Don’t Want US Dollars? Neither Does China…

Yesterday’s trading took the S&P/ASX 200 back down to a low not seen since February this year. Closing 0.8% lower, the ASX 200 is now trading at 5655 points.

The fall came on the back of the Federal Reserve signalling that they would begin to shrink their massive US$4.5 trillion (AU$5.67 trillion) balance sheet in October. In contrast, the US market expected this outcome, with the S&P 500 closing 0.29% lower.

The Federal Reserve has likely put a stop to increasing the cash rate for now. Reducing liabilities on the Fed’s balance sheet is one way of increasing borrowing costs for loans tied to vehicle, mortgage and business loans.

Part of the reason the Fed didn’t raise the cash rate is because official data shows US inflation is running below 2%.

Yet when Fed chairwoman Janet Yellen spoke on Wednesday night, she noted that persistently low inflation is a ‘mystery’, especially when it looks like the US is running at close to full employment.

Official stats suggest that the US unemployment rate is at a 16-year low, sitting at 4.3%. In the past, when the US has seen unemployment around this level, inflation has been higher.

But this time inflation isn’t growing despite near full employment.

The chasm between official and unofficial data

ShadowStats, a website that offers alternative data to government statistics, suggests that unemployment data is much higher than what the Fed claims.

Unemployment Rate: Official vs Unofficial 22-9-17

Source: ShadowStats
[Click to enlarge]

The red and grey lines are the official measures both the US government and Fed use to guide policymaking. Alternatively, ShadowStats suggests the US unemployment rate is actually sitting at 22.2%.

That’s five times higher than the official government rate.

It’s a similar story with inflation.

The Fed says inflation is slightly below 2%. Whereas ShadowStats suggests it’s almost three times that at 5.8%.

So, it’s not really a mystery as to why inflation is low. Nor is it a mystery as to why growth in the US economy is stalling and causing the Fed to hold back on a rate increase.

The official formulas used by governments and central banks to calculate what’s happening in the economy don’t match up with what’s actually happening in the economy.

When you have a large part of the country out of work, or working fewer hours than they’d like, it’s unsurprising to discover that consumption isn’t growing at the rate projection models suggests it should.

What’s interesting, though, is how the Fed announcement took the wind right out the rallying gold price.

The spot price of gold fell US$12 (AU$15) per ounce in the minutes shortly after the Fed meeting. However, the yellow metal is down U$21 (AU$26), or 1.6%, to US$1,290 (AU$1,628), since the Fed announcement.

Gold has put on an impressive run since the end of August, rising 1.6% in three weeks. Which turns out to be exactly what the gold price has fallen by since the Fed’s announcement.

This boost came largely on the back of geopolitical tensions between the US and North Korea.

Before the gold bears come out and declare the short-lived gold rally over, there are much bigger forces at work in the gold market than short-term global events.

Sure, the yellow metal is reactive to geopolitical events, and there are incredible power-shifting events taking place that will sustain the gold price in the long term. And, in my view, lift it much higher than today’s price.

At the heart of it is the mistrust of the US dollar.

Former World Bank economist Peter Koenig has recently spoken about the ‘fraudulent’ US dollar system at the centre of the world. Local Russian news service Sputnik recently released a podcast, in which Koenig said:

The entire Western monetary system is basically a fraud. It is privately made and privately owned. All international transfers have to transit through Wall Street banks. The only problem with gold today is that it is completely beholden to the West’s monetary system. World demand for the US dollar will rapidly decline, and so will the US dollar’s significance as a world reserve currency.’

The US dollar is the epicentre of the finance system, and has been for many decades. Throughout this period, America has abused this privilege, forcing other countries to play by their rules. They’ve done this through economic sanctions, and by threating to bar nations from SWIFT, an international payment system.

These heavy-handed bullying tactics have not only bred political mistrust but a deep dislike for the US dollar and government that distorts its value, with little regard to its effects on other countries.

But soon, the US dollar may no longer be at the centre of the fiat currency system. Goldmoney explained this week:

China long knew gold would be central to her geopolitical strategy as well as her own long-term security. In the last few years, she has dominated physical markets. She is the largest gold mining nation by far. There can be no doubt she has accumulated substantial undeclared gold reserves since 1983, when the central bank was first appointed for this purpose.

Finally, China’s stealth is about to pay off.

In early September, it was reported that China would offer a yuan-denominated oil futures contract through the Shanghai Energy Exchange. The problem is, few countries actually want the highly-illiquid yuan. Knowing this, China has thrown in the one thing many of these countries don’t have. They’ve said the new yuan oil futures will be fully redeemable for gold.

This move should rattle holders of US dollars.

China now gives countries regularly abused by the US — Iran, Qatar, Russia and even Venezuela — the ability to dodge the US dollar when exporting their commodities.

More importantly, though, it brings gold back into the financial system as a form of payment.

While few countries want yuan, China is slowly preparing the world for a time when the US dollar isn’t the heartbeat of the financial system. And it will have catastrophic consequence for the greenback.

Over the long term, however, it signals a return of gold as money. And, in my view, the price could be about to climb far higher from today’s US$1,290 per ounce.

Kind regards,

Shae Russell,
Editor, Markets & Money

PS: Crisis & Opportunity editor Greg Canavan believes the oil market is getting ready for a massive turnaround. In fact, he reckons if investors get in early, there are big gains to be had in the energy market. You just need to know where to look. Click here to access Greg’s latest report.

Shae Russell started out in financial markets more than a decade ago. Working with a derivative brokering firm, she helped clients understand derivative markets, as well as teaching them the basics of technical analysis. Since joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications. She holds the record for the highest-returning stock recommendation, in which a microcap stock returned over 1,200% in six months. Ask her about it, and she won’t stop yapping on. For the past two years, Shae has worked alongside Jim Rickards as his Australian analyst, translating global macro trends for Aussie investors, and how they can take advantage of these trends. Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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