Amid all the news of the past several weeks that has been extremely supportive of higher gold prices in the short- and long-term, a real bombshell exploded early last week. On Oct. 5, The Independent, a London newspaper, carried a story by Robert Fisk reporting that China, Russia, France and at least four nations of the Gulf Co-operation Council were secretly negotiating to abandon use of the U.S. dollar for payment of oil contracts. Fisk attributed this information to Middle East officials and bankers in Hong Kong. If this comes to pass, in lieu of the U.S. dollar, new contracts would be settled by a market basket of currencies including the Chinese yuan, Japanese yen, European Union’s euro, a new Gulf Co-operation Council currency – and gold. Should this occur, the value of the U.S. dollar as the world reserve currency would take a severe blow. Gold, by being officially recognized as a form of money, would become much more in demand and experience a major price jump. As this report spread across the globe, reaction was quick and strong. Top officials in Saudi Arabia, Japan and Kuwait denied the existence of these secret talks. But, around the world, buyers jumped to buy gold. On Oct. 6, gold’s price soared to record levels against the U.S. dollar (ignoring inflation). On Oct. 6, Max Keiser, the journalist who broke the story earlier this year about the German central bank gold holdings being stored in the vaults of the New York Federal Reserve Bank, said his contacts in Paris, Russia and the Middle East confirmed Fisk’s story. Keiser also said that gold may make up as much as 50 percent of the new market basket payment system. Fisk is a highly respected journalist, having been awarded Britain’s International Journalist of the Year award seven times. He is based in the Middle East and is considered to have the best network of Middle East contacts of any member of the media. Over the balance of last week, more details were unveiled. The transition to the new payment system is to be completed by 2018. Apparently U.S. officials were aware of the occurrence of these “secret” meetings but were not informed as to what transpired. One or more representatives from Brazil attended one meeting, but that country has not yet committed to be part of this agreement. Though not yet involved, the government of India has asked to be included in these meetings. Almost as damaging as this agreement is to the future value of the U.S. dollar was one of the components of the new payment system. Five of the six nations of the Gulf Co-operation Council still have their currencies tied to the value of the U.S. dollar (the other country, Kuwait, also did until a year or so ago). As part of this agreement, a new Gulf Co-operation Council currency would be established to circulate in at least Saudi Arabia, Kuwait, Bahrain and Qatar. This new currency will be based on a basket of currencies that will almost certainly include gold and may exclude the U.S. dollar. Between the establishment of an independent GCC currency and the potential pricing of many oil contracts for payment by other than the U.S. dollar, that would make at least $2 trillion of U.S. currency and debt now held by foreign central banks no longer needed for international commerce. In fact, these central banks would have to ship the U.S. dollars and Treasury debt back to the United States in order to buy the gold and other currencies that will be needed to pay for oil or to back the new GCC currency. Once this much money comes back to the United States, where the sellers expect to receive goods and services for the paper, the effect on the U.S. economy is almost certain to be devastating. Whether or not the U.S. dollar could even survive as a circulating currency is now a legitimate question. You can be sure that there is a lot of behind-the-scenes maneuvering going on. U.S. officials are probably seeking to water down the proposed currency basket and draw out the time frame, as I don’t think they have realistic prospects of killing this proposal. But, in the most optimistic scenario for the U.S. government and the U.S. dollar, where it might turn out that these alleged secret meetings are a complete hoax, or that all of these plans by the various nations are abandoned, I still think that the U.S. dollar is now doomed. On Oct. 6, 2009, the entire world saw just how quickly the value of the U.S. dollar could fall. From that day forward, central banks and foreign investors will include in their financial planning the risk of the failure of the U.S. dollar. From now on, the U.S. dollar is on a deathwatch. It might take years for the value of the dollar to fall so far that it is no longer viable for international commerce, but I think the end is inevitable. On the other hand, now that gold is being discussed as a form of circulating money again, expect its value to soar against all paper currencies. Patrick A. Heller owns Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” the company’s monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. His periodic radio interviews on WILS-1320 AM can be heard at http://www.amlansing.com, on the Korelin Economic Report at http://www.kereport.com, and on Coin Chat Radio at www.coinchatradio.com.
Let's think about this, assuming it is true. It is unlikely that any basket of currencies will exclude the US dollar. The Chinese yuan is too small to be a major part of a basket, and the Gulf currency doesn't even exist yet and will no doubt be another fiat currency. So the dollar will still be an important part of the reserve currency basket. If gold is a component, it will have to be denominated in some currency [you can't add ounces and currencies in any meaningful way], and that currency will effectively be the new reserve currency. And if the dollars come back to the US, why would that necessarily be bad? The US Treasuries are non-callable, so the holders will have to sell them to effectively "buy" US dollars to spend. This will depress bond prices, raise interest rates and strengthen the dollar. Then the dollars will be spent on goods and services provided by the US, raising asset prices, creating a favorable balance of payments, creating jobs and producing income for Americans. I'm not saying any of this will happen -- their view or mine. I only want to point out that a lot of what passes for analysis is badly thought out and slanted to produce fear.
