The enemy of the dollar is gold, not yuan or renminbi

Introduction to gold-backed currencies

1. When investors buy gold, they have to sell their US dollars or assets like treasuries to obtain the dollars to buy gold. Gold is currently around USD$2000 per ounce.

Figure 1: Gold price as of 16th of April, 2023

2) Selling USD to buy gold means increasing the supply of USD in the currency market which further devalues US dollar against other currencies.

3) Historically, gold-backed currencies were created whereby 25–40% of the total money issued by central banks or governments would be backed by gold. The US government has 8133.5 tonnes of gold reserves.

Figure 2: Ratio of gold to dollar issued, historically

Figure 3: Gold reserves of the United States, last audited in 1953

4) The current quantity of M0 money supply (central bank issued) is close to USD$5.3 trillion, and if 25–40% to be backed by gold, then price of gold would have been USD$4,600–7,400 per ounce, which is 2 to 3.5 times higher than current gold price.

Figure 4: M0 money supply, issued by central bank

5) Assuming highly liquid US treasuries is like M0, and risk-free which are close to USD$31 trillion, also at 25–40%, then price of gold would be at USD$31,500–50,000 per ounce, which is 15 to 25 times higher than current gold price.

Figure 5: US debt as of 17th of April, 2023

6) If M0 money supply and government bonds of Euros, Sterling Pounds, and Yen are added to the mix, the renumeration of gold price would be higher than aforementioned.

How some in global south, OPEC, and BRICS seem to be managing Eurodollar debt as gold gains at the expense of the dollar?

A) First, what is Eurodollar debt? It is the debt or bonds issued by banks and corporations outside of the United Stated that are denominated in US dollars. These debts/bonds create demand for the dollar since non-US bank and corporations need to buy US dollars in other currencies to pay their investors who bought their dollar-denominated debts/bonds. The size of this debt has ballooned to USD$65 trillion.

Figure 6: Unrecorded dollar debt in non-US banks and shadow banks across the global financial system

B) Ensuring inflation in the G7 remains high by putting a floor on oil price. High inflation means high interest rate (the latter, unlikely to be the height of the 1970s as current debts are being recycled too many times and losing count), also means increasing risk and severity of banking crisis of a highly indebted fiat system.

C) G7’s banking crisis will ultimately involve money printing from the G7. Inflationary policy is bad, but deflationary is worse, at least for monetary policies. Deflation in monetary policy makes everyone feels poorer even the rich, however inflation in monetary policy can still benefit the top 1%.

D) It is not about having investors to gain confidence in the currencies outside of the G7, but investors gaining confidence in the gold these central banks hold. Therefore, done right, currencies outside of the G7 can strengthen against the devaluation of G7 currencies allowing for easier Eurodollar debt servicing even at interest rate of 5% in the G7.

Factors affecting the probability of gold creating more volatility in financial market of 2023

1) US military budget has increased by 9%. To avoid nuclear fallout from wars between nuclear powers, inflation is an attack on the military capabilities without war-related human casualties.

2) To attack via inflation is to shift confidence to gold. That can be gained when BRICS announce gold-backing trading currency within BRICS. Demand for gold is proportional to volume of trade within BRICS, so new BRICS+ members that can significantly move the volume of trade upwards will move the demand for gold upwards. The new members to be recruited have to be observed.

3) OPEC+ especially UAE and Saudi are both putting a floor to the price of oil, with all member states actually cooperating. A floor price is also an attack on G7’s monetary policy, and by extension, their fiat banking system.

Conclusion

While there is concerted effort to push the price of precious metals like gold down through shorting using futures contract, it is highly unlikely that this concerted effort can suppress prices of precious metals once BRICS/BRICS+ makes an announcement of gold-backed trading currencies to be used multilaterally within BRICS/BRICS+. The demand for gold will be in excess of short-sellers, pushing up the prices of gold to new highs while incurring huge losses on the short-sellers. Technically, short-sellers can be bailed out using G7’s fiat system but that would require the G7 to print more money or incur more debt. Either way, it is bad management of debt and money printing especially when economic growths in the G7 have been forecasted to be lethargic compared to BRICS/BRICS+.

For further queries or advice, feel free to contact me at c.chan@3vs-process.com or chianwenchan@yahoo.co.uk