Happy Opening Day, everyone.
The Oriole Bird was a guest at my wedding.
Gold prices ticked above $2,000 on Thursday. Did you notice?
The move comes on the back of continued weakness in the dollar.
After a soft pivot to reduce the dollar’s strength and support the United Kingdom, we’ve watched the Dollar Index moving lower since October.
The dollar index has moved from roughly 114 to about 102 in six months. Gold has benefited.
But there’s more to the story of gold’s rise to $2,000 than just the greenback. A seismic shift has accelerated in the global currency markets, and the geopolitical impact will be massive on your money.
Let’s talk about the pressure on the global dollar reserve system.
A Dollar Winter?
Most people know the term Petrodollar. It’s the system on which global oil trade has rested for the last 60 years.
After the U.S. ditched the Gold standard in 1971, the shift toward a dollar-based system made the dollar the most important tool of trade for global commodities.
Want to buy oil in Europe? You’ll need dollars to do so. You’ll convert your local currency into dollars and buy oil.
Want to purchase a lot of grain down in South America? Those nations use the U.S. futures market to hedge production. And when trade is settled, it’s done either in dollars or it’s referenced against the dollar to settle an exchange.
This system created immense amounts of demand for the dollar, which helped keep inflation low at home while giving Americans a significant amount of purchasing power around the globe.
But after the last series of Fed interest rate hikes and dollar rallies over the last 20 years, emerging markets have cried uncle.
If nations see their currencies depreciate against the dollar – and they still need to convert to the greenback to buy products – then they’re getting hit pretty hard.
There have been grumbles about the dollar for decades. And now, there’s a growing effort among other “emerged” markets to cut the dollar out of the mix.
Enter the BRICS-IA
Brazil, Russia, India, China, and South Africa banded together more than a decade ago to create a growing economic bloc called The BRICS.
What do they all have in common?
Commodity production and heavy population demand.
Brazil is a powerhouse in the agricultural commodity and steel industries.
Russia owns many critical metals, oil, natural gas, and other key commodities.
China is the biggest global customer of agricultural commodities and is a massive producer of corn, rice, wheat, and cotton. They’ve been buying up commodities over the last decade like they’re preparing to go to war.
South Africa is a massive mining producer. India is the second-largest producer of rice.
The nations have been expanding their bloc over the last few years. In fact, Iran (oil), Argentina (food), Algeria (natural gas), and a few other commodity-producing nations have applied to join the economic bloc.
So… these nations have all the commodities.
And the West has… paper money?
As a liquidity crunch hits the globe once again, rather than pay up for dollars, many nations are just turning away from the greenback.
Rather than use the dollar, these nations are working on an agreement to create a gold-backed commodity for trading.
During the fourth quarter of 2023, central banks around the globe purchased the largest amount of gold in more than 50 years.
Something big is brewing. In the meantime, we’ve seen an increasing number of commodity deals between China and other nations that don’t use the dollar.
This morning, China announced it had engaged in its first Yuan-settled trade for liquified natural gas (LNG)… with France.
Meanwhile, Kenya announced it would use its Schilling to purchase oil from Saudi Arabia.
Historically, the U.S. was protective of the U.S. dollar, even aggressive against nations that shunned the dollar system. In addition, we were trigger-happy about slapping individuals with sanctions and cutting them out of the dollar system.
We won’t be able to do that to an economic bloc that has roughly half the world population and 40% of global GDP.
What Comes Next?
I continue to stress that investors should focus on what matters. Invest in food, oil, housing banks, and agricultural inputs.
If this trend continues, the dollar will see reduced demand, which will only fuel a higher price for commodities as its value diminishes.
I’m not talking about a dollar crash…
It would take a VERY long time for the world to completely turn away from the dollar.
Instead, think of this as a massive diversification play by central banks and commodity-producing nations. The playbook remains the same as in the 1970s.
You’ll want to own companies that generate long-term appreciation and strong income, and to protect yourself against the failure of these sorts of programs, check out Tactical Wealth Investor.
To your wealth,
Garrett Baldwin
Market Momentum is Yellow
It’s been an odd trading day with the S&P 500 falling despite positive momentum in the Index. Now is when I’m a bit more cautious, but I have eliminated the hedge from the Tactical Wealth Investor portfolio.
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