“Mind The Gap!” – The life and times of a man on the move Episode 91
China wants to achieve Creditor Status. This is not something to be overlooked. I laughed when they suggested the Yuan become a reserve currency, however it could be that China has aspirations of control greater than its borders.
In this weekly series, I look back on what stood out, what was bemusing, amusing and interesting during my weekly travels, interesting findings within the FX industry and interaction with an ever-shrinking big wide world. This is purely observational and for your enjoyment
Where is my free gasoline?
Yes, it was inevitable. Oil prices have absolutely collapsed this week. Actually not just collapsed, but for the first time since humankind has been drilling for the black stuff and piling it onto fires to fuel factories, homes and heavy industry or putting a refined version of it into the fuel tanks of millions and millions of cars, it has actually plunged into negative equity.
So, if it is worth less than $0 per barrel, why are tankers full of bitumen being given away for free, and refined oil in the form of petroleum spirit or diesel oil being sold for the cost of production only?
As for kerosene, let’s not even go there – there are hardly any airlines operating and those which are have reduced their services down to repatriation flights only for several weeks now, and in a business sector that is always teetering on the brink of obscurity, that will surely mean that many of the privately operated airlines without inefficient government backing will likely go to the wall, leaving us with overpriced creaking services provided by state owned flag carriers.
Thus, kerosene usage is down to almost nothing.
So, if oil is now at negative value, why are fuel stations around Europe still charging the same price as they did when oil was worth something? Either its a government ruse to relieve people of tax without them noticing – I believe this to be called “stealth tax” or it is oil companies trying to make hay before the sun gets extinguished in a sticky pile of bitumen.
In the United States, where transparency is far higher than it is in Europe and less government meddling goes on, regular gasoline is down to less than $1 per gallon even in expensive states like Massachusetts. I remember driving around Houston Texas for a year in 1999 and even in tax-free Texas it was around 95c per gallon back then.
So, we are seeing at-the-pump fuel at prices which, given the tax aspect, are lower than they were 21 years ago.
Still in Europe, and here in the United Kingdom, it is £1.08 per liter even at ASDA which is a supermarket with huge purchasing power and therefore cheaper fuel than most stand alone fuel stations. That is around £3.90 British pounds per US Gallon compared to £1 British Pound per US Gallon on average in the United States.
There was a time when fuel prices were roughly parity with Europe – but America has decided not to stiff its population, whereas Europe, once again, has.
This got me thinking about another aspect here, and that is how we should look at commodities and currencies in the modern world. Why on earth is oil even a futures contract on exchanges across Chicago? Who would have thought that an energy product would be a good idea as a futures contract?
Gold, yes. Whenever there is global uncertainty, war, political coercion as we are all now witnessing today, the smart money is gold. After World War Two, some historians went to Ein Kerem near Jerusalem, to look at some old houses that had been built there before the modern State of Israel was established, and had been inhabited by families fleeing persecution in Eastern Europe. The people were poor and had lost everything, however when the historians looked behind the plaster in the walls, they found gold.
So, the mantra is, when all fails, gold is the way to safeguard against governments looting people’s bank accounts, capital controls, war, pandemics, famines, corruption and state failure.
But why oil? It gets used at irregular rates, and is an energy resource that can easily be replaced by something intangible and not physical – like electricity, generated by Uranium 235 Pressurized Water Reactor style power stations.
When I was thirteen years old, which was millions of light years ago, I did a scientific research project for my high school physics class that involved me working out that if a new car with a steam engine could be powered by a U235 capsule the size of a human hand, it would be enough to heat the water and power that car for 25 years, the waste product being distilled water.
So, investing in that as a futures contract would be futile as there would be no replacement requirement for the fuel on a regular basis as there is with having to burn oil.
Still, it is a strange economic ideology.
So is reserve currency.
This week I received a diatribe from North American lawyer, economist, and investment banker Jim Rickards, who has 35 years of experience working in capital markets on Wall Street. He was the principal negotiator of the rescue of Long-Term Capital.
Mr Rickards talked directly and candidly about the current issue we all face, where China’s coercion features in it and what the reasons for changing main reserve currency globally was.
“I refer to the official adoption of the gold standard by the U.K. Many observers assume the 1944 Bretton Woods conference was the moment the U.S. dollar replaced sterling as the world’s leading reserve currency” he said.
“In fact, that replacement of sterling by the dollar as the world’s leading reserve currency was a process that took 30 years, from 1914 to 1944. Actually the period from 1919–1939 was really one in which the world had two major reserve currencies — dollars and sterling — operating side by side” said Mr Rickards.
“Finally, in 1939, England suspended gold shipments in order to fight the Second World War and the role of sterling as a reliable store of value was greatly diminished. The 1944 Bretton Woods conference was merely recognition of a process of dollar reserve dominance that had started in 1914” he said.
“The significance of the process by which the dollar replaced sterling over a 30-year period has huge implications for you today. Slippage in the dollar’s role as the leading global reserve currency is not necessarily something that would happen overnight, but is more likely to be a slow, steady process” he said.
What about China and their dictatorial aspirations?
Mr Rickards continued “Signs of this are already visible. In 2000, dollar assets were about 70% of global reserves. Today, the comparable figure is about 62%. If this trend continues, one could easily see the dollar fall below 50% in the not-too-distant future.”
“It is equally obvious that a major creditor nation is emerging to challenge the U.S. today just as the U.S. emerged to challenge the U.K. in 1914. That power is China. The U.S. had massive gold inflows from 1914-1944” he said.
“China has been experiencing massive gold inflows in recent years. Gold reserves at the People’s Bank of China (PBOC) increased to 1948.31 tonnes in the fourth quarter of 2019. For comparison, it held 1,658 tonnes in June, 2015” said Mr Rickards.
“But China has acquired thousands of metric tonnes since without reporting these acquisitions to the IMF or World Gold Council” – Jim Rickards
“Based on available data on imports and the output of Chinese mines, actual Chinese government and private gold holdings are likely much higher. It’s hard to pinpoint because China operates through secret channels and does not officially report its gold holdings except at rare intervals” explained Mr Rickards.
“China’s gold acquisition is not the result of a formal gold standard, but is happening by stealth acquisitions on the market. They’re using intelligence and military assets, covert operations and market manipulation. But the result is the same. Gold’s been flowing to China in recent years, just as gold flowed to the U.S. before Bretton Woods” he said.
“China is not alone in its efforts to achieve creditor status and to acquire gold. Russia has greatly increased its gold reserves over the past several years and has little external debt. The move to accumulate gold in Russia is no secret, and as Putin advisor, Sergey Glazyev told Russian Insider has said, “The ruble is the most gold-backed currency in the world” – Jim Rickards
“Iran has also imported massive amounts of gold, mostly through Turkey and Dubai, although no one knows the exact amount, because Iranian gold imports are a state secret. Other countries, including BRICS members Brazil, India and South Africa, have joined Russia and China in their desire to break free of U.S. dollar dominance.”
“Sterling faced a single rival in 1914, the U.S. dollar. Today, the dollar faces a host of rivals. The decline of the dollar as a reserve currency started in 2000 with the advent of the euro and accelerated in 2010 with the beginning of a new currency war. The current crisis will accelerate the process further” said Mr Rickards.
“So the dollar collapse has already begun and the need for a new monetary order will need to emerge. The question is whether it will be an orderly process resulting from a new monetary conference, or a chaotic one” he said.
“Unfortunately, it’ll probably be chaotic. Don’t count on the elites to act in time” concluded Mr Rickards.
We have seen China try to establish the Yuan as a reserve currency a few years ago, and of course I laughed at such a preposterous idea.
Of course, China will never be able to do that, it’s a communist country with capital controls and government ownership of all currency and all industry, and has its markets blocked to and from the outside world.
However, with China’s clever attempt to disable the world’s economies in which all of the world’s governments except Sweden are complicit and treacherous, it is no longer funny. They’ll simply own everyone else’s currencies instead of making the Yuan marketable.
Meanwhile, volatility is high and we should at least be thankful for that.
Wishing you all a super week ahead!