Gold, Oil, and Dollars

My efforts at maintaining this blog have flagged lately. I keep very busy with family and professional activities, which generally consist of advising SMEs on business strategy and funding. I have a lot to share here, but I don’t often take the time to do it. So, I’ll make some comments on what I see happening afar. 

Recently, Donald Trump cancelled his planned trip to North Korea, and it appears that onerous sanctions are being re-imposed on the North Koreans. It’s got to be a hard place in which Kim Jong-un finds himself. He cannot do anything that could lead to a significantly reduced military because his generals who probably dispose of him. At the same time, he probably would like to better the lot of his people, if for no other reason than to avoid insurrection. Yes, dictators are sometimes overthrown, and sometimes they are not treated very nicely. So, he remains unpredictable to throw his enemies off balance.

Countries that are under USA sanctions find themselves cut off from the SWIFT system. They are without normal avenues for obtaining U.S. dollars. They can do it, but through intermediaries who do not want to be discovered, so there are high transaction costs. Dollars are important. They are the denomination of 70% of world trade, including pretty much 100% of the oil trade. 

Russia, China, Iran, and Turkey, all not so friendly with America, have been stockpiling gold. A lot of it. It may be that along with Iran and North Korea, these nations will endeavor to establish gold as a means of settling transactions among themselves and others in an effort to displace the dollar as the world’s reserve currency. It is this reserve status that gives the dollar its strength. And in part, it is the strength of the dollar that allows America to keep spending. 

Nations have tried to displace the dollar as the King of Cash and have all failed. Maybe Iran came the closest when they insisted on payment in something other than dollars for their oil. What they found is that their customers complained about the costs of turning their dollars into Iran’s preferred currency, and insisted on passing these costs (estimated at 2%) on to Iran. This persuaded Iran to go back to accepting dollars. This doesn’t mean that nobody will ever unseat the dollar as the world’s reserve currency, but frankly, there is no currency that could do it. The Euro is a currency with more of a past than a future, just like Europe. Demographics have ensured that. But gold may do the job. Time will tell.