Arab gold

Alasdair Macleod – 02 December 2013

Ron Paul, the (retired) Republican Senator concluded a speech before Congress in 2006 thus:

The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros.*

To most people even today this is probably a pie-in-the-sky comment, but they would be wrong not to consider it more seriously in the light of subsequent events.

The possibility of the demise of the petrodollar is increasing quite rapidly for two reasons. Firstly, US oil consumption has fallen from 38% of the World’s total in 1965 to less than 20% today, while Asia/Pacific consumption has increased threefold to over 33%. Furthermore due to shale oil production US oil imports are expected to reduce further in the coming years, perhaps eliminating her oil deficit entirely, negating the need for petrodollars. This leaves the Arab nations with a stack of useless dollars.

The chart below shows the enormity of their problem.

Middle-East oil and gas revenue

In the thirty years before 2000, total energy export revenue ignoring compounding interest totalled $3.5 trillion and in the thirteen years since then over $8 trillion. With interest, and despite accelerated infrastructure spending since the late 1990s that still leaves enormous currency balances in Middle-Eastern hands, likely to be a number like $8-10 trillion with a large element of it still in dollars.

Secondly, America’s failure to support Mubarak in Egypt, the volte-face over Syria and now the détente with Iran have altered long-term relations with Saudi Arabia, forcing her to reconsider strategic options for the future and to look after her own interests. Saudi Arabia and Israel find that America is no longer prepared to be the regional policeman. And when she unsuccessfully courted Russia for help over Syria and got nowhere, it must have only heightened the Saudi’s sense of insecurity.

One could argue it all comes down to the money, but the other reality is US electoral fatigue after Iraq and Afghanistan; so a logical reassessment shows the region’s future on both trade and strategic grounds is increasingly focused towards Asia and Europe, not the US.

The currency replacement for the petrodollar need not concern us for the moment. What is more interesting is the regional attitude to gold, which was acquired in large quantities up to the mid-1990s, as insurance against this eventual outcome. Interestingly, I have discovered from contacts in the Swiss refining industry that some of this gold in LBMA 400 ounce gold bars is now being recast into the new Chinese 9999 standard of 1 kilo bars.

It is not immediately clear why Arab gold is being recast. However, taking into account the significant shift in the region’s trade and strategic options it becomes clear that gold held for eventual resale into dollar-denominated markets makes no sense at all, particularly when there are enormous dollar balances that will also have to be addressed.

However, the Arabs know that if they sell their dollars they will risk undermining the whole fiat currency regime. It is therefore quite possible they will seek as an alternative to take at least a portion of their oil revenue in gold or its equivalent, as Ron Paul suggested; so he had a point seven years ago and the foreign exchanges should now begin to anticipate this event.

There is a lesson for us in this: when we are distracted by China’s accelerating demand for gold and her conflicting desire not to trigger a financial crisis, the unexpected catalyst for monetary chaos may well be the actions of the Middle-Eastern potentates who cornered the gold market thirty years ago.

*This speech was recently commented on and drawn to my attention by Casey Research.

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Alasdair started his career as a stockbroker in 1970 on the London Stock Exchange. In those days, trainees learned everything: from making the tea, to corporate finance, to evaluating and dealing in equities and bonds. They learned rapidly through experience about things as diverse as mining shares and general economics. It was excellent training, and within nine years Alasdair had risen to become senior partner of his firm. Subsequently, Alasdair held positions at director level in investment management, and worked as a mutual fund manager. He also worked at a bank in Guernsey as an executive director. For most of his 40 years in the finance industry, Alasdair has been de-mystifying macro-economic events for his investing clients. The accumulation of this experience has convinced him that unsound monetary policies are the most destructive weapon governments use against the common man. Accordingly, his mission is to educate and inform the public in layman’s terms what governments do with money and how to protect themselves from the consequences.

9 thoughts on “Arab gold”

  1. All very true, however this is NOT new. Arabs have been large USD holders for some time, and it’s not entirely clear why less oil revenues (due to shale etc) should be a trigger for selling USD/buying gold.

    What is clear, is that they would move the market if they tried to move just 5% of their reserves into XAU.

  2. Sorry break the news and burst the bubble on the premise that underpins your entire article.

    However the Four Gulf Cooperation Council (GCC) which is comprised of 4 Gulf states including Saudi Arabia, are in the process of creating a common currency which crucially will be pegged soley to the US Dollar.

    This is ground breaking news and shows that Saudi Arabia is clearly helping the US Dollar.

    1. The GCC is a group of 6 countries, not 4. Saudi Arabia, Kuwait, Bahrain, Qatar, UAE, and Oman. The last news about the common currency is planned to include the first 4 only as UAE is demanding to host the central bank on its soil and Oman wishes to retain it sovereignty.

  3. Enjoyed this column, like I do all of your pieces. I would note that you refer to Ron Paul as a former “senator.” He is, in fact, a former Congressman (member of the U.S. House of Representatives). You probably want to correct this … I’m glad to see you mention Dr. Paul and one of his past speeches. He has an unbelievable record of being prescient/ahead of his time on issues. My bet: If he said this will happen, at some point it almost certainly will.

  4. Gold has fallen by more than 33% from its high,Silver by about 50 but Brent has fallen by about 15%,when the Global Economy is weak!The fair price of Crude, roughly, should be about US $ 90!

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