This article is a re-issue of an article recently produced for the Gold Forecaster newsletter.
When in the past sanctions were imposed on nations like Iran by the U.S. it was generally accepted that they seemed to be justified in doing so, after all, as far back as the ousting of the Shah, U.S. vital interests were compromised there. People in general accepted this morality.
In the last few weeks we have seen the use of the power to control the use of the U.S. dollar extend to a major company that disobeyed U.S. political positions in South Sudan and Iran. It is our impression that the U.S. felt it was their right to control the use of the U.S. dollar after all it is the currency of the U.S. That's true, but that is not all that it is. It is an extension of this morality, now to be imposed on friends as well as enemies! In so doing it is worrisome to its own citizens and companies, with overseas investments as well as to friendly foreigners.
BNP Parisbas - no $ dealing in 2015
BNP Paribas SA has to undergo a yearlong ban on dollar clearing which should affect specific business lines, such as oil and gas transactions, and certain offices, such as Geneva, where the alleged illegal transactions took place. BNP Paribas, guilty of hiding about $30 billion in transactions, has pleaded guilty to conspiring to violate the International Emergency Economic Powers Act.
The banning of BNP Parisbas from transacting in the dollar for a year has ramifications that have not been fully understood or factored into market prices yet. But in time we believe they will be.
At a time when the globe transacts 80% of its transactions in the dollar this move is a statement of U.S. power, exercised without weapons, but giving politics a major new control over the global economy.
The view from outside the U.S.
Outside of the U.S. these actions are seen as a major exercise of global power by the U.S. over its monetary 'empire' and one that will affect the use of the dollar in the future and the pace at which the world will accommodate the Chinese Yuan in global trade, when it arrives as a global reserve currency.
This was the first exercise of U.S. political power in this way dominating a foreign bank, in its home country, but from the U.S. It is a precedence setting move which we believe will force a re-evaluation of the use of the dollar as the sole global reserve currency. More to the point, France is considered and ally of the U.S. emphasizing the extent of this exercise of dominance.
Until now the international use of the U.S. dollar has not been seen as such but as the only currency available to transact global business. It was seen as almost independent of the U.S. politics. Now it is seen as a parochial currency and very much a part of the U.S. political scene.
The Dictates of Prudence
As a matter of prudence, central banks, banks and other centers of wealth and financial transactions will have to analyze how to minimize the exercise of such power on their international business. This calls for a jurisdictionally independent measure of value, free of political influence. After all, if one Asian country wants to deal with another, say European nation in business, they cannot afford to use a currency that will be influenced by the political positions of its issuer. This would be an unwarranted intrusion on the transaction. But this has now happened in France. Germany and its banks and those of other nations may well follow.
The government of France has this attitude, “We [Europeans] are selling to ourselves in dollars, for instance when we sell planes. Is that necessary? I don't think so. I think a rebalancing is possible and necessary, not just regarding the euro but also for the big currencies of the emerging countries, which account for more and more of global trade.” Already President Hollande has travelled to Brussels to the headquarters of the European Union to discuss alternatives to the dollar. Undoubtedly similar discussion are are going on worldwide.
This policy shift represents an enormous risk for the U.S. and its trading partners and undermines what has always been implied; that by clearing through the U.S. dollar, a country can access, safely, the world capital markets while remaining sovereign.
Russia is now being prevented from using the U.S. debt markets because of its position on the Ukraine. This is now a sufficient number of instances to justify nations moving away from the U.S. dollar. In this context the BRICS nations setting up of an IMF equivalent bank of their own takes on a different perspective. Russia has for some time now been attempting to move away from its dollar dependence.
To emphasize the point, countries can no longer access, safely, the world capital markets while remaining sovereign, unless they are in line with U.S. politics on the deal. It would be naive of the U.S. to expect even its allies to accept that condition. But there have been a sufficient number of these exercises now to confirm that the U.S. will continue to demand that, that condition is accepted by all, or face severe restrictions on the use of the dollar in the future.
But all nations have accepted the principle that a government should issue national currencies. These stand or fall on the financial condition and behaviour of government and country. But only the U.S. and to a lesser extent the euro are treated as currencies in which to do global business in. Other nations are seen as having too much local risk to qualify in this way. But now that risk is present in the use of the U.S. dollar.
We believe that the U.S. has gone one step too far and damaged the dollar's standing in the world with these actions. So, what next?
Gold's use in Global Business
Gold, in the past, served in a global role, because it was free of national influences and politics. Even an enemy could deal with you in gold because of gold's total independence from all national considerations. In the future we do not expect nations to suddenly turn back to gold as money. Too much power, flexibility, liquidity has gone into the regime of national currencies. No, nations will cling onto this present system for as long as it works to some extent.
Gold will be used to reinforce the credibility of different currencies in international financing and general business.
Gold Swaps and the Bank of International Settlements
We saw examples of this a few years back when the Bank for International Settlements [the central bank of central banks] conducted around 635 tonnes worth of gold/currency swaps when the European Sovereign Debt crisis began to hit. While no public discussion or revelations were made at the time, it was apparent that these were used as a form of 'collateral' by distressed nations to access funding when it was in doubt.
With a fragmentation of the world's monetary system headed our way [including the arrival of the Yuan as a global reserve currency] we are in no doubt that gold will serve in a similar role in the future. Then a race will be on to access ounces of gold from wherever they can be garnered. The demand from national central banks will be sufficient to make governments hand over their citizen's gold to boost central bank holdings at that time.
Privately Owned Gold
This will directly affect gold investors and where they store their gold. Already citizens of the U.S., aware of these dangers, have favored holding their gold, so they mistakenly believe outside their country.
So that they will not have the U.S. branches of their businesses penalized, Swiss banks and vaults have already reacted by asking U.S. clients to remove their investments from them, if those companies have a U.S. presence.
But now investors must dig much deeper and house their investments in countries not dependent on the dollar itself, for their global business. This accounts for 80% of world trade as we said earlier. Nations and companies must be able to turn to currencies not dependent on the dollar. These include the euro, the Swiss franc and the Asian currencies. Only these are in a position to resist any extension of the current U.S. actions.
Countries like Singapore [an international 'entrepot'] are entirely dependent on the dollar to fund their Balance of Payments, so if the U.S. wanted to pressure them and their use of the dollar, they would likely react like BNP Paribas and accept their penalties with a touch of the forelock. Hence we do not see such countries as places to hold gold.
Of course once the Yuan goes global, that will be a 'haven' alongside the currencies mentioned above. But even China is in a race to hold gold and have its citizens hold it too. It is well understood that China will take its citizen's gold if it deems it to be in the national interests to do so.