Throughout the last century or so, the United States has been locked in a state of military and political tension with the Soviet Union. This period, known as the Cold War, ended with the downfall of the U.S.S.R. in 1991.
However, we’re not even 15 years into this century and strife is developing yet again between the East and the West—except this time instead of a Cold War, the U.S. and Russia seem to be locked in a Currency War. And the battlefield is the Petrodollar.
What is the Petrodollar System?
The “petrodollar” refers to a unit of U.S. dollars earned when one country sells its petroleum (oil) to another country. Here’s a brief video overview of the petrodollar system, from its inception over 40 years ago until today:
Check out our Knowledge Center article The Petrodollar and Potential Impacts on Gold: Part I to learn more.
Petrodollar Under Threat
Recent reports from the East indicate that the decades-long dominance of the petrodollar may be under threat as Russia and China engage in a greater number of trade and energy deals. Russian President Vladimir Putin is turning to China more and more in order to counter the U.S. sanctions placed against Russia following the Crimea invasion. China and Russia’s mutual desire to break off dependence from Western interests, along with their need for energy independence, are likely the root causes behind why Russian President Vladimir Putin and his Chinese counterpart Xi Jinping have become such good pals as of late.
And alarmingly, Putin and Xi’s strategies may be working.
In May 2014, Russian state-owned natural gas company Gazprom signed a $456 billion deal with China—just one of a string of energy agreements going back to 2009. At the same time, Moscow has increasingly looked to Beijing as a key buyer of Russian crude. Furthermore, in June, China and Brazil agreed on a $29 billion currency swap in an effort to promote the Chinese yuan as a reserve currency, and early last month, the Chinese and Russian central banks signed an agreement on yuan-ruble swaps to double trade between the two countries.
Also, according to Reuters, a recent study by BNP Paribas shows that energy-exporting countries are set to pull their petrodollars out of world markets this year for the first time in almost two decades.
“At its peak, about $500 billion a year was being recycled back into financial markets. This will be the first year in a long time that energy exporters will be sucking capital out,” said David Spegel, global head of emerging market sovereign and corporate Research at BNP.
As Jim Rickards, portfolio manager at West Shore Group and partner at Tangent Capital Partners, told CNBC¹:
“Taken alone, these actions do not mean the end of the dollar as the leading globalreserve currency. But taken in the context of many other actions around the world including Saudi Arabia’s frustration with U.S. foreign policy toward Iran, and China’s voracious appetite for gold, these actions are meaningful steps away from the dollar.”
For us in the West, the downfall of the petrodollar would have huge economic consequences since this system is what has been keeping the U.S. dollar afloat for several decades. Without it, the dollar would crash. If (or more like when) this happens, owning gold bullion is a good way for investors to help secure the value of their financial assets.
Is this the beginning of the end for the petrodollar?
Give us your thoughts in the comments below or on Facebook, Twitter and Google+.
I started studying economics in September 2015, all new concepts but this is a form of art. You guys are brilliant. Here are my thoughts on gold and silver, I’d love to hear your feedback.
1. Gold, being more expensive then silver is a higher risk investment because anyone capable of manipulating the market would target something where their manipulation would cause most damage.
2. Silver, the ‘poor man’s gold’ is a panic button for anyone with small amounts of cash who realizes (when its too late) that their money will not be able to buy anything soon. Meaning that when it starts to rise, it grows beyond logical proportions if only for a moment.
3. Although both gold and silver cannot be printed, their value comes from ? (its not tied to the dollar so why does it have an inverse relationship)
4. I bought as much silver as I could afford in November 2015 right after I read articles about JP Morgan investing billions on physical silver. As they say, dont do what your bank tells you, but watch what they do. If it goes down to $12/oz I will buy more because I dont expect the crowd to realize where the value of the precious metal comes from. It may one day become the needle that pops the bubble. What are your thoughts?