The “Axis of Gold” Just Got Stronger
As you probably know by now, President Trump backed out of the nuclear deal with Iran and is re-imposing harsh sanctions.
And just this morning, Trump announced that he’s canceling the much-anticipated nuclear summit with North Korean leader Kim Jong Un because of Kim’s recent belligerent comments.
What does that mean, aside from the added geopolitical risk to markets?
As you’re about to see, you can now expect what I call the “Axis of Gold” to get even stronger. And it has potential to accelerate the demise of the dollar-based international system.
The Axis of Gold includes Russia, China, Iran and Turkey. I would also include North Korea in that list, although as a junior member.
These countries are forming a trading and financial network revolving around gold and are acquiring massive amounts of physical gold to support it. They are steadily moving toward a gold-based balance of payment system.
Why is this happening?
Well, if you’re on the receiving end of American sanctions like Russia, Iran or North Korea, you want a way to work around these sanctions. And gold is a powerful alternative.
Let’s first consider North Korea.
With the summit called off, there’s every reason to expect that North Korea will only intensify its nuclear program.
But how can North Korea obtain the foreign nuclear and missile technology it requires to advance its program?
By using gold.
If a rogue state wants to acquire ballistic missile components or equipment to enrich uranium, it can’t buy them through SWIFT, the international payment system. But it can use gold.
Gold can’t be hacked or traced. Unlike digital money in bank accounts, it can’t be frozen. You just put it on a plane or ship and send it to its destination.
And new U.S. sanctions will once again lock Iran outside of the international payment system. But Iran does a lot of business with Russia and China. That’s where gold comes in.
Let’s break down how a triangle trade involving Iran, Russia and China works using gold…
Russia is building a nuclear power plant in Iran. At the same time, China is building an energy pipeline for Russia.
Meanwhile, Iran sells a lot of oil to China. But Iran might not want too many yuan, because there’s a limited global market for them.
So Iran owes Russia money for the power plant, Russia owes China for the pipeline and China owes Iran money for the oil.
How does gold fit into this dynamic?
Gold allows the three parties to settle the multiple monetary transactions involved in this triangle trade.
The three parties can tabulate who owes what to whom, net it out and settle the transactions in gold. This is basically how a clearinghouse works.
When it’s all added up, for example, if it turns out that China owes Iran, China can then ship gold to Iran to square the account.
Now these three partners have a working payment system to settle trade. They’re not using the dollar payment system, or the SWIFT payment system or anything that the U.S. can interdict or even trace. They’re in effect bypassing U.S. sanctions by using physical gold.
This creates additional demand for gold as these nations acquire gold to preserve wealth and to mitigate their overdependence on the United States.
But now they’re actually getting to the stage where a nondollar system is close to becoming a reality.
Managing editor, The Daily Reckoning