Is it the risk-free instrument of the system, as evidenced by central bank reserves and work such as “The Golden Constant’’ by Roy Jastram? Is it just a risky and volatile asset class that ‘pays no dividend’, or is it nothing more than a traditional reserve instrument with limited meaning in the modern world?
Understanding these questions and the hidden truths of the Petrodollar system are central to successfully navigating this investing environment, one that is entirely unlike anything that any of us have witnessed in our investing careers. Making linear assumptions about the nature of money and the US dollar’s role in global capital flows I believe will deliver a painful outcome for those unable to see through the noise and recognise what are now major and permanent tectonic shifts in the monetary plates. Because gold is non-political and in limited supply it has always been the consensus choice of a multipolar world and this is where we are once again heading, albeit through a storm of short-term macro and geopolitical volatility.
Firstly, let’s park this idea that gold pays no interest. This is a silly and uninformed comment about the nature of currencies. Gold can be leased, and interest can be generated from it, but almost no one outside of the commercial banks wants to lend their gold. Investors and savers understand (if only intuitively in most cases) that gold is ground zero, the risk-free, so they do not want to lend it to counterparties whose risk-status is very likely mispriced. Currencies only yield when you lend them. Moving past this distraction about yield, let’s get into the crux of the matter. Very few investors worry about what the actual risk-free instrument of the financial system is. Central bankers, however, are very interested in risk-free status as they try to control, and over the longer-term guarantee, the economic fortunes of sovereign nations. This, of course, is why central bank reserves are made up principally by gold bars, rather than each other’s credit instruments. Gold has always been the true, non-political, risk-free form of money.
Nixon may have closed the ‘Gold Window’ in 1971 but he didn’t change the true nature of gold, rather he elevated through realpolitik the status of the US dollar. While we have as a result lived in a ‘unipolar’ world since 1971, enforced by US hegemony, it is clear now to all but the most blinkered of observers that we are now going through the death throes of this 50-year period in history. While we were all in the grasp of this petrodollar system dollars had dominance over raw materials flows and also other sovereign currencies. The current dramas surrounding Nordstream 2, Russian gas, the Strategic Petroleum Reserve, the effect of oil and gas on inflation and even US posturing against Saudi Arabia and China are about the reversal of this imbalance. What matters now is the flow of energy and raw materials, rather than the endless accumulation of US Treasuries. The ‘Petro’ end of the ‘PetroDollar’ has taken the whip hand in the relationship. This is the end of dollar dominance versus commodity and monetary flows, the end of the role as master and commander, much to the dismay of the US.
Failing to understand this shift could prove costly. No one cared what risk-free form of money really was during PetroDollar boom times, but rather cared what the commercial banks identified as risk-free (US Treasuries). Rapid de-dollarisation and deglobalisation (as we used to know it) is afoot. The dollar is no longer the de facto method of buying energy or raw materials and rather shockingly the era of cheap goods, cheap labour and cheap energy are probably over. Russia, Iran and Saudi Arabia have all done major long-term energy transactions with China outside of the US Dollar and since sanctions started against Russia we have seen an acceleration of the trend involving India, Brazil and other countries, all of whom are reacting to the re-emergence of a multipolar balance of power. This trend of deglobalisation and supply chain disruption which has helped to drive inflation higher is further exacerbated by the clamour for sustainability, onshoring, green energy and the like. As and when the Fed are forced to pivot due to a hard landing, or in my view more likely ‘event risk’ in the financial system (‘the plumbing’ as some call it) investors will have to face the grim reality that real rates in dollars are dropping again and that the ‘safety’ of dollars and Treasuries is simply a mirage. Be like the central bankers when it comes to the status of risk-free and as the saying goes… ‘do what they do, not what they say’.
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A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.