PM End of Week Market Commentary - 9/1/2017

davefairtex
By davefairtex on Sat, Sep 2, 2017 - 2:12pm

On Friday gold rose +3.40 to 1330.00 on extremely heavy volume, while silver rose +0.16 to 17.80 on heavy volume. Nonfarm Payrolls disappointed, and that caused a lot of volatility in the buck – first it dropped hard, but then it reversed higher. Gold and silver both seemed to do relatively well regardless.

The PM sector map looked great this week – picture perfect, actually. Junior miners led the seniors, while silver led gold. Only the silver miners are lagging a bit. Senior miners executed a golden cross this week, which is a very bullish sign longer term. It doesn't get much better than this for PM.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Junior Miners GDXJ 6.84% -17.12% rising rising falling rising ma200 on 2017-08-28 2017-09-01
Senior Miners GDX 5.85% -6.21% rising rising rising rising ema9 on 2017-08-16 2017-09-01
Palladium $PALL 5.25% 46.65% rising rising rising rising ema9 on 2017-08-31 2017-09-01
Silver $SILVER 4.37% -6.07% rising rising rising rising ema9 on 2017-08-25 2017-09-01
Silver Miners SIL 3.93% -20.96% rising rising falling rising ma50 on 2017-08-24 2017-09-01
Platinum $PLAT 3.45% -3.74% rising rising rising rising ema9 on 2017-08-28 2017-09-01
Copper $COPPER 2.65% 49.94% rising rising rising rising ema9 on 2017-08-16 2017-09-01
Gold $GOLD 2.58% 0.97% rising rising rising rising ema9 on 2017-08-16 2017-09-01

Gold rose +33.50 [+2.58%] this week, breaking above 1300 on Monday and never really looking back. Even gold-in-Euros managed to rally on the week. Gold's RSI7 is starting to show signs of being overbought, with the RSI7 at 80. Friday's candle print was a spinning top, which the code felt had a 41% chance of marking the top. Forecaster gives gold a +0.69 rating, which represents a strong uptrend. Intraday, gold seemed to have a strong bid whenever a dip occurred; it also showed some good resilience even during times when the buck rallied. These are all bullish signs.

The December rate-increase chances remains at 40%.

COMEX GC open interest rose +43,587 contracts this week. That's 135 tons of new paper gold. As a point of reference, about 48 tons of actual gold are mined every week.

Silver shot up +0.85 [+4.37%] this week finally managing to climb above the 200 MA. At least half of the gains came on Monday's breakout. By end of week, silver had even managed to close above the previous high of 16.72 set back in June. Silver is looking a bit overbought, with its RSI7 at 79. In spite of that, the candle code felt that Friday's spinning top was a bullish continuation. Forecaster also shows silver in a strong uptrend, with a +0.76 rating.

The gold/silver ratio fell -1.30 to 74.70.

COMEX SI open interest fell by -7,941 contracts.

Miners shot higher this week, with more than half of the gains coming on Monday's breakout. Even better, the junior miners actually managed to outperform the seniors – the junior miners have been languishing a bit in recent weeks. Friday's candle print for GDX was a high wave (36% bearish reversal); GDXJ printed a hanging man (47% chance of a reversal). Forecasters showed relatively strong uptrends: GDX (+0.63), and GDXJ (+0.77). GDX also executed a “golden cross” - the 50 MA crossed above the 200 MA, which is a buy signal for longer term traders.

The GDX:$GOLD ratio rose +3.06% on the week, and the GDXJ:GDX ratio rose +0.93%. That's bullish. Historically, we generally don't have significant moves higher in gold unless the miners outperform; since about February the ratio has drifted slowly downhill. This week may be a hint that gold may be ready to start a more significant move higher.

USD

The buck moved up +0.05 to 92.58. That small weekly change concealed a fairly large amount of volatility, with the most excitement happening Tuesday when the buck dropped well below the critical “round number 92” support level intraday – right up until the buyers showed up and pulled prices back to safety. As a result, Tuesday's doji ended up being a very strong bullish reversal bar, and Wednesday we saw a swing low. That sounded great, except that the buck has struggled to follow through.

Friday's candle was a takuri line (a normally fairly bullish single-candle print) but the code didn't give it a very high rating. The buck remains below its 9 EMA. The forecaster gives the buck a +0.32 rating, which is a gentle uptrend. I'm not sure we're looking even that good right now. If my speculation early this week was correct and the buck's rebound on Tuesday was due to central bank intervention (absolutely nobody wanted to see the buck crack 92 – not BOJ, not ECB, and not the Fed), the lackluster performance for the rest of the week makes sense. If there is no real fundamental buy-side interest, central bankers can bring about a short-covering bounce, but there won't be any follow-through unless they keep pouring money in.

Currency markets – especially the buck and the Euro – are too big for the central bankers to fight them long term.

US Equities/SPX

SPX spent much of the week rallying, closing up +33.50 [+1.37%] to 2476.55. Previous high for SPX was 2490, set back in July – we are rapidly approaching that level once again. Thursday saw SPX break above a previous high, invalidating the lower highs/lower lows downtrend pattern. Candle print on Friday was a spinning top, which the code gives a 33% chance of marking a high. The forecaster has a rating of +0.81, which is a strong uptrend. It looks like risk on to me, at least for now anyways.

The equities sector map looks a combination of special cases; sickcare (XLV) led, breaking out to new highs due to a fancy new (and expensive) drug being approved by the FDA. This caused the biotech group (IBB: +7.97%) to scream higher in response, since many of them have similar kinds of new (and expensive) drugs of a similar class that presumably will also be approved. Bringing up the rear are financials (XLF) and utilities (XLU). Likely XLF is projecting some damage to the financial industry from Hurricane Harvey – insurance claims, as well as (potential) mortgage defaults. Taken as a group, the sector map looks relatively bullish. Risk on for equities.

VIX dropped -1.15 on the week to 10.13. Looks like we're headed back to single digits.

Name Chart Chg (W) 52w ch EMA9 MA50 MA200 50/200 Last Crossing last
Gold Miners GDX 5.85% -6.21% rising rising rising rising ema9 on 2017-08-16 2017-09-01
Healthcare XLV 2.89% 11.93% rising rising rising falling ma50 on 2017-08-30 2017-09-01
Homebuilders XHB 2.27% 6.50% rising falling rising falling ma50 on 2017-09-01 2017-09-01
Technology XLK 1.87% 24.69% rising rising rising falling ema9 on 2017-08-22 2017-09-01
Materials XLB 1.84% 13.68% rising rising rising rising ema9 on 2017-08-30 2017-09-01
Cons Discretionary XLY 1.62% 11.58% rising rising rising falling ma50 on 2017-09-01 2017-09-01
Industrials XLI 1.51% 16.85% rising rising rising falling ma50 on 2017-08-31 2017-09-01
Energy XLE 0.92% -6.92% rising falling falling rising ema9 on 2017-08-31 2017-09-01
Cons Staples XLP 0.55% 1.05% rising falling rising falling ema9 on 2017-09-01 2017-09-01
REIT RWR 0.46% -6.59% rising falling rising falling ma50 on 2017-08-31 2017-09-01
Telecom XTL 0.17% 10.83% rising falling rising falling ema9 on 2017-08-24 2017-09-01
Financials XLF -0.16% 24.71% rising rising rising rising ema9 on 2017-09-01 2017-09-01
Utilities XLU -0.62% 11.88% falling rising rising falling ema9 on 2017-09-01 2017-09-01

Gold in Other Currencies

Gold rose in all currencies this week, climbing in XDR by +37.11. Gold is closing on breakouts in several currencies.

Rates & Commodities

TLT dropped -0.45% on the week, with all of the damage happening on Friday. The candle patterns were a bit odd, but Friday's big drop [-0.97%] resulted in a four-candle swing high and a brisk drop below the 9 EMA. TLT's forecaster plunged a massive -0.94 points in one day, pulling TLT into a modest downtrend (-0.36). I'm not sure why bonds were hit so hard on Friday.

JNK was mostly flat, dropping -0.05% on the week. Really what happened is that JNK spent most of the week moving higher, dropping hard on Friday which wiped out all the gains for the week and printed a swing high which had a 58% chance of marking a top. Interesting that JNK now seems somewhat aligned with TLT. Perhaps traders are just fleeing fixed income.

CRB climbed +1.75% on the week, with most of the gains happening on Thursday – when traders woke up to the fact that Hurricane Harvey might lead to shortages in gasoline (RBV17 up +0.21 [+13.44%] to 1.75). 4 of 5 groups moved higher, with energy, industrial metals, and PM all performing strongly. Industrial metals continued their relentless rally – copper rose +2.65% (+0.08 to 3.12), which is another new multi-year high. I'm starting to become a believer in the “industrial metal supply destruction” story.

Crude fell -0.48 [-1.00%] to 47.38. Crude dropped for the first half of the week, shrugging off the relatively bullish IEA report (crude draw: -5.4m barrels, gasoline unchanged), reversed direction strongly on Thursday, and Friday crude printed a three-candle swing low. Crude closed the week back above its 9 and 50 MA lines, and the forecaster crept back into uptrend territory, now reading +0.04. Volume this week was very heavy. It looked as though traders were having a hard time trying to figure out the impact of the hurricane on oil production, first selling off hard, then rallying back almost as hard.

The crude COT report shows that managed money went very heavily short this week, adding +82k contracts – which almost doubled their total short interest (177k total). This is in just one week! They also bailed out of 32k longs. That could be enough to mark a low for crude.

Physical Supply Indicators

* SGE Au9999 contracts are at +1.29 premium vs COMEX. Premium is almost gone.

* The GLD ETF tonnage on hand rose +26.01 tons, with 831 tons in inventory.

* ETF Premium/Discount to NAV:

 PHYS 10.82 -0.34% to NAV [up]
 PSLV 6.69 -0.36% to NAV [up]
 CEF 13.15 -6.1% to NAV [up]

* Bullion Vault gold (https://www.bullionvault.com/gold_market.do#!/orderboard) showed a discount for both gold and silver.

* Big bars premiums were: gold [1kg] 1.0% and silver [1000oz] 2.6%.

Futures Positioning/COT

COT report is through Aug 29th, when gold closed at 1314.60, and silver at 17.37.

This week in gold, the commercials net position fell again, this time by 28k contracts; commercials added 22k shorts, and sold 6k longs. Commercials are very heavily short now. Managed money net rose by 27k, adding 25k longs and closing 1.7k shorts. There are very few managed money shorts left. Both commercial shorts and managed money longs are very extended. A top could happen at any time, at least according to the COT.

In silver, the commercial net position fell by 10.5k; shorts rose by 7k, while longs fell by -3.6k. Managed money net rose by 8.2k, dropping 6.4k shorts and picking up 1.7k longs. Managed money is rapidly running out of shorts. At the current rate, we only have one more week of short-covering left. That's not good, since it appears that the entire silver rally in recent weeks was mostly about managed money covering short (-45k) vs going long (+15k). Contrast that with gold where its rally was almost entirely about managed money buying new longs.

Gold Manipulation Report

There was one after-hours spike in gold on Wednesday; it didn't do much more than whet the appetites of the longs. Someone got cheap gold courtesy of whoever attempted the smash. My sense is, someone may have been trying to push the market over after Tuesday's big failed rally.

Eurozone Status

  • German Elections; October 2017: Merkel has a 13.75 point lead over Shulz.

  • There was a migrant crisis summit held in Paris this week; the proposed solution coming out of the meeting was a repeat of the Turkish migrant deal: essentially bribing African countries to keep migrants from coming to Europe. M5S spokesperson had nothing good to say about the proposal. (http://www.express.co.uk/news/world/847897/Macron-Merkel-migrant-crisis-France-Germany-Italy)

  • Given the resounding victory of anti-migration candidates in local elections in Italy this year, its quite likely that migration issues will drive national election results in Italy in 2018, with euro-skeptics in one form or another looking poised for victory. The sense I have is that Brussels is scrambling to “fix” the problem prior to this latest date with destiny

  • Italian Elections: No updated polling data. Most recent data (Aug 9) shows anti-Euro M5S is slightly ahead of the PD: 27.4% to 26.85%. A combination of FI + LN (both semi-anti-Euro parties) continue to poll at 28%.

Summary

Gold, silver, and the miners joined industrial metals and took off skyward, finally breaking through resistance levels that had successfully capped both gold and silver over the past three weeks. Attempts by the shorts to slow the move higher in gold did not appear to work. Given the flat dollar performance, this week's move had nothing to do with currency. Lastly, miners actually outperformed the metals this week, which is a positive sign.

The COT report for gold shows an increasingly strong setup for a short-term top for gold; managed money shorts are at historical lows, they are heavily overextended long, and the commercials are fully loaded up short. Silver looks a bit different; its rise has mostly been about managed money short-covering, and the managed money silver shorts are almost gone. Its possible that silver's top may just happen because of a lack of managed money shorts to squeeze.

Gold and silver big bar shortage indicators shows no signs of shortage; premiums on big-bar gold and silver remain normal. GLD tonnage had a big increase, and ETF premiums rose. Shanghai premiums vs COMEX are almost gone. Perhaps gold is now flowing from East to West? Just kidding, goldbugs. Kind of.

My speculations about central bank intervention causing the dollar's strong reversal on Tuesday occupy my thoughts right now. If there is no fundamental interest from traders in buying the buck at these levels, gold should not be under any pressure from a from a major move higher in the buck. That's gold-positive. We'll have to see how the buck does next week. If I'm right, it will either drift sideways, or attempt to plunge once more.

I don't think Harvey is dollar-positive; we can't know today just what the impacts will be longer term. Is it a sort of reverse-neutron-bomb (destroys infrastructure, leaving the people alive) or just a temporary hiccup? How difficult will it be to restart the industries in Houston?

This situation reminds me of “parallel war” which I first heard described in a lecture given by Col. John Warden, the architect of the strategic bombing campaign used during Gulf War 1. The concept behind parallel war was this: if you disable the electrical generating capacity of a country at the same time you hit the pipelines that feed the electrical plants, you can take out both for far longer than either one on its own. That's because pipelines require electricity to operate the pumps, and generating plants require fuel (provided by the pipelines) to run. Take out both simultaneously, and maybe neither can be restarted without a substantially larger amount of work. In Houston, we may be seeing a similar thing happening: multiple, interdependent industries may well have been taken out in parallel by flood waters, potentially complicating the ability of each component to restart. Well, its a thought anyway. We won't know for a while.

Signs of an impending gasoline shortage in the US are showing up in unleaded gasoline futures right now. Here's what that looks like. Prices are projecting that the problem “should be” solved within 3 months. Of course, last week there was no problem at all.

Month

Price

Change

% Change

RBU17 [Sep]

$2.14

0.47

28.40%

RBV17 [Oct]

$1.75

0.21

13.44%

RBX17 [Nov]

$1.60

0.1

6.87%

RBZ17 [Dec]

$1.54

0.07

4.43%

RBF18 [Jan]

$1.52

0.05

3.46%

Will the poor showing by the Nonfarm Payrolls report flow through to other aspects of the economy? Does it presage a more general slowdown? That should show up in dropping chances of a rate increase, and a rally in bonds & utility stocks. GDP Now's forecast of 3.2% has steadily dropped since it started out 4 weeks ago at 4.0%.

Perhaps Harvey is our black swan. And just in time for September.

Trend-following code says:

Uptrend: gold, silver, copper, natgas, crude, USD.

Downtrend: treasury bonds.

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38 Comments

davefairtex's picture
davefairtex
Status: Diamond Member (Offline)
Joined: Sep 3 2008
Posts: 5410
bitcoin reversal

Well just yesterday I was going on about how everything looked great.  Not so today; the bearish strong line/bearish engulfing candle print has an 81% chance of marking a top.  That's about as bearish as candle prints gets.  Just as a reminder: the reversal is good for 8 days.  Forecaster more or less collapsed, dropping -1.32; forecaster gave off a sell signal, and is now showing a gentle downtrend.

This could just be yet another pause that refreshes in bitcoin, or it could be the start of a more serious sell-off.  My code is all just short-term trend & reversal analysis, so it has no insight as to where things might be going longer term.

lambertad's picture
lambertad
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China oil benchmark

I've seen quite a few of these headlines going around today and this seems to be an interesting development. It sounds like what they're really doing is just cutting out the USD. Anyone can already convert Yuan to gold, assuming you're holding Yuan. The new twist seems to be that this will severely limit the USG from imposing sanctions on big oil exporting countries - Iran, Russia, etc. and if countries don't want to transact in dollars, they now won't have to, or soon won't have to I should say. About that round number 92 Dave keeps mentioning.... This could force the CBs to spend a bunch of money defending that level, if they truly have drawn that line in the sand, and it seems likely that level could fall. I wonder if this is China's way of saying F-you to the ECB, BOJ, and FED, just trying to push the dollar through 92. I don't know what incentive they would have to do that other than just to cause some chaos. Thoughts on the timing of this?

https://asia.nikkei.com/Markets/Commodities/China-sees-new-world-order-w...

http://oilprice.com/Latest-Energy-News/World-News/China-Readies-Yuan-Pri...

sand_puppy's picture
sand_puppy
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Posts: 1887
China launches Crude Oil Futures Contracts backed by GOLD
Very curious what you financially savy guys and gals think about this.
 
September 1, 2017 8:56 pm JST
 

China sees new world order with oil benchmark backed by gold

 

Yuan-denominated contract will let exporters circumvent US dollar

DENPASAR, Indonesia -- China is expected shortly to launch a crude oil futures contract priced in yuan and convertible into gold in what analysts say could be a game-changer for the industry.

 
 

The contract could become the most important Asia-based crude oil benchmark, given that China is the world's biggest oil importer. Crude oil is usually priced in relation to Brent or West Texas Intermediate futures, both denominated in U.S. dollars.

China's move will allow exporters such as Russia and Iran to circumvent U.S. sanctions by trading in yuan. To further entice trade, China says the yuan will be fully convertible into gold on exchanges in Shanghai and Hong Kong.

 

 

"The rules of the global oil game may begin to change enormously," ....

The Shanghai International Energy Exchange has started to train potential users and is carrying out systems tests following substantial preparations in June and July. This will be China's first commodities futures contract open to foreign companies such as investment funds, trading houses and petroleum companies.

Most of China's crude imports, which averaged around 7.6 million barrels a day in 2016, are bought on long-term contracts between China's major oil companies and foreign national oil companies. Deals also take place between Chinese majors and independent Chinese refiners, and between foreign oil majors and global trading companies....

China has long wanted to reduce the dominance of the U.S. dollar in the commodities markets. Yuan-denominated gold futures have been traded on the Shanghai Gold Exchange since April 2016, and the exchange is planning to launch the product in Budapest later this year.

Yuan-denominated gold contracts were also launched in Hong Kong in July -- after two unsuccessful earlier attempts -- as China seeks to internationalize its currency. The contracts have been moderately successful.

The existence of yuan-backed oil and gold futures means that users will have the option of being paid in physical gold, said Alasdair Macleod, head of research at Goldmoney, a gold-based financial services company based in Toronto. "It is a mechanism which is likely to appeal to oil producers that prefer to avoid using dollars, and are not ready to accept that being paid in yuan for oil sales to China is a good idea either," Macleod said

nickbert's picture
nickbert
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Another NK nuclear test

https://www.yahoo.com/news/north-korean-earthquake-triggers-fears-042713...

Kim Jabba Un certainly keeps things here in Asia interesting, that's for sure.  But what does this mean for gold?  Why, it will mysteriously plunge come Tuesday morning of course!  ;-)

davefairtex's picture
davefairtex
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Posts: 5410
RMB convertibility issues

Rather than this being some sort of anti-dollar news, I think its just China trying to get around a problem they have of RMB convertibility.  China is a big boy now, and they want to play in the big arena, but they also don't want to open their capital account - they want to retain their iron grip on their domestic economy.  As a result, traders don't really want to accept RMB in exchange for hard commodities.  Why is that?  If you have a futures contract, there is an implied additional bit of currency risk that comes attached to it.

An RMB oil future has oil price risk + RMB price risk.  A USD oil future has oil price risk + USD price risk.  The market is saying that given a choice between RMB and USD, the USD has less risk attached because the US has an open capital account.  By making the RMB convertible to gold, that makes the RMB currency risk more or less go away, which makes the RMB/Gold futures contract look more attractive.

Again, this seems as though it is more about eliminating exposure to RMB currency risk than anything else.  That's my guess anyway.

If China had their way, I suspect they wouldn't involve gold at all.  They are more or less forced into doing this because nobody really wants to own any RMB currency risk right now.  After all, China could wake up tomorrow and devalue it due to their massive private debt issue.  That's why "smart Chinese money" has been fleeing RMB for the past two years.

cmartenson's picture
cmartenson
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This is GIGANTIC news.
lambertad wrote:

I've seen quite a few of these headlines going around today and this seems to be an interesting development. It sounds like what they're really doing is just cutting out the USD. Anyone can already convert Yuan to gold, assuming you're holding Yuan. The new twist seems to be that this will severely limit the USG from imposing sanctions on big oil exporting countries - Iran, Russia, etc. and if countries don't want to transact in dollars, they now won't have to, or soon won't have to I should say. About that round number 92 Dave keeps mentioning.... This could force the CBs to spend a bunch of money defending that level, if they truly have drawn that line in the sand, and it seems likely that level could fall. I wonder if this is China's way of saying F-you to the ECB, BOJ, and FED, just trying to push the dollar through 92. I don't know what incentive they would have to do that other than just to cause some chaos. Thoughts on the timing of this?

https://asia.nikkei.com/Markets/Commodities/China-sees-new-world-order-w...

http://oilprice.com/Latest-Energy-News/World-News/China-Readies-Yuan-Pri...

This puts not one but two daggers straight into the petro-dollar heart.  First it bypasses the dollar itself for oil trading and settlement by the largest petroleum importer on the face of the planet.  Second it allows full and open convertability of the Yuan into gold on two Chinese exchanges.  The gold standard has just been resurrected!

This is really, really big news.  I cannot over state just how big.  

I'm jaded enough to suspect that these next few weeks will be packed with articles in the NYT and WaPo about how China is now a rogue nation, operating outside the bounds of decency, with child slaves, sex scandals, and unacceptable maritime offenses.

Every country that has tried to approach this "third rail" of US foreign policy has been badly burned.  Let's see how the Deep State and Shadow Government branches react to this.

 

 

davefairtex's picture
davefairtex
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gold standard resurrected???

Uh Chris, I'm pretty sure that China isn't fixing the RMB at a specific number of grams.

If you believe they are doing this - could you point me to a place where they've announced the number of grams they're fixing the RMB to?  That would be remarkable news if that's what was going on, but I am going to go with the odds here: I don't think it is in China's interest (with such a vast private debt overhang) to make RMB convertible to a fixed number of grams of gold at this point in the game.

I think all that happens is that, if you are short oil, at settlement you will receive (your choice) either either a fistful of RMB, or a number of grams of gold - the specific number to be determined at whatever the current international price of gold happens to be at that moment.

I think this is mildly interesting, but no more than that.  Nobody wants to hold RMB, so if China wants to play in the world market and still wants to retain a closed capital account, they need to make the settlement option more palatable, and gold serves that purpose just fine.

 

Jim H's picture
Jim H
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Yes, this is huge.. the monetary equivalent of a Cat-5 hurricane

More from the Asia Nikkei article;

Grant Williams, an adviser to Vulpes Investment Management, a Singapore-based hedge fund sponsor, said he expects most oil producers to be happy to exchange their oil reserves for gold. "It's a transfer of holding their assets in black liquid to yellow metal. It's a strategic move swapping oil for gold, rather than for U.S. Treasuries, which can be printed out of thin air," he said.

Grant Williams seems to agree with Chris' view, and not so much with Dave's view of the meaningfulness of this move by China. 

The implications are equally striking when it comes to Gold demand, and ultimately the Gold price.  This is a very clear statement by China that the real reserve currency is Gold... or Oil.. .or Gold and Oil : )

It will be interesting to watch the controlled ascent of Gold going forward.. I don't think it will be possible to stop it now.  In my view the bankers who run the world are going to have to let Gold find a new (higher) level before re-asserting the manipulation game.  The price will need to be high enough to scare some scrap back onto the market... most probably something with a 2-handle.

https://srsroccoreport.com/u-s-gold-scrap-market-drying-up-americans-paw...

davefairtex's picture
davefairtex
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Posts: 5410
oil for gold

Guys, the oil producers can already swap oil for gold.  Here's how.

Saudi Arabia sells oil for USD.  Saudi Arabia then takes the USD, and buys gold with it.

Presto.  Saudi Arabia has sold oil for gold.

If you disagree with me, can you explain where I went wrong?

Unless and until a fiat currency is pegged to a specific number of grams (or ounces) of gold, nothing new is happening.

 

cmartenson's picture
cmartenson
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Yuan for Gold

This is a big deal for several reasons.

The first is that the US abandoned the gold standard and went on the petrodollar standard.  It's hard overstate the vast importance of this move (engineered by the evil/brilliant Kissenger) to the subsequent decades of US dominance in the world.

Every single country that tried to end-run this ended up getting in big trouble.  Iraq. Iran.  Libya.  Each of them announced some version of either trading oil for non-dollars, or creating a tighter linkage between a currency and gold.

Second, any country can already sell Yuan and buy anything it wants with them right now.  Sell yuan, buy euros, or dollars, or kiwis and then buy gold, or rugs or sheep.  This already exists for everyone.  So why make a big deal out of making gold the easy conversion after selling your oil?

China announcing this (and now, interestingly) easier method of converting yuan to gold for oil selling nations is a very big middle finger to the US banking cartel establishment.  More than symbolic in my view.

It is a calculated poke in the eye to the standard that has allowed the US so much freedom and latitude on the world stage.  

China clearly wants to limit the US dollar's role (for obvious and compelling reasons including the fact that the US has proven and re-proven itself to be an untrustworthy partner), and China seems to be angling to become the gold trading center of the world, which it is well on the way to becoming.  Sorry London, your best years are in the rear-view mirror.

After easy convertability, the next obvious step is fixed convertability.  By linking oil to gold, China has created the impression of an energy/gold standard.  Next up is the reality.

KugsCheese's picture
KugsCheese
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China RMB/Gold Oil Futures

Interesting that China is doing this: 1) it creates a bargaining chip for China...if you do that, we will buy x% of oil in non-P$; 2) if this contract takes hold, the volume diverted from P$ to RMB/gold could result in massive gold spike.  Many unintended consequences could result.  Is WW3 closer?

Jim H's picture
Jim H
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Posts: 2385
dollar demand...

Dave, any dollar holder can always buy Gold.. so duh on that point.  This new China deal is about dis-intermediating the dollar from the transaction.  You said it yourself earlier;

By making the RMB convertible to gold, that makes the RMB currency risk more or less go away, which makes the RMB/Gold futures contract look more attractive.

Lately a lot of entities have woken up to USD currency risk.  What an opportune time to make this next, incremental step, eh?

Your technical conceit about a, "Gold standard" requiring a peg is silly to me..  I don't think anyone means this when they talk about what is happening now.  Pegging would amount to a hard reset.. and what price would (China) cause Gold to reset to?  Doesn't it make more sense to let the supply vs. demand market re-assert itself, knowing that you (China) hold most of the cards (Gold)?  

You can say this means little.. and to most folks who don't understand what is going on, they will take your final bolded statement as somehow definitive.  I don't think that the act of pegging would make any sense for China, nor does it matter.  A pegged Gold standard is an anachronism - your argument that Gold doesn't matter until a true pegged standard returns is fallacious in my view.  This is about negating the need for dollars in oil transactions, and elevating the role of Gold, plain and simple.  Less dollar demand, more Gold demand.             

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So, will the exchange rate between gold and oil float?

How will it be decided How many ounces of gold 1 barrel of oil sells for?

Will the answer actually be based on:

  1. How many dollars does an ounce of gold cost, and,
  2. How many dollars does a barrel of oil cost?

But the transaction does not go through the US banking system...

 

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On Pegging...

Chris,  why do you think an oil:Gold peg is the ultimate trajectory here?

After easy convertibility, the next obvious step is fixed convertability.  By linking oil to gold, China has created the impression of an energy/gold standard.  Next up is the reality.

I don't think we are anywhere near a peg... it would simply not be possible given that both commodities are so mispriced today.  What would the peg be?  What entity would determine the peg?  

Oil is dramatically underpriced based on the EROEI cliff we are facing, and Gold is... well.. no need to explain that one.  We have a situation where infinitely printable, debt-based Fiat currencies.. ALL of them... are way overpriced relative to real, non-renewable things.  I do think reality will assert itself over time, but the paper currencies would have to take one hell of a fall before that comes to pass.  

     

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I call it the "reality peg"
Jim H wrote:

Chris,  why do you think an oil:Gold peg is the ultimate trajectory here?

It may not be imminent, but it's inevitable.

Fiat is a mental construct reinforced by power.  The power to tax is backed up by the power to detain.  So fiat gets its power from force, and that force depends on a whole lot of people remaining ignorant as to the true underlying dynamic at play.

Hey, it was a wonderful diversion in the course of human history that we could pretend that an exponential money system was somehow grounded, sophisticated, and persistent.

In the end money that is not tied to anything limited, valuable and tangible, is just an agreement.  When that agreement is broken, then it's only a matter of time before things get "renegotiated."

But when that same agreement is rooted in a massive disconnect between itself and reality?  Then you have an additional forcing function at play.

That forcing function is this; everything that we call "part of the economy" requires energy to be there in the first place.

Energy is the master resource.  

Whatever we decide to use for money in the future has to have some sort of direct backing by or relationship energy or it will be meaningless.  Under these terms, fiat money is about as useless and meaningless as can be, given that it is created in unlimited amounts at whim, it's just that a critical mass of people have not yet cottoned on to this disconnect.

Maybe China has.  They've certainly been playing a very different resource game than the US over the past decade.  

Maybe it's as simple as this; gold is useful as money  Gold takes a lot of energy to mine.  Therefore gold has an explicit relationship to energy.  Either already consumed (embodied) energy, or future energy (to increase gold supply).

If you understood this, and were playing a long game, what would you do?  I would make gold ownership legal for my people (done), encourage them to buy as much as they like (done), open new exchanges to assure that my country became the dominant gold trading center (done) and keep 100% of my own country's gold production 'in house' while being extremely vague about official holdings (done), while getting as much gold to flow in my direction without alarming the current holders fo that gold (done).

China has done all of these things.  Seems almost like they are playing some sort of game, eh?

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big news from China

To summarize, China has finally decided to allow "convertibility of RMB to gold."  What does that mean?  It means anyone can now go to China with RMB, buy gold, and have it shipped back to their country.  This is massive news.  It is very exciting.  It means that the gold standard has been resurrected!

Well actually, no.

This "convertibility" just means allowing foreigners to buy gold.  It is something that the US - and the UK, and most of the West has allowed for a very long time now.  Anyone can come to the US, buy gold with USD, and ship it out of the country.

So the fact that China is finally allowing others to swap RMB for gold is big news - its a loosening of China's capital account.  I interpret it as an acknowledgement of reality: the oil exporters don't want to sign up to a 5-year oil supply contract in a currency if the currency's capital account is closed.

China really wants to have oil futures (and indeed, all commodity futures) denominated in RMB - this is useful for their industries, since RMB futures acts as a much better hedge for their businesses against commodity price moves.  Hedges in USD still leave Chinese companies with RMB risk, which is bad for them.

However, I do not think this is the resurrection of the gold standard.  Its an admission by China that nobody will accept payment in their currency unless they actually allow people to buy things of value with it - something the US and the West has allowed for a very long time.

Anytime that anyone talks about gold and China, there is a certain amount of hyperventiliating that happens in the goldbug-leaning community.  "THIS time we really end up with a gold standard!" (subtext: not only will we be proven RIGHT, at long last, we're all gonna get RICH too!).   COMEX default.  China will back its currency with gold. Etc.   If you have followed gold with any degree of intellectual honesty over the past 10 years, you will have noticed this pattern.  Its like having an impatient teenager in the back of the car, every few minutes saying, "OMG I think we're there!" at every turn in the road, only to be disappointed one more time.

So about that resurrected gold standard: No, I don't think we're there yet.

 

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here's the flaw

Second, any country can already sell Yuan and buy anything it wants with them right now.  Sell yuan, buy euros, or dollars, or kiwis and then buy gold, or rugs or sheep.  This already exists for everyone.  So why make a big deal out of making gold the easy conversion after selling your oil?

This isn't true.  You cannot sell RMB and buy gold - not from China anyway.  Sure, you can sell your RMB to some other person who wants to buy a Chinese export product, but you can't take your RMB and directly purchase Chinese assets - certainly not the way you can in the US, or the UK, or Europe.  The Chinese are very picky about what they allow foreigners to buy.  Ultimately, this limits the attractiveness of the RMB as a "reserve" currency.  That's because it makes the currency easy to get into, but much harder to get out.

You hear a lot about Chinese companies going on a "shopping spree" with USD - but we never hear about other countries (OPEC?) going on a "shopping spree" with RMB inside China.  That's because China doesn't allow it.

The impact of this is that there is no "deep pool" of assets for sale that a large holder of RMB can decide to purchase with their accumulated RMB savings.

The new thing here is that they are now willing (apparently) to allow foreigners to - finally - buy gold, using RMB.  This provides an escape hatch for anyone who has accumulated RMB.

If you don't have an escape hatch, and then China decides to massively devalue (which they pretty much have to do because of their debt), you're basically stuck with a bunch of mostly-worthless RMB.

Technical point: If, as a foreigner, you want to trade RMB oil futures, and you want to hedge out the RMB devaluation risk, you can pair the trade with a long RMB/Gold future.  That way if RMB gets devalued, you can make up for your RMB/oil losses with your gains on RMB/Gold.  Without RMB/Gold, you can't hedge away your RMB/Oil risk.  That's - my guess - why China is doing both at the same time.  Its to enable oil traders to hedge their RMB currency risk.

And if as an exporter you sign a long term (5 year?) contract to supply China with oil, and the contract is priced in RMB like China wants it to be, you-the-exporter can now hedge this long term contract in the RMB/Oil market - and then hedge your RMB currency (devaluation) risk using an RMB/Gold contract, where you can take delivery of the gold if China ends up devaluing.

Which they will.

Without RMB/Gold futures, China doesn't get RMB/Oil futures - and without RMB/Oil futures, China doesn't get oil exporters to denominate their oil sales in RMB, which is the whole point of the exercise.

Does this bring back the gold standard?  I think it just provides a currency devaluation hedge.

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[duplicate]

[EOM]

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Thanks for explaining this so

Thanks for explaining this so well Dave. Thankfully we have people like you and Martin Armstrong to put these things into perspective for the non-financially savvy of us.

> Anytime that anyone talks about gold and China, there is a certain amount of hyperventiliating that happens in the goldbug-leaning community.  "THIS time we really end up with a gold standard!"

Haha, you would think that after ten years the teenagers would've grown up, oh well, seems like they will forever remain excitable bug***s.

I have one question about this one-liner from Armstrong:

> They do not understand that ONLY a rising dollar will break the world monetary system.

Assuming you agree with this, how could this possibly happen if the Fed doesn't want things to break and also has the dollar printing press, which they certainly aren't afraid to use going on the last 10 years. If it takes a book to properly sketch this end game scenario as you see it, I'd be pleased to get your recommendation! Thanks

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armstrong

Not surprisingly, I agree with Armstrong.  This is an attempt to provide an escape hatch for the prospective owners of RMB.  Nobody will want to hold RMB (or trade RMB-based products) if you can't easily get out of it.  Having the ability to turn your RMB into physical gold provides that escape mechanism.  Armstrong has a lot of experience in international trading; he knows what they want.

But again, I think this is less about gold, and more about China getting everyone comfy using RMB - and specifically, enabling RMB-denominated futures trading for use in hedging by Chinese companies.  Ultimately, China wants you to use their fiat paper.  Gold is just the tool they are using to suck you in.

I do not think China wants to limit themselves by gold.  They greatly prefer the freedom to print.  We all need to remember, the vast majority of "printing" occurs in the area of private debt, and China's growth in private debt is really second to none in the world.

Should we expect the kings of private debt growth to embrace the discipline required by a gold standard?

I think that's just a goldbug fantasy.

My fantasy, which conceit leads me to think is more likely to come true, is when the Eurozone breaks up, nations will start to impose real capital controls, and then gold will finally come into its own - as a private escape hatch.

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Topic on agenda for upcoming webinar?

Chris and Adam, 

I hope this topic will be made part of the agenda on the upcoming Dangerous Markets Webinar. 

The takeaway from this conversation for me is that the second largest economy in the world is actively seeking to undermine the petro-dollar and they're at the point that they're taking concrete steps to make it happen (they've been working on this plan for years). It's also obvious that China has a long-term gameplan, while the USG is playing hopscotch in a minefield (maybe overstated, but we literally jump from one disaster to the next). So, with that being said, wouldn't it make sense that the active strategy by China would increase demand for the RMB and decrease demand for the USD and wouldn't this hurt dollar denominated assets providing problems for people who only hold USD assets? 

Anyway, hope this topic makes it onto the webinar list, but thanks Chris, Dave, and all of you who made this an interesting discussion.

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Serendipitous timing

lambertad --

You asked your question with very serendipitous timing.

Over the weekend, Chris and I decided on producing a special webinar to help make sense of that topic, plus several other related (and serious) recent geo-political developments.

We'll be holding it this Wednesday at 3:30pm EST. There will be a replay video for those who can't participate live.

Those interested in registering for this special webinar can learn more by clicking here.

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an element of "the plan"

It's also obvious that China has a long-term gameplan, while the USG is playing hopscotch in a minefield (maybe overstated, but we literally jump from one disaster to the next).

Self-driving cars hold the double promise of an axis of control over the population, as well as a mechanism to improve energy efficiency.  Hirsch himself couldn't have asked for a more effective way to maximize the impact of our existing auto manufacturing capability on energy use.

The US regulatory environment (and Congressional gridlock) is often seen as a massive roadblock to getting real stuff done.  But here we are: a Congressional committee voted 54-0 to grease the skids for self-driving cars.

https://www.reuters.com/article/us-usa-selfdriving-vehicles/house-panel-approves-legislation-to-speed-deployment-of-self-driving-cars-idUSKBN1AC2K0

The fix is certainly in.  Same thing with the Russian sanctions.  My speculation: we see unanimous bipartisan agreement on stuff that the deep state is pushing.  Everything else is gridlocked.

Same thing seems to be true for shale.  "Environmental Obama" didn't do anything to derail shale.  Drill, baby, drill.

I think the US does have a plan.  We just aren't privy to the details.

 

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petrodollars vs "reserve currency"

From my viewpoint, the vast majority of the dollars soaked up by foreigners are used as a reserve currency component.  A bunch more are used by private citizens and corporations to park money.  They have little to do with petroleum or the "petrodollar."  Here's a sorted list of US major foreign holders of treasury bonds, as per http://ticdata.treasury.gov/Publish/mfh.txt

  • China: 1.15T
  • Japan: 1.09T
  • Ireland: 302B
  • Brazil: 269B
  • Cayman Islands: 254B
  • Switzerland: 244B
  • UK: 237B
  • Luxembourg: 211B
  • Hong Kong: 203B
  • Taiwan: 184B
  • Saudi Arabia: 142B
  • UAE: 59B
  • Kuwait: 32B

Note that the "petrodollar" component is definitely not at the top here.  The 'petrodollar' might have been a really important thing 40 years ago, but the numbers suggest something else is going on today.

China holds far more dollars than they would need to arrange the purchase of oil denominated in dollars.  Same holds for all of the countries on this list.

There is something other than "having enough money lying around to buy oil" that explains the choice that countries make in the selection of their reserve currency.

What backs a currency these days is "what you can buy with it."

What can you buy with RMB?  Chinese exports.  And, perhaps now, Chinese gold.

What can you buy with USD?  US exports, US property, plant & equipment (up to 100% ownership), US companies (up to 100% ownership), US commodities (including gold) - and I'm sure, US politicians.  Oh, and oil-priced-in-dollars too.

 

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US$ as a Reserve Currency

What can you buy with USD?  US exports, US property, plant & equipment (up to 100% ownership), US companies (up to 100% ownership), US commodities (including gold) - and I'm sure, US politicians.  Oh, and oil-priced-in-dollars too.

The above is all true at the moment.  However the United States has history of changing the rules and is powerful enough to do so, when it decides that it is in its own interest to do so.  eg.  Nixon and the closing of the gold window.  With all the stresses that the US (and the world) is currently under, I would not be surprised if there are some sudden changes to the "rules".

My view is that there will be no formal restoration of the "gold standard", as fiat currencies gives governments an easy way to reward favoured clients, "bribe" populations in the short term. Instead it will emerge as more nations/ individuals quietly decide to acquire gold as insurance against possible sudden loss of value of fiat currency.  As Chris and others point out gold is a monetary asset unencumbered with any liabilities to anyone else.  It will be the failure of major currency (Euro?) that will probably start the ball rolling.  There may be a formal de-facto acknowledgement of "gold standard" but it will be after the event. 

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Treasury Bonds in Ireland

Dave,

You're certainly correct about corporations parking money.

The 302B in US Treasuries in Ireland surely isn't reserve currency (we've got less than 1B). It's Google, Apple, Facebook et. al. parking money here to avoid paying US taxes.

E.

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davefairtex wrote: What can
davefairtex wrote:

What can you buy with USD?  US exports, US property, plant & equipment (up to 100% ownership), US companies (up to 100% ownership), US commodities (including gold) - and I'm sure, US politicians.  Oh, and oil-priced-in-dollars too.

Sorta true, but not entirely.  Not if you  are China at at any rate.  Or Iran,  Or Venezuela.  Or anybody the US doesn't like a the moment.

Here's a quick Google result:

Heck, the US will even block China from buying German companies.  The long arm of the empire and all that....

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US blocking China

Well, it is at least somewhat amusing that its reasonably big news that the US is more or less telling China at this late stage that it isn't allowed to buy any more US companies - especially given that US owners have never been allowed to buy Chinese companies.

Still, China really does own a fair-sized chunk of the US that it acquired before being blocked.  We certainly can't make that same claim in reverse.

Of course, you do make a valid point.  The more restrictions the US puts on what you can buy with USD, the less interested people will be in holding it.  That, more than anything else, will put an end to the USD as reserve currency.  But so far, that hasn't happened.  COFER data tells us that.

The US still provides vastly more things to buy with USD than China does for RMB.  Even after we've blocked China.  The US still has an open capital account.

Again, I'm not treating this as some immutable law.  I'm looking at this as status quo.  As another poster pointed out, we've changed the rules before.  If the changes are major, and sudden, that could well result in a weakening of the reserve currency status.  According to my theory, the more restrictive we get, the less others will want to hold USD.

Things I'm watching for:

  • closing the capital account
  • restricting purchases of US property, plant, & equipment
  • restricting purchases of US commodities
  • restricting repatriation of profits
  • restricting acquisitions of US companies

If it became a widespread perception that the US was shutting off access, the rush out of USD assets would be...hyperinflationary.  Probably.  Certainly it would result in a big bond market crash.  And probably that would lead to a US default - unless the US monetized, in which case the buck would get absolutely crushed.  Either currency or bond prices would get hit - take your pick.  No free lunch.

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Also...not all reserve currencies are Treasuries

In the Venn diagram for reserve currency holdings, there are two circles, one has Treasuries in it, the other is straight up dollars.  

So not all foreign held dollars are reserve currency holdings and not all Treasuries held over seas are reserve currency holdings.

(Reuters) - The dollar’s share of currency reserves reported to the International Monetary Fund rose in the fourth quarter, snapping three straight quarterly declines, as the absolute level of reserves held in greenbacks hit a record, data released on Friday showed.

The dollar’s share of allocated currency reserves, or those reported to the IMF, rose to a record $5.05 trillion in the October-December period, or nearly 64 percent, according to the data. That was up from the third quarter, when the dollar’s share hit its lowest in two years at $4.94 trillion, or 63.3 percent.

Meanwhile, China’s share of allocated currency reserves, reported by the IMF for the first time, totaled just over 1 percent, or $84.51 billion.

The euro’s share fell to 19.7 percent to mark its lowest in a year, from 20.2 percent in the third quarter, while the yen fell to 4.2 percent in the fourth quarter from 4.4 percent in the third quarter. The yen’s latest share of currency reserves was the lowest since the first quarter of 2016.

Total foreign exchange reserves worldwide fell to $10.8 trillion from $11.06 trillion in the third quarter, according to the IMF data. The total amount of allocated currency holdings rose to $7.9 trillion from $7.8 trillion previously.

(Source)

So ~$5 trillion of US dollars held in reserve.  Some of those reserve holdings will be US dollars (in electronic form), and some will be in US Treasuries.  There are probably a smattering of other assets that qualify.

Some large portion of outstanding US Treasuries held by foreign countries belong to corporations, pensions, endowments, and the like.

To put a number on the status of the petrodollar, though, if there are 42 million barrels of oil a day exported and bought (true for 2016) and those went for an average of $50/bbl, then that's $2.1 billion a day of required dollar flows from all importers to all exporters.

That pencils out to more than $750 billion a year.

That seems like a very hefty built-in demand for dollars to me.

China is now saying they'd like to take their 8 Mbd out of that equation....which is a pretty big deal as it's a gigantic change from the regime in place since the early 1970's.

Just for yucks, assume that China's oil export partners all decide to go for 100% gold convertabiliity.  What's that lead to?

(8 Mbd x $50 x 365) = $146 billion per year

Gold at $1335/Oz divided into $146 billion = 3,417 tons.

Clearly that isn't going to happen, but the numbers should be eye opening to at least somebody in the west, which seeming still doesn't care.

 

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Long Term Foresight

in strategic planning VS U.S late stage defense.Say what you will about China,no country has done a better job securing natural resources going forward in to the future for its citizens....

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Cat 5 Hurricane Irma

Irma: a cat 5 hurricane bearing down on Florida - current most likely track anyway.  Expected to hit around Sunday/Monday.

https://www.wunderground.com/hurricane/atlantic/2017/hurricane-irma

File under the heading: "when it rains, it pours."

Or maybe: "nature bats last."

 

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math error

Chris-

As a company, you don't need 365 days of USD working capital to buy your company's year-supply of oil, any more than a paycheck-to-paycheck employee with a rent of $2000 a month needs $24,000 in his bank account to make his rent payment every month.  Your $750 billion number could well be something more like $62 billion.

With a deep & liquid market like the USD, a company could probably make do with 1 month of USD on hand, maybe even less.  Of all the currencies in the world, it is easiest to pick up USD whenever you like, and the spreads are pretty narrow.

How much working capital do the importing companies need specifically in USD?  Enough to make their USD payments every month.  The rest they can keep in the currency of their choice, which I'd call "their reserve currency", which they'd select for safety and liquidity.

Which might well end up being USD also.  But that's a separate decision, made for entirely different reasons.  Reserve currency savings and working capital currency for transactions need not be the same at all.  I bet if Russia forces everyone to buy oil in Rubles, companies will keep as few Rubles around as possible.

Regardless, petroleum isn't the 800 pound gorilla when it comes to USD usage.  It may have been at one time, but the "exporter nation" paradigm has changed that.

Last point: China's "convertibility option" is just an escape hatch.  If nations actually end up using it, that's failure.  China does NOT want its gold leaving via this avenue.  They want everyone to use RMB fiat with confidence because people can "theoretically" get gold if things go bad.

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Stocks vs flows error?
davefairtex wrote:

Chris-

As a company, you don't need 365 days of USD working capital to buy your company's year-supply of oil, any more than a paycheck-to-paycheck employee with a rent of $2000 a month needs $24,000 in his bank account to make his rent payment every month.  Your $750 billion number could well be something more like $62 billion.

Not quite Dave.

You may not need all $750+ billion on hand on day one, but the that's the flows from importers to exporters which happen to be the same as the stocks necessary to accomplish that over the course of one year.  What the exporters do with those dollars is another matter, but the importers have to first send them to the exporters.

It implies that the importer nations HAVE TO run a positive $750 billion USD trade surplus in other areas over the course of a year, or engage in borrowing USD to cover the shortfalls or to run a similar sized surplus in some other currency(ies) which then get traded into USD.

This is the enormous advantage built into being the USD issuer.  It's like being born on third base (but telling yourself that you hit a triple).  It's an 'exorbitant privilege.'

 

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stock assumptions

You may not need all $750+ billion on hand on day one, but the that's the flows from importers to exporters which happen to be the same as the stocks necessary to accomplish that over the course of one year.  What the exporters do with those dollars is another matter, but the importers have to first send them to the exporters.

I completely disagree.  You do NOT have to have $750 billion in "currency stocks" - the only time you'd need that is if every importer decided to hoard the income from the entire year's production.  If they spend it as fast as it comes in, your $750 billion stock is absolutely not required.  Its a small fraction of that $750 billion number.

Let's look at the case of Saudi Arabia.

Example: KSA exports (lets say) 10 mbpd x 365 days x $50.  That's $182 billion per year.  According to your theory, we'd need $182 billion in "stocks" for them to do this just for 2016.  And that would require them to have $182 billion in a "bank account" somewhere.

But for some reason, their entire USD hoard is just $142 billion.  The "stocks" required to support KSA is $142 billion.  And the real punchline: this is after many decades of production.  Let's say that's since 1974.  So the annual change-in-stock requirement: $142 billion / 43 years = $3.3 billion.

The data I have suggests that the exporters (generally) spend it as fast as it comes in.  More or less.  Only a small fraction is devoted to "stocks" (i.e. hoarding), which we can measure using the MFH numbers provided by the Treasury department.

If you still insist that the exporters hoard their entire year's production - please show me where that hoard shows up in the data, because I just don't see it.

Its similar in concept to the difference between M1 and GDP.  We don't need M1 = GDP to enable each year's GDP.   That would only be true if M1's velocity was 1.  M1 is a small fraction of GDP because its velocity through the economy is substantially greater than 1.  As is, I claim, the velocity of the "petrodollar working capital" for USD.  We could even suppose that the ratio could even be about the same, i.e. about 6:1.

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Talking completely different languages
davefairtex wrote:

You may not need all $750+ billion on hand on day one, but the that's the flows from importers to exporters which happen to be the same as the stocks necessary to accomplish that over the course of one year.  What the exporters do with those dollars is another matter, but the importers have to first send them to the exporters.

I completely disagree.  You do NOT have to have $750 billion in "currency stocks" - the only time you'd need that is if every importer decided to hoard the income from the entire year's production.  If they spend it as fast as it comes in, your $750 billion stock is absolutely not required.  Its a small fraction of that $750 billion number.

I don't think you'd deny that importers have to spend $750 billion USD to get their oil, so we must be talking different languages.  For countries that don't have anything that KSA wants to buy, they have to come up with 100% of what they will use to buy their oil from the KSA with.

No flows for them.  Just drawing from whatever stocks of money they do happen to have.  This will show up in their current and capital accounts.  It's exactly as I've written it.  If you do not have the trade balance to support your importing ways, you have to borrow the difference.

Accordingly, Greece, for example, has a stock of dollars and euros, and if they deplete them they have to replenish them from somewhere else.

(Source with a good explanation)

The amount that Greece has to spend on oil comes from its stock of dollars.  Whether you choose to measure that on a monthly, yearly, daily or hourly basis is up to you.  But over the course of a year Greece will have brought in (or exchanged for) a given quantity of dollars which it will have used to buy oil.

It has a stock of them, it has some flows, but at the end of the year we discover that the depletion of Greece stock of dollars sent off to oil exporters matches the dollar cost of its oil imports minus whatever the oil exporters bought from Greece.  If they bought zero, then stocks = flows.

Now Greece can get other flows of dollars in other ways to help offset all of this, but what I wrote is exactly right, and best measured in the current/capital accounts for an entire nation:

It implies that the importer nations HAVE TO run a positive $750 billion USD trade surplus in other areas over the course of a year, or engage in borrowing USD to cover the shortfalls or to run a similar sized surplus in some other currency(ies) which then get traded into USD.

Finally, KSA's total dollar balances that you are citing are very incomplete.  There are a variety of ways to hold or recycle your current account surpluses including in equities, foreign real estate, etc.

I don't have a more recent chart, but here's one from 2015 showing the cumulative current account surpluses of oil exporters.

These represent the current account stocks resulting from the petrodollar regime.  These may someday become flows....which will tank the dollar under certain circumstances.  Unlikely any time soon, but everyone should be aware of the potential energy in the system.

What I see in that chart is a steady accumulation of stocks of dollars principally between 2000 and 2014.  It levels off in 2015.

 I rather imagine it has become negative since, but I don't have the data except by inference to note that KSA's foreign exchange reserves have fallen since then.  

 

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Atreat
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davefairtex
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clearer now I think

Ok, you've cleared some things up for me with your most recent post.

Initially, you talked about a "stock of dollars" that had to be borrowed for the oil imports to take place.   $750 billion of them per year.  Now you've expanded that initial definition to include all US assets, which includes property as well as equities.  As a result, I find myself in agreement with you.

Note however how the nature of the discussion has changed.  Instead of this being a currency/monetary phenomenon, it has turned into an asset ownership transfer phenomenon.  US property and equities aren't borrowed into existence.  What is happening is simply the steady selling off of US national assets in exchange for a supply of energy.  This is in line with what I see in the data also.

Going back to my original statement: "what backs the US dollar?"  That would be the US assets that are steadily being sold off to meet the steady inflow of dollar claims.

But its not just US assets that are slowly being sold off.  Every net importer ends up selling off assets to pay for their imports.  That goes for Europe (Greece) as well as the US.

Based on the TIC data, there is no vast pool of accumulated petrodollars waiting in the wings.  They've mostly been recycled - swapped for US dollar (and Euro)-denominated assets: property, companies, and equity.   Certainly, if OPEC wants to bail out of USD assets, that would result in a massive crash in property prices as well as equities, but this isn't a monetary phenomenon.

And now that we're in agreement on where the value eventually ends up - in assets - let's circle back to the genesis of the discussion.

Did pricing oil in dollars mean that OPEC ends up buying exclusively US assets?  No.  The argument you used was sound: the number of net dollars (or Euros) spent on net imports for a given country - regardless of the transaction currency -  is eventually recycled in asset purchases by the exporters from the importing country.  So regardless of the transaction currency, if Europe imports a trillion dollars in oil, the OPEC nations will end up with a trillion dollars worth of EU assets in one form or another.  Doesn't matter if the oil is paid for in dollars, yen, or quatloos, it is EU assets that are eventually accumulated by the exporter.

Oil is definitely still priced in dollars, but the USD is simply the transaction currency, not the ultimate storage vehicle.

So, how much USD is required to act as the transmission currency for USD-priced oil purchases?  That number isn't zero - but it goes back to my "working capital" claim.  I'd say it is 1-2 months of oil flow.  And for China, that's about 24 billion dollars.

So, in conclusion, the USD-demand effects of eliminating the need for Chinese companies to keep around a couple months of USD for their oil purchases will result in about a $24 billion reduction in demand for USD cash deposits.  That's the USD "bank deposits/cash on hand" that was formerly required by Chinese companies to execute their monthly USD-based oil transactions, but is no longer required.  So its something, but not a very big something.

The 800 pound gorilla in the picture is the asset accumulation by the exporters over the decades, NOT the monetary requirement of the float required to execute the monthly oil purchase transactions in USD.

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