Happy 4th to all.
Here’s the last piece of content we promised you this holiday. A podcast on gold exchanges and dollar dominance.
A month or so ago, Tom Luongo and VBL had a chat about manifestations of Dollar demise as exempllfied in global exchange volumes. Tom graciously let us rehost that pod HERE
Friday Tom B of Palisades had both of us back to revisit this concept and the Geopolitics driving policy decisions right now. When that Pod is posted we will send a link
Which brings us to this post, an outgrowth of that awesome conversation with the Tom/Tom Club
What is this Post?
The purpose of this is to give a reliable framework in which to see how Dedollarization will play out. In doing so we will look at:
Crisis driving Geopolitical change, in this case GRC
How financialization makes change inconvenient.
How changes in business behavior predict Geopolitical change
Exchanges are the last link in dollar GRC status
Why now?
The conversation surrounding Dedollarization and Geopolitics is peaking. We are starting to see two camps form: Those saying the Dollar will die and those saying the dedollarization is hype. Both camps are right, neither label matters in our opinion.
Recently the listing of new contracts on non-western exchanges in regions of demand have sprung up. We view that as almost the last signpost confirming what most of us sense. And so this recording was made1
Incidentally, Vaults moving to Singapore in 2013 was the first signpost2
NOTE: Recording volumes are choppy, apologies as this was recorded early AM on a walk. The content should be worth it however. Enjoy…
0:00-7:00min: Warm up/ Background
Change comes out of necessity, not desire
Geopolitical change comes from need, not desire
GRC Born out of necessity
Once the world changes GRCs in response to a crisis, infrastructure/ conveniences gets built up around the new GRC further cementing the GRC
Financial and Physical Trade
Financialization is in response to real trade
Financialization makes things smoother, more efficient, and more convenient
Noone changes GRC unless there is a crisis
Financial tethers make it too convenient unless a crisis occurs
If a real crisis of confidence emerges, then existing Financial conveniences can only slow the change, not stop it
Bottom Up: How business practices effect Geopolitics
7:00-14:00 min: Gold Supply-Chain Migration from US to China
How the trade flows determine GRC.
Changing econmomic power as mirrored in changing supply chains
Supply> shipping> storage> refining> financialization> Exchange listing> GRC change
The customer is always right
Demand determines delivery
Eventually, the USD remains GRC out of convenience not necessity.
When a crisis arises, you get acceleration of the whole process.
Pricing is the last Domino to fall.
14:00-21:00 Exchanges Announce the Winner
New GRC created in practice but not name
Bottom line: if your money is the undisputed global lreseve currency, exchanges do not list contracts in local currencies for globallly traded ccommodities.
Once they start to do that: it is a sign of change in economic dominance, tradeflows, and ultimately power.
For a country to do this, to challenge the incumbent power without fear of reprisal several things are likely. Chief among them are: established trade realtionships, economic might, and a desire forpricing power.
The only thing stopping this process is another crisis that makes people back off
BONUS:
GSTrader European marketsJPM ETF guide
For the past decade or so we have watched the exchange industry (first as traders looking for arb opportunities, then as part of our business) closely in monitoring global trade flows for clues as to nascent trends.
We are now firmly in the financialization stage of global trade being re-cemented along new economic lines. And while there likely wont be an announcement that the USD is no longer the GRC ( whatever that actually means), the face of trade will be completely changed as the USD must cede its monopoly on trade. Things will wax and wane for sure, but we can say this with 99.9% certainty:
There will be more dollars floating around with less need for them. That translates into global debasemant relative to other fiat. To the extent the Fed does not want this, they will attempt to vacuum up the extra dollars with higher rates and capital controls.
By the time there is some announcement of what the GRC actually is, that will be like trying to figure out which professional boxing belt is actually the true champion in the 1980s
Gold Pricing power Migrating to the Far East a partial timeline
2012: Singapore abolished a general sales tax on imports of investment grade Gold and Silver
2013: JPMorgan, Deutsche Bank, UBS and ANZ – have all set up gold vaults in Singapore
2014: Switzerland's Metalor Technologies started a refinery with about 350 tonnes per year
Gold Exchanges and Dollar Death