Thursday, January 26, 2012

Gold for Oil; Paradigm Shift?

Is the US dollar reserve currency status declining quickly as we move into 2012? Are events overtaking the ability for the US to control world economics as it has done since Bretton Woods in 1944 when the US dollar began its journey to supremacy?

There are only 'unconfirmed' reports to go on, but it appears that India has an agreement with Iran to swap gold for oil. Whether this is factual or not remains to be seen, but there are other transactions taking place between Russia and Iran, China and Russia, Japan and China that suggests a new paradigm may be emerging quickly to that of the primacy of the US dollar as the reserve currency.

The theory is the US has been able to control world markets by having control of the medium of exchange. For many years, Europe has sold its goods and services to the world by exchanging euros for dollars. These dollars are then stored in Europe to swap with other currencies during trading activities. Eurodollars are another name for these.

Oil exporting countries, like Saudi Arabia, do the same thing. Get paid in dollars for their oil. This creates a huge basket of what is called petrodollars to be used in the world markets.

But recently, something is amiss in the financial system and traders are turning their backs, slowly at first, on the US dollar. The probable reason? Value is being destroyed by rampant deficits and money printing in the US.

So 'who we gonna turn to'? Yes, gold. Here is an excerpt from a piece by Alex Stanczyk of Anglo Far-East Bullion Company:
"The old saying, “Black Markets are Free Markets that exist in times when the government does not approve of the Free Market,” may again be proving true. These events illustrat e how gold actually is the money of last resort, even at a government level. Recent sanctions include EU's accepting no further contracts and freezes by the US, IMF and EU of Iran’s ability to trade in gold. The element to note is that this is incredibly difficult to enforce.
Gold has been smuggled across borders for centuries as payment for strategically important items, securing armies, arms, and for serving as bedrocks of monetary systems. Gold continues to resurface as money throughout history. You can transfer large quantities of capital completely outside the control of governments’ ability to stop it."
If indeed we are seeing the loss of confidence in the US dollar then the next ten to twenty years could see turmoil in markets that would see the world's ability to trade curtailed by regional and national interests. It could also see a grab for value; often taking the form of hot wars.

Gold in New Zealand dollars: $2098.33 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $40.89 per oz
Previous all-time high: $59.19
per oz (30 Apr, 2011)

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  1. By trading in gold, New Delhi and Beijing enable Tehran to bypass the upcoming freeze on its central bank's assets and the oil embargo.

    The amount of gold traded here would boost gold prices. The two sides were reported to have agreed that payment for the oil purchased would be partly in yen and partly in rupees. The switch to gold was kept dark.

    This is why the sanctions imposed by the US and EU countries won't work. It feels good for them, like they're addressing the Iranian hegemonic threat, but neither import very much Iranian oil. It's all the other countries like China and India that import Iran's oil, so of course they're going to bypass any sanctions that will cut that flow off. They have to make these shady deals.

    Very interesting to use gold over primary currency though, I wonder if anyone else will spot the sea-change and adopt similar policies.

  2. The other point is that if gold is to be more openly used, it would have to rapidly increase in value (measured in US dollars) for transactions to be 'fair'. This is based on the huge amount of dollars out there and the way the COMEX keeps gold prices low using paper gold derivatives.