FUNERAL FOR THE DOLLAR / MACLEOD FINANCE

Funeral for the dollar

An obituary for the dollar may be premature, but China is clearly planning for a post-dollar world. The coffin is being made ready and embalming fluids are in stock.

ALASDAIR MACLEOD

With respect to the dollar’s demise, China’s leadership has followed a longstanding policy of not interfering with the dollar, beyond reducing its role in China’s international trade where practicable. 

So far, the dollar’s problems are laid entirely at America’s door. 

This is classic Sun Tzu: don’t interfere when the enemy is making mistakes.

That was before US trade policy took aim at China. 

Following 2 April last year when President Trump announced a slew of new tariffs, President Xi did a whistlestop tour of the South-east Asian nations to cement an alternative free trade area and agreed to accelerate free trade between South Korea and Japan. 

That was a reasonable response to US tariffs. 

More interesting was that the Shanghai Gold Exchange (SGE) subsequently opened vaults in Hong Kong and Saudi Arabia.

Why? 

It appears that China was taking the view that the dollar was finally doomed and that the yuan had to be saved from going down with the dollar’s ship. 

In other words, China is no longer prepared to just stand aside and let the US continue to make all the mistakes. 

She had to actively prepare for a post-dollar world.

A new spin on Bretton Woods

It would also be a post-fiat currency world, where trust and faith have been the important determinants of value. 

Trust and faith in the dollar as a medium of exchange would disappear, taking the entire fiat currency system, including the yuan down with it. 

Clearly, China reckons that the only way to protect the yuan’s value is to tie it to gold, perhaps in a new version of the defunct Bretton Woods system but centred on the yuan.

The details are yet to be fully revealed and will depend on events. 

Meanwhile, through the SGE’s new vaults in Hong Kong and Saudi Arabia, an exchange facility for yuan for gold and vice-versa is established for the two main Asian wealth regions. 

And only in the last few days Hong Kong’s regional government and the Shanghai Gold Exchange have agreed to launch a cross-border precious metals trading and clearing system with an initial reserve capacity of 2,000 tonnes.

The intention is clear. 

China will be the pricing centre for gold following the demise of London and New York and their fiat currencies. 

It was likely that Xi briefed China’s diaspora nations last April in his whistlestop tour, that this vaulting facility would be available for trade settlements bypassing a collapsing dollar and allied Western currencies, and that the joint HK/SGE agreement will position Hong Kong as their regional gold reserve hub.

Since last April, China’s reliance on export trade to the US as a percentage of her total has diminished significantly, freeing Xi’s hands somewhat. 

Then last October, America threatened additional tariffs of 100% following China’s announcement of expanded export controls on rare earths. 

The US subsequently backed off from these threats, but China continues to maintain strict controls on rare earth exports where she has a virtual global monopoly.

The Art of the Deal had gone badly wrong for the US. 

And instead of backing down, China now has a policy of retaining rare earths for her own use and imposing tighter control over other critical mineral exports, principally silver, antimony, and tungsten. 

I shall return to the silver story below.

Monroe doctrine backfires

Having continually made geopolitical strategic mistakes, America’s deep state has retrenched into the old Monroe doctrine of being the hegemon for the Americas rather than the entire globe, accepting the reality of a multipolar world. 

If they had done this a decade ago, it might have been sensible. 

But the consequence of Monroe today is twofold. 

Firstly, the fear factor which has been instrumental in keeping the rest of the world under the US cosh has diminished, allowing Asian and African nations greater freedom to align themselves with the Chinese-Russian trading partnership making the US dollar redundant as a trade settlement medium.

Secondly, the US kidnapping of Venezuela’s Maduro and the brazen theft of oil destined for China together with Trump’s threat to take Greenland has led to the counter-threat of US government debt liquidation. 

In other words, as a consequence of riding roughshod over the established rules-based system of international relations America’s foreign creditors are no longer buyers of US debt and at the margin will be sellers.

This is yet to be reflected in long bond yields, which have been on pause for the last few years after the post-covid shock. 

But a reluctance by foreign investors to invest surplus dollars, coupled with a tendency to reduce their overall dollar reserves is set to drive term rates significantly higher.

Higher bond yields will collapse the value of all US dollar denominated financial assets, producing cascades of foreign and domestic sellers on an overwhelming scale. 

The table below estimates onshore and offshore foreign dollar exposure:

According to the BIS analysis, offshore exposure at $98.87 trillion is over double that of the onshore exposure of dollars and underlying financial assets recorded by the US Treasury’s TIC system. 

The total of $144 trillion is approximately 4.5 times US GDP.

It is this mountain of fiat currency which stands to be sold down, rather than added to. 

Remember, dollars are themselves a US government debt obligation, additional to underlying debt obligations.

Conclusion: The dollar credit bubble is becoming unstable, and is in great danger of bursting, taking bond and equity values down sharply when it happens. 

China is prepared for it and has credible plans to continue trading without dollars.

Is silver part of China’s monetary policy?

While nearly all central banks other than the Western majors are accumulating gold, they have not shown interest in silver. 

This probably reflects silver’s subsidiary role to gold under Western monetary standards, being historically restricted to low value coinage. 

China is different.

Until 1935, China had a silver, not a gold standard. 

In common with the Middle East where Maria Theresa silver dollars were a common form of payment until the 1970s, the population of China has had a more practical affinity with silver as money than gold. 

Accordingly, in 1983 the CCP appointed the Peoples Bank (PBOC) with total responsibility for acquiring and dealing in gold and silver.

We have good information on how the PBOC has acquired substantial gold in addition to declared reserves. 

And from 2002 when it established the Shanghai Gold Exchange and authorised citizens who had previously been banned from gold ownership, they were then encouraged to buy gold. 

Clearly, the PBOC had stashed away enough gold to satisfy the PCC and it was time to arm the citizens with real money. 

What is less obvious perhaps is that China also became the second largest silver miner, the largest importer of doré for refining, and as an importer of base metal ores containing silver the largest processer and refiner of silver in the world by far.

The PBOC’s silver role has been in price management, suppressing silver prices through Western derivatives, and enhancing the state’s accumulation of strategic stocks at low cost. 

When this policy commenced following the PBOC’s 1983 appointment, the plan would have almost certainly been to acquire silver for its monetary qualities because photovoltaic and electric vehicle demand didn’t start until much later.

Nevertheless, the history of China’s silver standard means that its monetary role is embedded in Chinese psyche to a greater extent than in those of European and American populations. 

We see this in persistent premiums on the SGE and SGFE (the futures exchange) over London and Comex. 

Indian demand has led to similar premiums in Mumbai.

While it is now clear that China will offer gold backing for trade settlements in yuan, it is not clear that the facility will be offered to domestic Chinese individuals and businesses. 

Could it be that they will be offered a silver standard at a fixed ratio to gold instead?

Criticism of dual standards would refute the idea. 

However, because China has acquired substantial if undeclared silver and gold reserves, the PBOC could easily manage a dual standard, particularly given exchange controls which would ringfence the two standards from each other.

For now, the sudden and strong move upwards of silver prices is being cast as solely due to a liquidity crisis in London and New York. 

The fact of the matter is that prices are being led higher by Asian demand., not a derivative market crisis. 

But there are two other big-picture factors which are not being appreciated. 

Base metals prices measured in gold have been badly suppressed by the expansion of fiat currencies and can be expected to return to a long-term norm. 

Therefore, even in gold a basket of base metals could rise five times. 

The position is illustrated in copper below, which is at only 15% of its long-term average value:

There is a tremendous inflation shock building up for commodities being valued in declining dollars, which will be manifest in a collapse of its purchasing power. 

Even regarded only as an industrial metal, silver is simply front running a massive inflation shock in 2026.

This brings us to the second consideration. 

It is increasingly obvious that the dollar-led fiat currency system which has been in place for over 54 years is coming to an end. 

That means fiat currencies will lose all their value as mediums of exchange. 

Theoretically, prices for gold, silver, and the entire commodity complex are on their way to infinity. what we are seeing is only the start of a massive pricing crisis.