Surely, you can’t be accused of being a pro-Putin conspiracy hack if you’re quoting the US treasury secretary herself casting doubts on the “hegemony of the US dollar”. Just last year Janet Yellen insisted the greenback was in no danger of losing its status as the world’s reserve currency as a result of sanctions imposed against Russia over its invasion of Ukraine.
“I don’t think the dollar has any serious competition, and is not likely for a long time,” she told reporters in Denver in March 2022.
Yet speaking in Washington this week she was forced to concede that sanctions put the dollar’s dominance at risk after all as targeted nations seek alternatives.
“There is a risk when we use financial sanctions that are linked to the role of the dollar that over time it could undermine the hegemony of the dollar,” she told CNN. “Of course, it does create a desire on the part of China, of Russia, of Iran to find an alternative.”
Her comment, rather snub, last year was a direct echo of US-EU hubris immediately after the sanctions; mainly to silence commentators, prominent among whom was Credit Suisse Group AG interest rate strategist Zoltan Pozsar, who wondered if blocking Moscow’s access to its own foreign currency reserves could drive other countries away from the dollar.
The US boasts the “deepest and most liquid capital markets of any country on earth”, without a doubt, has a well-functioning economic/financial system and, of course, the rule of law, she reminded critics at the time. Besides, “Treasury securities are safe, secure and immensely liquid.”
Yet one of the many enduring lessons of the past year, especially in light of the stunning SVB (Silicon Valley Bank) collapse, is that the market’s favourite safe haven asset, US Treasuries, isn’t so risk-free after all.
For, at the heart of the banking crisis that sent contagion fears across all the way to the EU and spooked markets on both sides of the Atlantic was not irrational exuberance about the housing market, like 2008, but Treasuries purchased during ultra low interest rates losing value during the steepest interest rate hike in 40 years. It’s not led to a cataclysmic bank run, at least not yet, but it’s forced a lot of trauma and valuation cuts on small and medium banks as investors trust only the safety of too-big-to-fail banks that the government will step in to protect.
But that’s hardly the only odd thing of the last year. 2022 was also the time when central banks bought more gold than in any year since 1967-8, when the London Gold Pool collapsed.
The Pool was an agreement among US and western European central banks to stabilise and maintain gold price at $35 per ounce by buying and/or selling as needed. It didn’t work because over time European banks began doubting Uncle Sam’s ability, or willingness, to back dollar-gold at 35/ounce. They bought large gold reserves of their own, pressuring the Pool’s reserves to the downside and gold price to the upside, giving the kiss of death to the Bretton Woods system that had endured since the end of the world war and eventually breaking the dollar’s last direct link to gold in 1971.
The big difference between that central bank gold rush and last year’s is that this time the People’s Bank of China is leading it.
According to the Financial Times (FT), the biggest buyers of gold in 2022 were China and the Middle East’s oil producers. This – China’s insatiable demand for gold – is key to understanding President Xi’s recent historic trip to Saudi Arabia and Beijing’s decision to launch “a new paradigm of all-dimensional energy cooperation” with GCC countries.
The fine print of the agreement – which is a natural one between the world’s biggest oil importer (China) and the largest exporters (GCC countries) – is extremely important. It says China will “make full use of the Shanghai Petroleum and National Gas Exchange as a platform to carry out yuan settlement of oil and gas trade.”
It turns out that in March 2018, the Shanghai International Energy Exchange (INE) launched the first crude oil futures contract to be traded in China and denominated in the Chinese yuan. Now any producer can sell oil outside the dollar – the yuan in this case.
But most producers aren’t exactly looking forward to accumulating large yuan reserves. That explains why the crude futures contract is explicitly linked with the ability to convert yuan into physical gold through exchanges in Shanghai and Hong Kong; without touching an ounce of China’s own official reserves.
And since this is officially gold-buying season all over again, it also gives countries that aren’t sure about backing US-EU at the UN about the Russia-Ukraine war, like India, Pakistan and Gulf countries, something extra to think about.
Markets are convinced that extremely large global gold flows signal paradigm shifts in the international monetary system. And since gold hasn’t flowed into vaults of central banks around the world quite like this in more than half a century, and a few upstart countries have decided to build on the momentum created by the Ukraine war and trade out of the dollar, even oil, perhaps US Treasury Secretary Janet Yellen has just been a little slow in reading the writing on the wall; put there by China, which is only too used to playing the long game.
Copyright Business Recorder, 2023
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