and Russia, and the name itself sort of meant “border land” or the like. I’m not here to advocate for ANY war. But I’m providing the facts that led to Russian invasion, and with this, what led to the US sanctioning Russia, taking them off of SWIFT, and seizing their reserves.
Modi with India was being criticized for buying cheap Russian oil for his people, and he’s like, “I have to look out for my people. If I can get cheap energy and it will help my people, I will buy it”. And that, is how you build a strong BRICS+ down the road.
In the future, we will have more regionalization. You will have more countries like Ghana requiring portions of what is being mined/drilled there to be sold in local currencies to strengthen it against the USD. If Ghana no longer NEEDS USD to buy oil, what that does is then make their cedi stronger. By proxy, the USD is then weaker against the cedi. Meaning – they can take gold and buy oil from Russia, and then they have a STRONGER cedi to buy MORE FOOD from the US in USD.
This essentially will make all prices go up, in USD. You will need more currency units to buy things. Specifically, oil and metals in a future gold-based exchange. My concern then is that the higher costs of energy may then squeeze farmers here – and with this, the lower profits. This may endanger food production from us.
What is to become of the USD?
The hard to understand mechanics here are that the DXY can moon – because it doesn’t care about gold, cedi, Yuan, rubles. It only cares about the currencies above, and with this, IF those economies are going into a tailspin – check out Europe’s energy shit storm and how they are trying to print people energy – then you can have the DXY at 120-150 easily in the next few years.
But….de-globalization. End of petro-dollar. Countries no longer needing USD to buy energy. SWAP lines being denied. Kicking people off of SWIFT. Seizing reserve assets of a country. All of this has consequences, in terms of USD against everything NOT DXY. This can and absolutely WILL reduce the dollar MAJORITY of world reserves, a lot faster than anyone is tracking.
Remember, we have already seen the move from 65% to 60% in 11 years, so it’s not that the move isn’t happening. My suggestion is the geopolitics in the last few years will now accelerate that to NOT the majority. Can it get to 49% in 5 years? Why not? I would suggest IF a gold-based exchange is stood up in BRICS+, this then will take those metals and energy markets from the West and move them to the East, or at least set up a parallel system which sucks supplies from the Western-based exchanges and drives up prices.
I am NOT saying it is dead inside of 5 years. It COULD be. But my contention for YEARS has been that gold IS the financial center of the universe and the day they got off of that, you could almost envision the Chinese contemplating a 50 year plan to get it back to gold. The West is very much in favor of you thinking of gold as a pet rock, but today with blockchain technology, it’s also very easy to transact in fractions of fractions of a gram of gold, worldwide, in seconds. What I have seen of Kinesis is a future of how the world can get on to an exchange, with ANY currency they want, and buy gold OR BRIC$. They can then buy contracts with this for PHYSICAL delivery. Hell, hedging might ALSO be available there, but small limits on contracts would prevent HFT which ruined the West’s exchanges.
A very, very, very small group of people who run the HFT and big banks have gotten stupid rich over the last 40 years. Now we as citizens of the West, are about to pay for their greed. Our dollar isn’t going anywhere, but it sure as hell will not be worth the purchasing power it is today, in 5-10 years as all of these countries who seem to love our dollar are about to sell stuff on BRICS+ exchanges for more spending power and they can get goods sent to them without ever touching a USD.
It stands to reason that IF we are to fight this war, we need to fix our exchanges, today. What that means is hard caps on spec positions, banning HFT, and this MIGHT allow for more reasonable price discovery. You have to have a legit hedging account to place certain futures bets, and if you are a retail spec like me, there’s also a limit. We need to drive down the paper shit in the system and get closer to a more physical-based exchange. If not, we lose pricing power and for sure the USD will lose it’s majority status of world’s reserve currency in under 5 years.
January 22, 2023 at 3:39 pm
January 22, 2023 at 5:39 pm
Nate have you taken into consideration that most western gold mines forward sell their gold for many years, even if at spot. So even though most of the gold is refined in Switzerland it is sold well in advance or there is a contract in place where the mining company can only sell to XYZ Bank/Fund. To me this means that the bankers will control the physical when they need to. Only the raw gold going east does not pass thru the Big Western banks or the gold coming from Russia now. I suspect a small amount is being refined in the Middle East as well but that is quite new. Not sure if that complicates your thinking. You were not in the business when R McEwen tried to hold back production in the 90’s because he was pissed off with the Banks screwing him.
Keep it up, I love reading your stuff.
Douglas Perkins 5 Starr Place Kingston, ON K7L 4V1 email@example.com
January 22, 2023 at 9:18 pm
Doug – I would consider myself a relative ‘expert’ on silver primary miners, or lack of them. I also know they forward sell some production, but they aren’t doing this years in advance. For example, first majestic or endeavor silver would withhold silver. I don’t know how much the big gold miners would forward sell today. I could imagine they would for a few months. My thinking here is that at some point they will get more attractive terms to sell to shanghai or saudi or New Delhi.
The main issue is if people are indeed trying to get gold off of the exchange because it’s hard to buy in size elsewhere, and the exchange makes it nearly impossible for you to buy, you will go to Shanghai or the like. Less buyers on comex could make comex price go down more. I believe that in a matter of years the physical exchanges will drive price. Having comex as a non-delivery mechanism for metals has this as a derivative creating price discovery. In what Adam smith book can that be found? Insanity. They broke our markets and this is the problem we have with everything. It starts with properly paying a true market price for goods, and not a fake juked price of non-deliverable goods.
January 23, 2023 at 12:53 am
Dirk – finally sat down and saw your comment. Then a cringe moment. Appreciate you pointing that out. I have a 2 and a half year old and had maybe an hour to bang this thing out. Many of these I’m on a clock and fire at will. This is obviously not professionally edited or reviewed. They don’t pay me enough for that. Wait. They don’t pay me at all :). I do this for fun, and occasionally I catch a typo and make a mad dash to edit. This was got through the wickets.
January 23, 2023 at 12:42 pm
another well thought out article. yes, nate can see how this will play out and I believe that he’s right.