BW3: Gold Replaces Dollars in Mercantilism
The Shanghai Gesture
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The World is in a three phase rollout of a New Currency Order. This post is about those three phases.
Phase 1: Trade becomes bilateral but units remain dollar based.
Phase 2: Pricing Power Shifts East, Different Currency Units are Used
Phase 3: Deals Are Formalized and Digitized Using CBDC
TL - DR
The world is being torn into two distinct and separate trading and currency blocks.
The new system planning has been in the works for many years.
Russia and China are risking war to break out of the Western Alliance’s dollar system and America’s global domination.
If the new system is successfully launched many will join it from as far away as South America, Africa and the Middle East.
The attraction is that for the recipient country the currency offers an intrinsic value in contrast to the ‘Fiat’ currency of the US dollar system.
In recent years various countries have intimated that at a point in time in the future they won’t pay for their imports in US dollars but in their own currency.
Now a new system could unify these national arrangements in creating an alternative structure to the existing dollar-based system
The US can hope for it to resolve itself, or it can be part of the solution that preserves its power by suggesting a BW3 type thing. Or it can react harshly and too late having been painted into a corner by adversaries in a neo-mercantilst world.
Where We Are Right Now
The world is bifurcating in generationally irreparable ways. Covid, trade sanctions, and war have underlined western supply-chain dependencies and vulnerabilities to Eastern economies. Meanwhile intractable ideological differences1 have all but set the world on a path towards increasing mercantilism concurrent with receding globalization. The world is splitting in two along trade lines as a function of these deep differences manifesting in global protectionist policies.
Nation-states are going their own way to ensure economic survival. Money as a tool of international trade is now set for bifurcation as economies split into pro and anti dollar factions. These divisions manifest largely along East and West lines. How did we get here? Western sanctions may have forced Eastern hands.
The Role of Western Sanctions
Sergei Glazyev, Bank of Russia in a recent interview:
“Having frozen Russian foreign exchange reserves in custody accounts of Western central banks, financial regulators of the US, EU and the UK undermined the status of the dollar, Euro and Pound as global reserve currencies. This step sharply accelerated the ongoing dismantling of the dollar-based economic world order.”
Outside our Western bubble, there is a growing reluctance by nations to hold Western currencies in their foreign exchange reserve custodial accounts. Why?
The risk of sanctions and confiscation by the West can remove a nation’s ability to economically exist. Not to mention the questionable safety of those western Fiat currencies given the condition of their own economies now.
Why should emerging anti-dollar nations continue using the US dollar for crossborder transactions at all with anti-dollar trade partners if there can be an agreed substitute?
The US bank reserve sanctions on Russia may have forced China’s and Russia’s shared hands to step up plans to get off the dollar. By not giving them a face-saving out, We may have forced their hands. To be fair: What choice did we have other than declaring war on Russia post their war of aggression on Ukraine? The recent collaterol crisis is a preview of a long drawn out affair that results in mercantilist policies and a currency reset to come.
Zoltan’s Collateral Crisis As Reset Preview
Remember when Zoltan commented on the commodity collateral crisis? That was a taste of things to come.
Commodities are collateral, and collateral is money, and this crisis is about the rising allure of outside money over inside money.
Stated then: Collateral is the foundation on which the financial system is based. Collateral equals money in the realest sense. That Eastern collateral is a large and grossly undervalued part of the current core’s monetary valuations.
The West appreciates physical collateral less than the East. We value futures, derivatives, and those things created on top of the spot markets. In essence, we give a premium to what human ingenuity adds to nature.The East, while also believing that, feels the basis/core/spot assets that are the foundation for human ingenuity are grossly undervalued. So, the East went on strike. Thus, a collateral crisis which we have yet to get out of ensued.
Those raw commodities have an intrinsic value that can be measured. Even if their value is only economically potential in nature and must be forged by mankind to generate economic wealth, these resources can thus be measured in potential value. Therefore to the East more than the West, that basket of commodities has a fundamental value attached to it. Gold is a slightly different, more interesting case. It is a natural resource but not irretrievable consumed as most commodities are. Gold is the perfect bridge between fiat and economically important commodities. That makes it a store of value for China’s ascendant economic partnerships.
Golden Yuan Ascendant
Western leaders have known for some time now that China will someday renegotiate its business relationship with the west, and the USA in particular. The Russian sanctions may have kicked that into overdrive as Glazyev stated above. There is coming a day when China will demand items exported to the US consumer be paid for in Yuan or some other more hard asset-backed type currency. The Yuan will also one day soon be (publicly) backed by Gold in part to facilitate getting its own trade partners off the US dollar2 and in part to protect China from a potential US de-Swifting as was done to Russia.
The Golden Yuan is a real thing and we have written about it as far back as 2017 having first been inspired by a Grant Williams presentation seen then. 3 Quickly, let’s first see how much Gold China has. China, by Simon Hunt’s estimates, currently has over 40,000 tons of Gold. In metric tonnes that comes to about 36,300 tonnes. This is well within the empirical estimates by other analysts like Koos Jansen and Ross Norman pictured below.
Some of this is held by government agencies, some held by its citizens, and some not even on the books yet in areas like Mongolia. That secured Gold will ease concerns of trade partners in transition off the dollar. If needed, China can also use their Gold to counter a weaponized Dollar. That makes it both an insurance policy and a tool for self-defense.
But how does Gold factor into a Bretton Woods 3 type system if /when it comes? The promise of “egalitarian” treatment for trade partners is one way.
Benefits of Switching
One anti-dollar trend is the growing desire for a trade-weighted currency with equitable values based on contributions to the economic pie, including about 20 commodities used to grow that same pie. That basket, however it is comprised, will then ultimately be priced in Gold as opposed to some Fiat monetary unit for international trade.
According to Simon Hunt Strategic Services:
This new currency is likely to be introduced formally within three years unless prevented from doing so by American military intervention. If the currency does get off the ground it will signal the end of the US dollar’s global domination and the country’s hegemony. This is why a successful launching of the proposed new currency is so important.
Taken together, The dollar’s hegemony must decrease.
If you are wondering why China doesn’t just pull the trigger right now on its Golden Yuan, consider this; The East does not want to obliterate the West as trade partners4 and risk war. Therefore it must ensure success of its new Golden Yuan/ Digital RMB once launched.
New currency weakness would only encourage attack by those with the most to lose from its success. A world power with a strong military but waning economic influence could act militarily to preserve that power as Hunt notes. So waht is the plan for this attempt to get the world off the USD and economically re balance the scales. It is essentially the Bretton Woods III concept. And it is already happening.
The Russian-Chinese Currency Reset
One primary architect of the East’s planned replacement for the USD in world trade is Sergei Glazyev, Russian Politician and Economist, Member of the National Financial Council of the Bank of Russia & a Full Member of the Russian Academy of Sciences.
Based on an interview Glazyev gave April 16th, here is our insight into his description on the rollout of said the dollar replacement currency in three progressive phases.
Phase 1: Establish behavior (of trade partners)
Phase 2: Standardize activity (for scalable growth)
Phase 3: Paper over the deal with CBDC ( to keep outsiders out)
Phase 1: Trade Becomes Bilateral But Units Remain Dollar Based
Phase 1 is when the black market comes out of the shadow as is currently happening. Trade begins to recede from global-swift to more bilaterally settled. Pricing mechanisms remain mostly determined and benchmarked by global exchanges (heavily influenced by US interests) and are still priced in dollars.
According to Hunt, Phase 1 is almost over after having accelerated from the US’s freezing Russian reserves. This US heavy-handed action immediately disincentivized global banks from adding to existing dollar reserves for fear of them also being frozen in some unilateral event. These banks have to replace their dollars with something thought right?
The immediate replacement for their former USD currency reserves is: that nation’s own currency (Rubles/Yuan), Gold (held by the nation), and we add Bitcoin. Therefore the dollar is held less while their monetary reserves are diversified in preparation for more bilateral deals. The dollar thus is slowly(?) replaced by something else in inventory all these governments can agree on: specifically a suitable store of value in cross-border trade, can neither be confiscated nor fabricated, and despite being a physical asset does not degrade. Something they also all have at least a little of already.
That means Gold, physical resource-backed Fiat, and Bitcoin (if it survives as Zoltan noted). Domestic currencies are subsequently mostly held for domestic payments, and as representations of a country’s wealth in gold terms. Once behavior is established in the sunlight for the world to see, then pricing control is pushed in Phase 2.
Phase 2: Pricing Power Shifts East, Different Currency Units are Used
Phase 2 is a kind of standardization of what already happened in Phase 1. It is a more active institutional fragmentation of dollar power by directly doing trade in other currencies. Specifically it involves new pricing mechanisms that do not refer to the dollar.
We would add this: it manifests in part when new Eastern contracts on Asian exchanges gain traction. Deals are currently done referencing these contracts still using US dollars and exchanges for indexing. But once liquidity grows to critical mass on Asian bourses, that changes.
With that shift comes the ability to transact business in other currencies using a transparent mutually agreed upon manner determined by a Non US exchange. These mechanisms are already set up. They merely await volumes to generate their own virtuous cycle of growth.
Once behavior and exchange infrastructure are aligned, the East will then seek to make it all legal. That in this case is via CBDC. Contracts will be “papered over”.
Phase 3: Deals Are Formalized and Digitized Using CBDC
Phase 3 is a formalization and protective moat for Phase 2 using contracts in the form of digital currency. Anti-dollar countries going this route will be invited to participate in a new digital payment currency founded through agreement and based on their ideas of transparency (exchange pricing), weighting fairness (GDP, purchasing parity, per capita measures, and others) and trust (no unilateral freezing). The assets in the indexed currency would contain a basket of physical assets as well. Those assets would be representative of the economies in the currency math and also that commodity’s potential to create economic national wealth.
In this way, China and pals will have taken an idea from rebellious black market upstart, to critical mass use, to incumbent leader in 3 steps. How will it be used in practice?
How Will It Be Used?
This digital currency index would be used to finalize international trade only. National currencies would be used almost solely for domestic credit creation. The concept goes; if a nation’s domestic currency is not supported, then domestic investment wanes. Which in the end weakens the economy in the international basket. 5
Bretton Woods III As Defensive Reaction
This is what will happen:
Whether the West likes it or not: Demand for commodity reserves will be higher based on the competing Eastern ideology that demands less counterparty risk and more sound collateral. Commodities and Gold will naturally replace demand for FX reserves (Treasuries and other G7 claims); Meanwhile, demand for dollars will be lower too as more trade will be done in other currencies; and as a result of this, the dollar premium will fade away and potentially become a liability for anyone holding Dollars.
Translation: the dollar is on its way out as the world's undisputed reserve currency, a consequences of events that put in motion when Putin invaded Ukraine (with the implicit blessing of China and India) and when the West decided to expel Russia from the entire western financial system. It is this chain of events that Pozsar calls Bretton Woods III- Source
The West has a decision: Do nothing and risk shrinking influence as the world continues to fragment and go towards a more mercantilist playing field; declare a Bretton Woods 3 and claw back some of the Eastern and Euro trade that is rejecting Neo-Keynesian philosophy, or escalate militarily. Most likely result? All three will happen to some degree. They already are..
Regardless of where Gold ends up relative to other commodities, higher as it regresses to its historical mean, or lower relative to those same commodities, although we find that hard to believe; The monetary reset is happening with or without the West. Give it a name, Shanghai Surprise, Bretton Woods 3, Mercantilist policies, who cares. But it is time to do something about it.
Much of this was inspired by a recent Simon Hunt Strategic Copper Services (attached below) note that resonated with our past work.
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