One of the greatest wealth transfers in history is taking place.
This article originally appeared on Sprott's Thoughts and is republished here with permission.
Alasdair Macleod writes the blog FinanceAndEconomics.Org. His research aims to explain the relationship between the dollar and gold, and to warn investors about the biggest threats to their wealth from macro-economic events.
Besides what the Fed is doing by printing money, there is another big threat to the dollar, said Alasdair. Countries in Asia are banding together in order to rid themselves of using the dollar in international trade.
He also warned that credible allegation of misconduct at the London bullion exchange could accelerate the trend of Shanghai becoming the world’s trading hub for gold.
“There is a thing called the Shanghai Cooperation Organization, an agreement principally between China and Russia, whereby they tie up the whole of Asia as their backyard. Other members are the countries north of Tibet, Tajikistan, Kyrgyzstan, Uzbekistan, and so on. In or soon after September, four new members will join – India, Pakistan, Iran, and Mongolia. That’s almost half the world’s population. The objective of the SCO is basically to settle international trades between these countries without using the dollar. I’m not saying they will necessarily achieve that, but that’s what they want to do. They don’t want to see trade settlements reflected in bank accounts in New York.
“It’s not just members of the SCO, either, that could eschew the dollar. The Middle East, for example, now principally sends exports to China and India, so there’s no pressing reason to use the dollar there.
“You can see that, if they succeed, the whole Asian continent, at some point in the future, will be off the dollar. They’ll use their own currencies, gold, or something else. That’s a very big change, and I don’t think people fully appreciate what that means for the dollar.
“Apart from everything the Fed is doing, there’s an awful lot of dollars held in foreign corporate accounts, principally because they’re required for trade. If the world stopped using the dollar, then those dollars will need to find their way back home.
“What that’s likely to do for the dollar relative to other currencies, I don’t know, but I do think it’s likely to affect the relationship between the dollar and gold.
“While the value of the dollar depends on confidence, gold is different, because gold is accepted everywhere. They might no longer accept dollars in some parts of the world – just like they wouldn’t accept my British Pounds in California – but they’ll accept gold. In Asia, that’s particularly true. People might place a different value on gold depending on the geographic region, but gold is more or less accepted as a form of payment anywhere.”