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Sunday, August 10, 2014

BRICS ANTI DOLLAR ALLIANCE - what does it mean for hard assets?

Is This A New Anti-Dollar Alliance?
In the last few years, we’ve seen many signs that the U.S. dollar is losing importance in the international arena. For example, over the past several years, many countries have made agreements that allow them to settle their trades in their own currencies, cutting the dollar out of the transaction completely.

 The most recent challenge to the dollar is coming from the BRICS (Brazil, Russia, India, China and South Africa) countries. And, it could have important implications for those who hold assets denominated in U.S. dollars.

China and Russia Moving Away from the Dollar

You may have heard about the historic energy deal recently made between China and Russia. In short, Russia will export about $400 billion of natural gas to China over the next 30 years. By 2018, this deal will be supplying about 25% of China’s energy need. Why should you care? Well, these transactions will be made in Chinese yuan and Russian rubles, not in U.S. dollars. In other words, this is a substantial blow to the petrodollar.

China and Russia have also set up swap facilities that exclude the greenback from other transactions. And, recent sanctions on Russia by the U.S. are accelerating that trend. Many Russian companies are quickly switching contracts from dollars to other currencies, partly to escape Western sanctions.
Gazprom, the famous Russian natural gas giant, provides a good example. It has signed agreements with consumers to switch from dollars to euros for payments. Alexander Dyukov, the company’s CEO, said: “Practically all — 95% of our customers — confirmed their willingness to move to settlement in euros.”1

And, it’s not just Russia and China. Brazil, India and South Africa are also joining this anti-dollar trend.

The BRICS’ New World Order

Last June, Sergey Glaziev, Vladimir Putin's economy advisor, published an article outlining the need to establish an international alliance of countries willing to get rid of the dollar in international trade and refrain from using dollars in their currency reserves.
It looks like that alliance is taking shape.

Recently, the BRICS countries announced that they are “seeking alternatives to the existing world order.”2 The five countries unveiled a $100 billion fund to fight financial crises. This fund will be their version of the International Monetary Fund (IMF). They will also launch the New Development Bank (NDB), which will be their alternative to the World Bank. It’s a new bank that will make loans for infrastructure projects across the developing world.

The BRICS’ version of the IMF will function around a currency reserve pool. Each country will contribute to the fund according to the size of their economies. It’s expected that contributions to the currency reserve pool will be as follows: China, $41 billion; Brazil, India, and Russia, $18 billion each, and South Africa, $5 billion.

The punchline, however, is that the dollar will play no role in that currency reserve pool. Currency swaps between the BRICS central banks will facilitate trade financing while completely bypassing the dollar. With these two new institutions, the five countries are taking steps to effectively reduce their dependence on the dollar and other American institutions, such as the Fed and the IMF. As Brazilian President Dilma Rousseff told reporters, the five countries “are among the largest in the world and cannot content themselves in the middle of the 21st century with any kind of dependency.”3

To be clear, we don’t expect this BRICS anti-dollar alliance will destroy the dollar’s global reserve currency status overnight. But, the trend is clearly moving against the dollar. And, if this trend continues, most of the significant global economies will gradually abandon the greenback.
These countries are essentially taking steps to move away from a dollar-based global trade system. This is a big deal because the BRICS countries are all expected to be future financial powerhouses. If they continue to kick the dollar out of their economic relations, this could seriously hurt the buck.
This means that an increasing amount of global trade will be done in other currencies, weakening the demand for dollars. As the buck continues to lose status in the international area, there could be consequences for every dollar-based investment.

This process could take several years…or it could happen relatively quickly, with a sudden dollar crisis. Under that scenario, U.S. dollar-based assets could suffer a significant loss of value. U.S. investors could potentially protect their portfolios against the risk of a sudden crisis simply by keeping a portion of their assets in gold, silver and other hard assets.

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