Read Between The Lines

Paul Goncharoff

One of several valuable life lessons learned when you live outside your native country is that the optics are radically different. This is especially true when you are from the United States, and you live and work in Russia. With the exception of the internet, which offers the same fare worldwide, there is a bit less in-your-face media “noise” and frantic urgencies to gulp daily from storms in teacups. Imagine a day without Rachel Maddow, or Sean Hannity! It is almost as if the planet has taken a nap here from the constant barrage of stress and strife delivered in strident tones verging on the hysteric with tales of enemies and evildoers under every bed in town.

Not that stress and strife are absent here, there is enough to go around, yet the many events arising in our world seem presented in a less hysterical way. Living in Russia, especially these past five years has been instructive, more so when logging on to my daily dose of ‘newsworthy fare’ from CNN, FOX, CNBC, BBC then contrast that to what I see, read and discuss face to face with people here. Truly two different realities. The news is not different, events are events and you can’t get around that truth, but what is considered worthy of reporting and of real interest is mostly worlds apart.

One common take away that seems to unite many Russians when they read or view world news is that the root of just about any conflict or case of geopolitical gastritis are found in the economics, which surround yet are hidden by the issue reported. Truths are often found by diligently following the money trail – not the emotional aspects, orchestrated discords, proxy music or the spin optics. Reading between the lines has evolved over decades into a fine art here, illuminating both failures and successes in roughly equal measure, yet certainly not perfect either.

Sanctions, restrictions, treaty busting and trade tiffs have played their role in clearly defining actual bottom lines in international geopolitics for many Russians. The tit-for-tat responses and the fallout they cause are clearly seen and expected from both sides. Be it in the Middle East, the expanding NATO frontiers, the South China Sea, Venezuela or the several proxy-style dust-ups such as Syria and Ukraine that are also ongoing. The roots often are in the politics and policies of the US Dollar and the power it bestows. Oil, Gas, and the economics of trade and influence are allowed or disallowed by a dominant currency system.

One banker here said it colorfully “when you have an invitation to a seat at the USD table, and you vote unanimously with Washington agreeing that your steak tartare is delicious, you will have no shortage of second or third helpings. Heaven help you if you wish for fish or veggies, you will simply not be served – you will go hungry, nor be invited back to share another meal at that table even if you offer to go “Dutch”.

One topic that is been making the rounds here is not so focused on Brexit, Nord Stream 2, Ocasio-Cortez, Bolton, Pompeo or even President Trump, it is Gold and the Dollar. If every action eventually creates and equal and opposite reaction, then we are beginning to see this confirmed with the USD. Central banks around the world, including Russia’s Central Bank (RCB) and the People’s Bank of China (PBC), have kept on steadily increasing their gold purchases in efforts to replace US dollar-denominated assets. This can be compared to the seat-at-the-table example where some of the guests are getting indigestion from “hegemon-like behavior” which one Chinese businessman quipped is clearly on the rise in the US.

The PBC bought a further $179 million worth of gold in February, the fifth straight month in which China increased its holdings of gold in terms of value, according to China’s State Administration of Foreign Exchange. At the end of last month, China’s official reserve gold assets stood at $79.498 billion in value, compared with $79.319 billion as of the end of January 2019.

Russia has been called a “mystery wrapped in an enigma”, another enigma to consider is that the PCB is not the only official government entity that holds gold in China. The State Agency for Foreign Exchange, China Investment Corporation, the military, and commercial banks are also gold buyers, yet apparently, they are not included in the PCB’s direct gold acquisition reports. It seems likely that actual physical gold holdings in China are rather higher than the amounts reported by the PCB; the unaudited question is by how much more? In time, we will know, and it just might surprise us all.

The RCB in January increased its holdings by almost 20 metric tons to 1,857 tons, topping the PBC’s officially reported 1,843 tons. Russia has been increasing its holdings every month since March 2015, and are continuing to do so.

Summing up 2018, the world’s central banks added 651.5 tons of gold to official reserves, up 74 percent on a yearly basis and the second-highest yearly total on record according to the World Gold Council. Seems like they are taking USD divestiture and diversification seriously.

Due to uncertainties in bilateral relationships between several countries and the US, particularly with ongoing trade, tariffs, sanctions and regulatory disputes are pushing efforts to reduce holdings of US dollars and increase holdings of other financial assets such as gold. There already enough examples of US dollar-denominated assets being seized or frozen by the US government, and no one wants to look forward to such an experience, especially when it is at Washington’s sole discretion.

The director of the Finance and Securities Institute at Wuhan University, Dong Dengxin, recently said, “The creditworthiness of the US has been decreasing because of its hegemon-like behaviour, which has prompted many countries to decrease reliance upon US dollar assets”.

The Federation Council of Russia is also assessing the likely abolition of 20% VAT on the purchase of physical gold bars. According to some experts in the Gold market, such a shift by Russian individuals out of USD and into physical Gold inside the country, which could be from $2 to $4 Billion (50 – 100 tons) in the first year after adoption.

Time appears to be running out. This is one major reason why Gold, Silver and other hard assets are rapidly gaining ground to secure wealth in this increasingly fractured financial era and in anticipation of the massive unfunded liabilities coming due by 2020.

There has been additional talk of the very apparent financial landscape changes these past two months, especially with the apparent Fed policy reversal from rate hikes to probable rate cuts, and QE assuming the role of a “normal tool” in the tinker box of rate manipulation. At the same time, the ECB announced new stimulus measures just two months after they supposedly tapered their QE program to zero, while the BOJ has never stopped their printing presses. Many Russians have observed that between the increasing levels of debt in the US and Europe, plus fiscally wobbly QE mechanism which is now accepted as a financial management tool, they are observing a massive Ponzi scheme in its final stages.

All of this global printing forces the dollar higher; at the same time, neither the U.S. nor the global economy can permit a stronger dollar. Along with slowing economic growth, and an end to the Federal Reserve rate hike cycle, the growing U.S. budget deficit should also weigh on the U.S. dollar, driving gold prices higher. The famous magic tax cut in the US has already turned negative, with the budget deficit widening to -4.4% from -3.5%.

A Russian financier made the following synopsis to me over coffee last week: The United States government has added borrowed funds of more than $10 trillion in the years since 2009. That increase of debt yielded only $3 trillion of real GDP. Today US debt on average increases by $100 billion per month when reported GDP increases only by about $40 billion per month. The US debt-to-GDP ratio already exceeds 100%, which is the most since World War 2. No wonder so much vitriol is poured into anti-Russia, anti-China and anti-this or that. After all, there are no Nazis and Japanese to fight and the Communist threat has dissolved. Enemies must be created or dreamed up to justify increasing debt. In the absence of a Manhattan project to print money for, there are now force projection, space, crypto wars and hypersonics to finance. He ended by smiling and saying, “Who could have believed that increasing unsustainable debt liabilities without control, check or balances would ever become an established US policy?”

An accepted economic premise states that deficits should decline during economic expansions. Therefore, when recession does come (and this is a cyclical reality) government is prepared, and has adequate finance to smooth out dips. The US is now ten years into expansion, and the Treasury is budget-depleted. Today projections call for debt-to-GDP ratio to be at 115% over these coming 2 – 3 years while at the same time the Fed expects average growth to be 1.9%. Do the math; this does not cut the mustard, and little wonder why USD trust and faith is eroding.

While not gold related, but supporting the same eventual de-dollarization trend is emergence within BRICS of a blockchain rooted common payment system designed for use between any of the five countries using only their local currencies. Called “BRICS Pay” (not to be confused with the Crypto-Ruble), to be test launched in South Africa this April/May, taking the form of a digital wallet initially for retail purchases and money transfers via a mobile app. Thereafter, to be adopted throughout BRICS and possibly with their trade counterparties beyond, also exclusively in local currencies. BRICS Pay is one small but wholly innovative new factor to add to the growing trend in many areas of finance disconnecting and diversifying away from the dollar habit. One day it too shall arrive to some form of critical mass, and then who can say how far it may reach.

In conclusion, seems the subjective consensus from here is that the dollar is likely to rise as every other central bank prints their currency into oblivion. This might pressure Gold in the short-term, but the US and the world cannot stand a stronger dollar for very long. The Fed will have no choice but to do its own propping up of US equities and bonds, sacrificing the dollar in the process. Same holds for the ECB and BOJ. This means a Fed policy reverting to rate cuts, and renewed QE looks highly likely despite popularly managed economic perspectives (known as MOPE). Gold will remain as it has throughout history, as the bulwark against the erosion of wealth. This admittedly disquieting prospect seems only a matter of time, more likely in the coming months rather than years.

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