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Authored by Nick Giambruno via InternationalMan.com,
I recently spoke with my friend and colleague Chris Lowe about China’s new alternative financial system – and how it could mortally wound the US dollar. It was such an important discussion that I had to pass it along.
Chris is the editor of Bonner & Partners’ Inner Circle. His publication shares insights from Bill Bonner’s personal global network of analysts and investment experts.
Using force to compel people to accept money without real value can only work in the short run. It ultimately leads to economic dislocation, both domestic and international, and always ends with a price to be paid.
– Former U.S. Congressman Ron Paul
He who holds the gold makes the rules.
– Old saying
Chris Lowe: Why did you start researching the petrodollar system and its potential unraveling?
Nick Giambruno: This has been on my radar since 2006. That’s when Ron Paul, then a Republican congressman, spoke to Congress about the collapse of the dollar-based global monetary system.
As I recently told my Crisis Investing readers, I think it’s his most important speech ever. It’s called “The End of Dollar Hegemony.”
During the speech, Dr. Paul lays out why a global monetary order built around a fiat currency is doomed to fail.
Crucially, he pointed out the one thing that would precipitate the US dollar’s collapse—the end of the petrodollar system.
I recommend reading the speech in full…
While CNN doesn’t dedicate much time to covering the subject, we’ve repeatedly pointed out that, contrary…
But this is the most important part:
The economic law that honest exchange demands only things of real value as currency cannot be repealed. The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or Euros.
I discussed this with Dr. Paul at a past Casey Research conference. He told me he stood by his assessment.
In a nutshell, he’s saying we’ll know the dollar-centric monetary system is on its way out when countries start trading oil for gold instead of dollars.
That’s already starting to happen.
Chris Lowe: To catch up real quick, why is the petrodollar at risk?
Nick Giambruno: Under the current petrodollar system, all global oil sales are made in dollars. However, the Chinese government recently announced a new mechanism that will allow oil producers anywhere in the world to trade oil for gold.
China’s new mechanism will totally bypass the US dollar and the US financial system… along with any restrictions, regulations, or sanctions from Washington. So for many oil producers, it will be much more attractive than the petrodollar system.
I call it China’s “golden alternative” to the petrodollar. Whatever you call it, though, it will allow for the large-scale trade of oil for gold, instead of dollars.
Here’s how it will work. The Shanghai International Energy Exchange is launching a crude-oil futures contract denominated in yuan, China’s currency. This will allow oil producers around the world to sell their oil for yuan.
Of course, the yuan is a fiat currency, just like the dollar. And most oil producers don’t want large stashes of yuan. The Chinese government knows this. That’s why it’s linked the crude-oil futures contract with the option to efficiently convert yuan into physical gold through gold exchanges in Shanghai and Hong Kong.
Chris Lowe: How soon will this new system be up and running?
Nick Giambruno: I spoke with officials at the Shanghai International Energy Exchange. They told me they plan to go live with it before the end of the year, or shortly thereafter.
Chris Lowe: But isn’t that a good thing? Isn’t gold, as a currency, more reliable than the dollar?
Nick Giambruno: I think it’s high time gold played a more central role in the global monetary system. The problem is ditching the petrodollar would negatively affect the US economy.
Think about it. If Italy wants to buy oil from Kuwait… or Argentina wants to buy oil from Brazil… they have to buy dollars on the foreign exchange market first.
This creates a huge artificial market for dollars.
It means the US can simply print dollars and exchange them for real things like French wine, Italian cars, Korean electronics, or Chinese manufactured goods.
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