Israel ditches the dollar for the Chinese renminbi and Beijing begins to quietly acquire Russian energy assets.
The underpinnings of the global monetary system continue to evolve, not least thanks to two major news stories that have occurred in the past 24 hours that no one seems to have noticed.
Those who have read my blog over the past two weeks will know that I predicted that China and Russia would become closer economically, creating a second world monetary system in which the US dollar would no longer be the reserve currency.
A few weeks ago I wrote an article proclaiming that Russia would back the ruble with gold as a way to retaliate against Western economic sanctions. I also made similar predictions about China’s new digital currency last summer when I launched Fringe Finance.
This change is the result of the United States and the rest of Western economies foolishly thinking that they are going to be able to effectively sanction Russia economically, despite the fact that Russia is a massive oil producer and the country seems ready to back its currency, the rouble, to this production capacity.
Meanwhile we continue to accumulate huge deficits, we have very little production capacity and even less means to guarantee our currency. Our destiny seems to be to continue printing money regardless of the negative consequences. We are nothing more than printing press junkies who will not quit our addiction to inflation until we hit rock bottom.
If you haven’t read them yet, here are some articles that explain my position on Russia and China creating their own monetary system:
- US dollar dominance is fading before our eyes
- The Dethroned Dollar: We have reached the end of monetary policy as we once knew it .
- The global gold rush has only just begun
- Russia will support the ruble with gold
This thesis has undergone several developments over the past 24 hours.
First, it went unnoticed yesterday when Bloomberg reported that “Israel’s central bank made the biggest changes to its reserve allocation in more than a decade, adding the Chinese yuan alongside three other currencies to a stock that topped $200 billion last year for the first time. »
Here is what the report says:
Starting this year, the currency mix will expand from the US dollar, euro and pound sterling trio to include the Canadian and Australian dollars as well as the yen and yuan, also known as the renminbi. The additions mark a change in the Bank of Israel’s “set of investment guidelines and philosophy,” Deputy Governor Andrew Abir said in an interview.
Following discussions held by the monetary committee last year, the pound and the yen will represent 5% and the currencies of Canada and Australia 3.5% each. Under the new approach, the yuan’s share is set at 2% for 2022, according to the Israeli central bank’s annual report released late last month.
To account for these changes, the euro’s share will fall from just over 30% to 20%, its lowest level in at least a decade, while the dollar will represent 61%, down from 66.5%. . The weighting of the pound, on the other hand, will almost double to 5%, thus returning to a level which was not reached in 2011.
The “dramatic” increase in Israel’s foreign exchange reserves has led the central bank to lengthen its investment horizon, Abir said. “We are looking at the need to get a return on reserves that will cover the costs of liability.”
In other words, Israel is reducing its investment in the dollar and the euro to increase its investment in the renminbi.
And so, perhaps it wasn’t just me, the little old man who tweaks his blog daily, who noticed that China and Russia could be about to make significant changes to the global monetary landscape. It seems that Israel is figuring it out.
I expect other countries to follow suit.
Then another one of my predictions started to come true this morning when it was announced that China was considering buying some of Shell’s Russian LNG assets. Bloomberg reported:
China’s major state-owned energy companies are in talks with Shell Plc to buy its stake in a major Russian gas export project, according to people with knowledge of the matter.
Cnooc, CNPC and Sinopec Group are in talks with Shell over the company’s 27.5% stake in the Sakhalin-2 liquefied natural gas project, after the European company said it was pulling out of Russian operations following the invasion of Ukraine.
I had previously argued in my podcast and on my blog that even if the West were to ignore Russian investments, there would certainly be a strategic buyer who would come and grab what can only be described as energy assets. Russia’s long-term strategies.
Many people smarter than me, including macro analyst Luke Groman, predicted that China would be the strategic buyer for such deals. I agreed.
Now it seems that is exactly what is happening. These purchases will only serve to further tighten the ties between the economies of China and Russia.
If the picture isn’t clear yet, it soon will be, even for most people who aren’t paying attention yet.
China and Russia continue to cooperate: they do business together, back their currencies to tangible products and, as I wrote a few days ago, we are seeing the dollar dethroned as the currency of world reserve. We just don’t notice it yet.
My next prediction, which has yet to come true, is that China will back its digital currency with gold. I’ve been predicting this since August 2021, long before the current macroeconomic situation emerged. Today, my convictions are even stronger.
When the rest of the world realizes what is going on here, there will be a mad dash for gold, in my opinion. I continue to prefer gold to any fiat currency and, as I wrote a few weeks ago, I consider miners to be one of the most undervalued sectors of the market.
(This piece is taken with gratitude from QuothTheRaven.)
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