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Global Oil Trade Aggressively Shifting Away from the Dollar

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Russia stands as one of the top ten nations in the world holding foreign reserves. The total value of their reserves amounts to approximately $445 Billion.

It used to be that over half of Russia’s reserves were comprised of US Treasuries and other dollar-denominated assets. But that’s no longer the case.

Today, Russia holds less than $15 Billion in US Dollars. They’ve converted most of the dollars to gold.

While this may not signal anything new, it should make everyone question the motivation behind this shift. Obviously, the US sanctions against Russia play a big part in this conversion.

But Russia is not the only country implementing de-dollarization measures. There’s a bigger strategy in play, one that can severely impact not only the US but the entire global economy.

As we’ve seen take place during prohibition in the US, and now in the War on Drugs, when demand is high and trade is restricted, it opens up either a black market or a black market means to maintain trade in goods.

And this is what’s happening right now in the global energy market.

Global trends toward diversification against the US Dollar

Russian President Vladimir Putin claims that several countries have begun diversifying their assets away from the US Dollar.

If there is truth to this statement, such a move can have deeply negative consequences for the greenback, but it won’t necessarily consign Americans to a monetary doomsday scenario either (we’ll discuss this later in this article).

Let’s take a step back so that everyone understands how the oil trade has driven global dollar dominance.

Since the emergence of the “petrodollar” in 1974--establishing the US dollar as the primary currency with which oil is bought and purchased--the dollar has been the dominant currency for international trade.

In the last few years, however, as many as 23 nations, led by Russia and China have begun experimenting with dollar alternatives for oil transactions.

What’s interesting is that diversification from the dollar is taking place both overtly and covertly:

Overtly, China, Russia, and Venezuela have been trading oil and natural gas with each other using non-dollar denominated currencies.

It’s well known that the China-Russia oil and gas pipeline facilitates an energy market that excludes the US dollar.

On the covert front, we see the unintended consequences of US sanctions, namely how it has contributed to creating a stronger bond between “outcasted” countries, and how it contributed to the formation of an energy black market.

How the Energy Black Market Works

$133 Billion worth of oil is currently traded in the black market--nearly 8% of the world’s oil market.

According to industry insiders, tanker ships from sanctioned countries simply take their oil out to sea and transfer them to ships of non-sanctioned countries. Both ships temporarily shut off their location transponders to avoid detection of the illegal trade.

Is it worth the risk? When the oil is trading at $10 a barrel, as Iran had been doing, some purchasers are willing to take that risk for something close to an 80% discount.

On a less-covert front, India has been outright purchasing Iranian oil for a steep discount using Rupees. It will be interesting to see how many other nations will either choose to buy black market oil at these discount prices or buy oil “legally” using a non-dollar denominated currency.

How might this de-dollarization trend affect Americans?

Every nation in the world uses crude oil. Since oil was traded in dollars, every nation stored dollars in order to make transactions, and this is how the dollar became the dominant currency for international trade.

When nations begin using other currencies to trade oil, the demand for US dollars begins to disappear. But the excess supply of dollars remain. Eventually, this excess has to find its way back to the US.

When the US has an excess supply of dollars, this supply will have an effect on prices: it will cost more dollars to buy the same amount of goods.

Your purchasing power will see a sharp decrease as your dollars will be worth much less.

Bear in mind that we have already seen this in our real estate market: internationally-held dollars came in and swooped up American properties for investment, driving up housing prices and making it difficult for Americans to buy residential properties.

The only solution to hedge against dollar weakness

Gold and silver are the only forms of sound money that can offer Americans the same kind of protection available to governments across the globe.

If gold and silver are being used to diversify out of dollars, and if gold and silver can be used to destabilize dollar demand, then gold and silver is the most direct way to hedge your purchasing power against a falling dollar.

Some of you may feel that converting dollars into gold and silver may smack of unpatriotic sentiment.

First of all, be reminded that nowhere in the Constitution will you find anything supporting the value of non-backed paper currency. America’s Founding Fathers were too smart to believe in the value of paper money, particularly after what had happened to America’s first currency, the Continental.

Second, note that even the US Government has been loading up on gold reserves. The US currently has 8,000 tons of Gold in reserve--the largest gold reserve worldwide.

But 2018 also saw something different: central banks across the world bought more gold than any year after 1971. And they are expected to increase and extend their gold purchases well into 2019.

This gives every American fundamental reason enough to buy gold and buy silver not only to hedge against the falling dollar but to capitalize on the growth that both metals are about to undergo.

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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