As I’ve written previously, Russian writer Dmitry Kalinichenko wrote an article entitled “Grandmaster Putin’s Golden Trap”. I view that article as generally brilliant. Here are some more of my comments on Mr. Kalinichenko’s observations.
Mr. Kalinichenko’s article focused on what he believed to be Russian President Vladimir Putin’s most brilliant financial strategy: buying gold with US fiat dollars.
On the face of it, that “strategy” doesn’t sound like much. Buying gold with fiat dollars? It’s done every day. What’s so brilliant about that?
Well, the brilliance (or just common sense) behind Putin’s strategy is based on two fundamental premises:
1) The fiat dollar is significantly overvalued and thus able to purchase more than it’s really worth; and,
2) The price of physical gold has been artificially suppressed and is therefore far lower than its true price would be in a “free” (rather than “manipulated”) market.
If either of these two premises are true, buying gold makes good sense.
But, if both of these premises are simultaneously true, then President Putin (and anyone else who has access to fiat dollars) is virtually compelled to spend all the over-valued fiat dollars he acquires to purchase all the underpriced physical gold he can find.
I.e., if both of these premises are true, it’s like not only having physical gold’s price fall to $500 an ounce at the same time you’re allowed to purchase that gold with the “Monopoly money” that comes with the Parker Brothers game.
If both premises are true, you’ve got be ignorant or crazy to not take advantage of the resulting buying opportunity.
Putin believes these two premises are true and welcomes the rising purchasing power of the dollar and the falling price of gold. Therefore, Putin gladly accept over-valued fiat dollars for Russian crude oil and then uses those fiat dollars to purchase underpriced gold.
• In A.D. 1971, President Nixon closed the “gold window” by declaring that paper dollars held by foreign entities and governments could no longer be redeemed with gold from the US Treasury. Nixon’s order reduced the paper dollar to a pure fiat currency. The world didn’t like the dollar’s fall from “good as gold” (redeemable in gold) to a pure fiat, but generally speaking, went along with the change.
According to Kalinichenko, by accepting fiat dollars for crude oil and then quickly converting them into physical gold, Putin has effectively re-opened the “gold window” that Nixon closed.
But that’s an exaggeration. Technically, assuming that that US Treasury is not directly redeeming the paper dollars with gold, paper and digital dollars are still fiat dollars that are being redeemed indirectly by purchasing privately-held gold. The US government still refuses to redeem those fiat dollars, but the modern Western world (based on fiat dollars) will exchange its physical gold for fiat dollars.
Nevertheless, Kalinichenko thinks that strategy (buying underpriced gold with over-valued fiat dollars) makes Putin a genius—a “grandmaster” of the games of geopolitics and international economics.
I agree that Putin’s strategy is both brilliant and obvious, but it’s not as impressive as Putin helping to change the world’s perception of the dollar from a final “payment” suitable for saving, to merely an intermediate means to receiving a real “payment” (gold). Insofar as Putin’s strategy helps the world to understand that the dollar is not really a “payment,” the fiat dollar’s value will decline and the dollar might even die.
• Kalinichenko made additional observations concerning the current global conflict over crude oil, fiat dollars, Western sanctions on Russia, and gold.
For example, although President Obama has previously declared that the United States is the world’s one, “indispensable country,” Kalinichenko argues that, today, Russia is the “indispensable country”:
“Not so long ago, British scientists came to the same conclusion as was published in a U.S. Geological survey a few years ago. Namely: Europe will not survive without energy supply from Russia. That means: “The world [economy] will not survive if oil and gas from Russia is subtracted from the global balance of energy supply”.
Kalinichenko implies that if the West’s sanctions succeed in crippling the Russian economy, a resulting shut-down of Russian crude oil and natural gas production will:
1) cause the collapse of the energy-dependent European Union; and,
2) an EU economic collapse will trigger a global economic collapse.
Kalinichenko argues that, therefore:
1) under today’s economic circumstances, Russia is the world’s “indispensable country”; and
2) left unchecked, the West’s sanctions on Russia are counter-productive since they may not only collapse the Russian economy, but also the EU and then global economies.
“The Western world, built on the hegemony of the petrodollar, is in a catastrophic situation: it cannot survive without oil and gas supplies from Russia, but Russia is now ready to sell its oil and gas to the West only in exchange for physical gold!”
How long Russia will continue to turn whatever fiat currency it receives for petroleum products into a gold “payment” remains to be seen. Whether Russia will ultimately and openly demand gold for its crude oil also remains to be seen.
Nevertheless, if Russia has found a way to be “paid” in gold for its crude oil, how many other oil-producing countries will also soon demand to be paid in gold? In fact, how many others are already doing so? If more oil-producing countries implement a strategy that allows them to be paid in gold, how many other nations, and then common people will follow?
More importantly, what will happen once the West’s gold is largely gone and no longer available to be purchased by Russia, China and the BRICS nations with fiat dollars? It seems certain that once fiat dollars can no longer be used to purchase Western gold, we’ll see the value of the fiat dollar fall and the price of physical gold jump.
But what else? What would be the effect on the global economy if natural, physical resources like crude oil were primarily (only?) sold for physical gold? Will the Powers That Be allow such a development? Can they stop such development without collapsing the global economy or going to WWIII?
If Putin’s strategy is brilliant, it’s also dangerous to the world, and especially dangerous to Russia. Will the Powers That Be allow Putin to continue to implement his strategy if the end result is the dollar’s death?
• Kalinichenko also offered insight concerning the “hidden costs” of gold price manipulation:
“Right now the West spends much of its efforts and resources to suppress the prices of gold and oil. . . . Today, assets such as gold and oil look proportionally weakened and excessively undervalued against the US dollar. It is a consequence of the enormous economic effort on the part of the West.”
Kalinichenko argues that there’s an “enormous economic effort” required to artificially support the fiat dollar and artificially suppress the price of physical gold. That “effort” may not yet show up on any accounting ledgers, but is nevertheless too expensive to be indefinitely sustained. Sooner or later, the West will be bankrupted by the “hidden costs” incurred by the effort required to artificially manipulate the values of fiat dollars and physical gold. That “cost” (“hidden,” for now) will be recognized when the US government is forced to admit that, in order to support the illusion of value in the fiat dollar, it had to secretly sell off virtually all of the US government’s 8,200 tons of physical gold at artificially-suppressed prices.
Kalinichenko is simply reminding us that there’s no free lunch. The Powers That Be can’t simply “wave a magic wand” to support the fiat dollar as if that support would be “cost-free”.
Market manipulation of the price of physical gold is achieved by means of trading “paper gold” in the markets and convincing investors that the price of “paper gold” and physical gold are identical. But, Kalinichenko reminds us that,
“For reference: the turnover of the market of paper gold, only of gold futures, is estimated at $360 billion per month. But physical delivery of gold is only for $280 million a month. This equates to a ratio of trade of paper gold versus physical gold of 1000 to 1.”
In the West’s gold markets, there are 1,000 ounces of paper gold traded for every one ounce of physical gold actually delivered.
I can’t say that a 1000 to 1 ratio of paper gold to physical gold necessarily means that the price of physical gold is likely to rise by a factor of 1,000 any time soon. But, if that 1000 to 1 ratio is true, would it be irrational to suppose that the price of physical gold might soon increase by a factor of 10? 20? Even 50?
That potential price increase is part of the significant “cost” ultimately incurred by manipulating markets to simultaneously over-value the dollar and underprice physical gold. One “cost” was the $3 trillion we spent to invade Iraq in order to punish Saddam Hussein for daring to sell Iraqi crude for currencies other than the “petrodollar”. We invaded Iraq to protect the petrodollar. Another “cost” of market manipulation is the loss of America’s physical gold and the shift in gold ownership from West to East.
Because of that cost (loss of physical gold), if and when America needs gold, and the gold has been sold to support the fiat dollar, Americans will be bankrupted. Big time. The fiat dollar will die. Chaos will loom. Collapse is possible.
That chain of events provides a fantastic implication: even after President Nixon closed the gold window in A.D. 1971, the fiat dollar has been implicitly backed by gold—not necessarily the US government’s gold—but the gold of the Western World. If so, for the past 43 years, the world has not accepted fiat dollars not because they were implicitly backed by petroleum, but because those dollars could be redeemed, somewhere, for physical gold.
If so, even now, the fiat dollar is backed by gold rather than petroleum.
If that conjecture were true, it would follow that if West’s gold supply dried up, the fiat dollar would die.
• Kalinichenko believes the dollar’s doom is sealed:
“Using the mechanism of active withdrawal from the market of one financial asset (gold) artificially underpriced by the West in exchange for another financial asset (fiat dollars) artificially over-valued by the West, Putin has thereby started the countdown to the end of the world hegemony of petrodollar. Thus, Putin has put the West in a deadlock of the absence of any positive economic prospects.”
Not so. That “countdown” may have already begun, but Putin is not the first to realize that fiat dollars are over-valued and gold is underpriced. Putin may be an excellent chess player, but he’s not the “grandmaster” that Kalinichenko imagines.
For at least a generation and possibly two, the dichotomy between the over-valued dollar and underpriced gold may have provided the mathematical and financial motivation for gold to flow massively from West to East.
During that time, Asian and Middle-East governments have been selling their natural resources and human labor to the West in return for intrinsically-worthless fiat dollars. Are we to believe that the East is populated and governed by a bunch of morons? Or could we reasonably wonder if some sort of “secret deal” had been agreed to by the US, Saudi Arabia and OPEC whereby at least some percentage of the “petrodollars” received by oil-producing nations could be converted into physical gold at bargain-basement prices?
Did the “petrodollar” agreement entered into by President Nixon secretly allow the oil-producing nations to redeem some of their fiat dollars for US gold? Could that at least partially explain why the US gold treasury hasn’t been fully audited for over 60 years? Could such secret agreement underlie current suspicions that the US gold treasury (allegedly 8,200 tons) is already exhausted?
That speculation is a little too extreme, even for me.
But consider this: SRSrocco recently published an article entitled “U.S. Gold Exports Jump 70% In September”. The author of the article researched the amount of physical gold actually exported by the US to foreign countries since about A.D. 1970.
He reported in part, that:
“I have to say, the more I research these older US Geological Survey Gold Yearbooks, the more fascinating data I uncover.
“For example, in 1974, the U.S. exported 3.3 million ounces [about 93 metric tons] of monetary gold. Of this amount, 2.58 million ounces of monetary gold [almost 80% of the total exported] were shipped to Saudi Arabia. This is quite interesting due to the fact that the U.S. Arab Oil Embargo started in 1973.
“Furthermore, it’s truly amazing how much gold the U.S. exported since 1971 . . . and this doesn’t even include foreign gold held at the NY Fed.”
The author admits that his research is preliminary and he draws no conclusions at this time.
Still, you have to admit that it’s a little “odd” that 93 metric tons of gold were exported from the US to Saudi Arabia just a year or two after the Saudi’s signed on to the petrodollar strategy, and a year after the onset of the US-Arab Oil Embargo.
(Incidentally, it might be interesting see the number of tons of gold the US exported in the years before A.D. 1971 (when Nixon closed the “gold window”) and compare those sums to the amount of gold exported from the US after the A.D. 1971. Could it be that the rate of US gold exports actually increased after Nixon closed the “gold window”? I’ll bet it did. . . . It’s also interesting that the same year that Nixon closed the “gold window,” he also opened relations with China under the guise of “Ping Pong Diplomacy”. Prior to closing the “gold window,” the US had the world’s largest treasury of gold. Today, some believe that China may hold the world’s largest gold treasury. Curious coincidences, hmm?)
In the improbable event that, in return for signing on to the petrodollar strategy, the Saudi’s and OPEC were allowed to secretly withdraw 100 tons each year from the 8,200-ton US gold Treasury, that treasury would now be reduced to about 4,000 tons.
In the improbable event that the Saudi’s and OPEC were allowed to withdraw 200 tons per year from the US gold Treasury, that Treasury would now be virtually empty.
If this speculation were true, then the fiat dollar would’ve been secretly backed (but only for some oil-producing nations) by gold (rather than crude oil) even after Nixon closed the gold window in A.D. 1971.
Under this speculation, Putin’s “brilliant, new strategy” isn’t new at all, but was more-or-less implemented by the Saudi’s and OPEC 40 years ago. If so, Putin is, again, not the genius Kalinichenko believes.
Still, Kalinichenko correctly observed that,
“The problem for the West is that the stocks of physical gold in possession of the West are limited. Therefore, the more the West devalues oil and gold against the US dollar, the faster it loses physical gold from its limited reserves.”
“The Western world has never faced such economic events and phenomena that are happening right now. The former USSR rapidly sold gold during the fall of oil prices. Today, Russia rapidly buys gold during the fall in oil prices. Thus, Russia poses a real threat to the American model of petrodollar world domination.”
I suspect that Russia not only poses a “real threat” to the US but also to the New World Order’s “petro-currency world domination”. If so, we can expect the US and/or the New World Order to try to destroy Russia. That means massive economic sanctions or nuclear war.
I’m not predicting that a third world war is imminent. I’m only observing that, logically, some people in positions of power in the US and/or N.W.O. must be contemplating that possibility and weighing their chances of successfully launching a surprise nuclear attack on Russia.
More, if it’s true (as Kalinichenko previously claimed) that Europe (and even the western world) can’t survive without Russian petroleum, the idea of nuking Russia won’t be well-received by European allies since it would constitute an act of self-destruction for the EU and even the world economies.
Would the US government be willing to destroy Russia or at least collapse its economy to save the fiat dollar, if the results included a collapse of the EU economy?
If the gov-co thought they could get away with it, the answer must be Yes.
• Kalinichenko argues that,
“Leading Western economists are certainly aware of the severity of the predicament and hopelessness of the situation the Western world finds itself in, in Putin’s economic gold trap.
“But everyone in the West is silent about it because no one knows now how to get out of this situation.”
• Today’s fiat dollar is called the “petrodollar” because, since the early 1970s, it has presumably been “backed” by the world’s crude oil. Any nation that wanted to purchase crude oil from Saudi Arabia and OPEC had to “pay” with fiat dollars. Since crude oil could only be purchased with fiat dollars, there was a global demand for intrinsically-worthless fiat dollars. That demand created a perceived value for the fiat dollar.
However, the fiat dollar may have actually been supported by the supposedly sacrosanct 8,200 tons of gold held in the US Treasury—or by privately held gold in the Western World. If so, it’s at least arguable that the post-1971 fiat dollar was secretly supported by America’s and/or the West’s supply of physical gold. Could it be that, all the while that government called gold a “barbarous relic” and disparaged its value, gold still (secretly) provided the ultimate support for the illusion of fiat dollar value?
If so, and if (when) the US and Western World run out of gold (not out of petroleum or even the fiat dollar’s status as “World Reserve Currency”), the price of gold will skyrocket and the fiat dollar may die.
This implies that the fiat dollar’s longevity ultimately depends on the West’s supply of gold, rather than the fiat dollar’s status as “petrodollar” and/or “World Reserve Currency”. When the dollar can’t buy gold, it dies.
• Kalinichenko concludes his article with, “This is called ‘Checkmate,’ ladies and gentlemen. The game is over.”
It remains to be seen if Kalinichenko is right.
But, if the “game” is over, what’s next?
Could it be something more serious, even more deadly, than a “game”?