India to pay gold for Iran oil, China may follow

Rumors are swirling that India and Iran are at the negotiating table right now, hammering out a deal to trade oil for gold. Why does that matter, you ask? Only because it strikes at the heart of both the value of the US dollar and today's high-tension standoff with Iran.

Tehran Pushes to Ditch the US Dollar

The official line from the United States and the European Union is that Tehran must be punished for continuing its efforts to develop a nuclear weapon. The punishment: sanctions on Iran's oil exports, which are meant to isolate Iran and depress the value of its currency to such a point that the country crumbles.

But that line doesn't make sense, and the sanctions will not achieve their goals. Iran is far from isolated and its friends – like India – will stand by the oil-producing nation until the US either backs down or acknowledges the real matter at hand. That matter is the American dollar and its role as the global reserve currency.

The short version of the story is that a 1970s deal cemented the US dollar as the only currency to buy and sell crude oil, and from that monopoly on the all-important oil trade the US dollar slowly but surely became the reserve currency for global trades in most commodities and goods. Massive demand for US dollars ensued, pushing the dollar's value up, up, and away. In addition, countries stored their excess US dollars savings in US Treasuries, giving the US government a vast pool of credit from which to draw.

We know where that situation led – to a US government suffocating in debt while its citizens face stubbornly high unemployment (due in part to the high value of the dollar); a failed real estate market; record personal-debt burdens; a bloated banking system; and a teetering economy. That is not the picture of a world superpower worthy of the privileges gained from having its currency back global trade. Other countries are starting to see that and are slowly but surely moving away from US dollars in their transactions, starting with oil.

If the US dollar loses its position as the global reserve currency, the consequences for America are dire. A major portion of the dollar's valuation stems from its lock on the oil industry – if that monopoly fades, so too will the value of the dollar. Such a major transition in global fiat currency relationships will bode well for some currencies and not so well for others, and the outcomes will be challenging to predict. But there is one outcome that we foresee with certainty: Gold will rise. Uncertainty around paper money always bodes well for gold, and these are uncertain days indeed.

The Petrodollar System
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A reputed Israeli intelligence website has claimed that India is opting for gold to repay crude oil supplies from Iran. Given the US and EU embargo on Iran, payment in hard currency, such as the US dollar or euro, is very difficult; hence, this barter.

The website, Debkafile, said the transaction will be routed through UCO Bank, the Kolkata-based public sector lender. However, when contacted, a senior bank executive said he had not heard of any plans to settle oil payments in gold. A senior finance ministry official said he did not wish to comment on the issue. When reached over the phone, economic affairs secretary R Gopalan, who has been leading the talks with Iran, said he was busy in a meeting and did not respond to a text message.

The report on the Israeli website coincides with the visit of an Indian official delegation to Tehran last week to find ways to continue the bilateral trade between Iran and India in spite of the sanctions imposed for forcing Iran to forsake its alleged plans for developing nuclear weapons.

While the use of gold as currency may help India get around the proposed freeze on Iranian central bank's assets and the oil embargo that the EU foreign ministers have agreed to impose on Monday, any outflow of sovereign gold will not go undetected, bringing in the political consequences of flouting the West-imposed embargo.
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When asked about India buying oil from Iran with gold, Rickards responded, “To the extent I’ve been surprised by anything in the world lately, it’s that things I could see coming are happening faster than anticipated. Again, in the wargame in 2009, we contemplated these kind of scenarios. We thought they would play out in 2013, 2014, but here they are, early 2012, playing out in earnest.

For every action there is a reaction. In other words the US likes to think we severely damaged Iran by forcing them out of the dollar system. But Iran is saying, in effect, ‘Keep your dollars. We have another payment system, it’s called gold.’

There’s a lot of gold in India and they are willing to exchange that for oil. You don’t need a banking system and you don’t need dollars. So I think the US, by throwing its weight around, may find because they’ve weakened the dollar so badly that people don’t just stand there and take it. So what happened this week was full scale financial war. We’ve cut Iran out of the dollar system and caused hyperinflation in Iran and they’ve responded.

China is ready to jump into the same game. They have a banking system and it connects to the Russian banking system and Russia has a fair amount of gold. So there could be a whole network among Central Asian countries, China, Russia, India, Iran and others, who say the time has come leave the dollar system completely.

(These countries will say) Let’s get our own payment system going. Let’s use our own trade currencies. Let’s use gold as a foundation. It’s exactly what I talked about in my book, but having forecasted all of this I am surprised to see it happening so quickly. This could be the beginning of the end of the dollar.”

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Iran is to consider accepting gold as payment for oil and other commodities in what is seen as a fresh attempt to skirt international sanctions on the country's nuclear programme and ease their impact on Iranian businesses and consumers.

"In addition to the U.S dollar and currencies of the trading countries, Iran could take gold in its commercial transactions with other countries," Mahmoud Bahmani, Iran's central bank governor, told domestic Iranian news agencies.
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Already, Iran has started to receive Indian rupees and Chinese renminbi instead of dollars for its oil sales from India and China, the two biggest importers of its crude oil.

A separate barter arrangement also exists. "Iran imports goods from China and India instead of the hard currency and faces no problem in this regard," Mr Bahmani said. It is not clear how these barter deals work. It is also unclear if these agreements are designed to allow Iran to import grain to feed its population of 74 million or to help these countries clear the debt they have accrued through purchases of Iranian oil.

Mr Bahmani made clear that Iran's trade with other countries would not be limited to the dollar and "any country could pay with either its own currency or gold."

Local business people say Iran has already agreed with Turkey, South Korea, and Japan to carry out trade in their national currencies. Turkey said on Tuesday it was talking with countries such as Saudi Arabia and Libya to diversify its energy supply, which depends heavily on Iranian oil.

But Taner Yildiz, energy minister, added that Ankara was not bound by the US or the EU sanctions. "Turkey will never lose its strategic co-operation with Iran," he said. Turkey, South Korea, India, and China have all increased their gold reserves in recent years.
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Beijing is planning to avoid U.S. financial sanctions on Iran by paying for oil with gold. China’s imports of the metal are already large, and you can guess what additional purchases are going to do to prices.

On the last day of 2011, President Obama signed the National Defense Authorization Act for Fiscal Year 2012. The NDAA, as it is called, attempts to reduce Iran’s revenue from the sale of petroleum by imposing sanctions on foreign financial institutions conducting transactions with Iranian financial institutions in connection with those sales. This provision, which essentially cuts off sanctioned institutions from the U.S. financial system, takes effect on June 28.
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...China has already been trading its produce for Iran’s petroleum, but there is only so much gai lan and bok choy the Iranians can eat. That’s why Iran is also accepting, among other goods, Chinese washing machines, refrigerators, toys, clothes, cosmetics, and toiletries.

The barter trade works, but Iran needs cash too. As it is being cut off from the global financial system, the next best thing is gold. So we should not be surprised that in late February the Iranian central bank said it would accept that metal as payment for oil. Last year, China imported $21.7 billion in Iranian oil and exported $14.8 billion in goods and services. As the NDAA goes into effect, look for Beijing to ship gold to Iran to make up the difference.
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The implications of China paying for Iranian oil in gold is the most important event in the modern history of gold

1. It is reasonable to assume that China has been threatened with total or at least selective exclusion from the SWIFT system if it pays in any currency for Iranian oil.

2. Gold has been decided by China as the means of making payment for massive international purchases free of the SWIFT system.

3. Other Asian and Middle Eastern nations will now see the gold they hold as money free of Western economic interference.

4. Gold now is not only money free of liability, but also free from interference regarding settlement by the long arm of Western influence.

5. The SWIFT system is becoming ever more a weapon of Western international political will.

6. In case of war anywhere, it is now demonstrated for all to see that only gold will buy the materials required. Paper currencies are under the SWIFT system’s control in settlement.

7. Far from being a barbaric relic, gold is now clearly the money of state survival in every sense.

8. It is reasonable and possible for the supply of physical gold to fall far behind the size of the massive short positions now common to algorithm and hedge fund paper shorts. That will make an effective cover at a reasonable price as compared to a certain day’s close impossible the following day on an exogenous event.

9. It may not be possible to use TA of any nature to determine a price of overvaluation for gold. Should the USA decide to take on China in full out economic war with the physical market totally illiquid, such as through isolation from the SWIFT system, consider the gold price that might result.

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The Obama administration announced Monday that it had exempted seven countries that are major consumers of Iranian oil from threatened U.S. sanctions aimed at punishing Tehran for its disputed nuclear program.

Officials said India, South Korea, Turkey, Taiwan, Malaysia, South Africa and Sri Lanka had reduced their purchases of Iranian crude sufficiently to cut Tehran’s exports without upsetting global oil prices. In March, the Obama administration similarly exempted 10 European countries and Japan from sanctions, saying they too had done enough to wean themselves from Iranian energy.
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Obama administration officials didn’t say how much the seven countries had cut their oil purchases. In March, U.S. officials signaled that they were seeking reductions of 15% to 22% of purchases.

Several large countries, including India and Turkey, said publicly that they were reluctant to reduce imports of Iranian oil because of their long reliance on the Islamic regime. They appear to have met the minimum level of cooperation that Washington demanded, however.
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Two importers of Iranian oil that have not yet been granted exemptions are China and Singapore.

China has been increasing purchases of Iranian oil in the last two months, after a sharp reduction earlier in the year. But Beijing has forced Tehran to grant it substantial price cuts. Since price cuts reduce Iran’s profit, China may ultimately be granted an exemption, some analysts believe. The tiny nation of Singapore imports relatively small amounts of Iranian oil overall.

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China has increased its oil imports from Iran following the settlement of ambiguities by the two countries regarding the terms of the existing crude sale agreements.

Customs data indicated that China added 133,902 barrels per day to its crude shipments from Iran in May, increasing its Iranian oil purchase by 34.5 percent from the level of 388,034 barrels per day in April, Reuters reported on Thursday.

The rise in China's crude shipments from Iran was aimed at offsetting a plunge in the oil imports in the first quarter of 2012.
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bushi said:

...mighty dollar in full retreat, if you ask me. The trend continues. If not accelerates...

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The United States gave China a six-month reprieve from Iran financial sanctions on Thursday, avoiding a diplomatic spat with a country whose support it needs to try to quell violence in Syria and rein in Tehran's nuclear ambitions.

With Thursday's decision to grant exceptions to China, which buys up to a fifth of Iran's oil exports, and Singapore, which buys Iranian fuel oil, the Obama administration has now spared all 20 of Iran's major oil buyers from its unilateral sanctions.
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U.S. Secretary of State Hillary Clinton said both China and Singapore earned the reprieve by cutting imports of Iranian crude and argued the reductions by all 20 countries showed that Iran was paying a high price for its nuclear program.
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This really is big news folks because what started out as a "threat" by the U.S. has turned out to be an expose’ of the Dollar’s Achilles heel. Yes I am sure that China’s trade would have been disrupted to some extent but the decline in demand for Dollars would (and will in the future) have torpedoed the Dollar unlike any event seen before. This "blink" shows that our fearless leaders finally have figured out the errors of their logic, what would have been a broken leg or arm requiring maybe 6 weeks to heal for China turns out to not be worth pointing a fully loaded gun at our own heads.

So we didn’t pull the trigger so all is well, right? No, the damage is done and our bluff was called, this rabbit is not going back into the hat no matter how hard we try. The SWIFT system has already been "skirted" by multiple side deals where countries plan to settle in their own currencies. This is the same thing as when a banking system actually goes down, yes trade and business slows but deals are still made and settled in barter. I don’t know what the logic was that excluding anyone from the SWIFT system was such a big stick but it surely isn’t and now can no longer used for any leverage. While China was touring the globe and doing deals (buying up resources), they were making these alternative settlement deals AND just so happened to purchase the LME which, oh by the way, will be moved to Hong Kong.

I do want to mention something that was questioned and even laughed at for months now, June 27th. Does this day ring a bell? June 27th was the day that Jim Sinclair said would be an inflection point for the Dollar where the world would be changed forever. Well, the 27th came and went, yet to the average snoozer and probably most of the whiners who wrote in, in total panic to Mr. Sinclair, the world is still here and nothing has changed. Well, the world has changed and the U.S. no longer has the financial big stick called "SWIFT" to wield, we wasted it and it now resembles wet spaghetti! Is the Euro up because Europe has figured out how to "save itself? Did they really come up with a plan? No, the one minor detail as it always is and has been is, "where is the money coming from". Coincidence that Gold is up $50 today? I think not, Gold is depressed yes and deserves a wicked bounce, that is the nature of cycles but I find it very hard to believe that Gold is "up because Europe is not going to collapse". First off, if Europe does collapse in a heap, Gold will explode in value as Euro capital will accrue into Gold’s value. I personally think that Gold’s move today is in response to the Dollar’s Achilles heel being exposed.

Was Jim Sinclair correct about June 27th? I think that this time he has split the many of his previous bullseye calls right down the center like Robin Hood. His $1,650 Gold call was off by a whopping 6 months even though he made the call 9 years earlier! This time he missed by a day because it took roughly 24 hours for the world to figure out that the "SWIFT bluff" not only turned out to be a bluff but turns out to be a MAJOR shift in power from West to East. China no longer needs the SWIFT system yet we HAVE to have it to create (false) Dollar demand. This, while at the same time COMEX is losing it’s importance as the LME moves to Hong Kong with contracts that can be trusted.
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Switzerland defies US, EU ban on Iran oil

The Swiss Federal Department of Economic Affairs stated that Switzerland will not join the oil embargo against Iran, despite pressure from the United States and the EU, IRNA reported on Friday.
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ancona said:

Switzerland has never really bowed down to anyone. Their stratedic location makes a land invasion incredibly difficult, and the fact that every single adult has a rifle and ammunition helps as well. Their importance in international finance makes them someone we had better not mess around with, because while they are small, a huge proportion of the worlds wealth resides there, and as we all know, he who has the gold gets to play by different rules.

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Central bank demand internationally continues and demand for gold in the increasingly volatile Middle East remains robust as seen in data from the Istanbul Gold Exchange.

It showed that Turkey’s gold imports were 11.3 metric tons last month alone. Silver imports were 6.7 tons, the data show. Much of these imports may be destined for Iran where imports have surged an astonishing 2,700% in just one year – from $21 million to $6.2 billion.

In the first seven months of this year, Turkey's exports to Iran have also skyrocketed to $8 billion, up from $2 billion in the same period last year. And it is widely believed that the major portion of the increase, which is $6 billion, stems from the export of gold.

There is speculation that the Iranian central bank is buying gold and that they may be accepting gold in payment for oil and gas in order to bypass western sanctions.

Turkey is paying for the oil and natural gas it is importing from Iran in gold, Turkish opposition deputies have claimed, drawing attention to the enormous increase in Turkey's gold exports to Iran in 2012.

“Gold is being used as an instrument for payment. Under the guise of exportation, gold is being sent to Iran in exchange for oil,” Sinan Aygün, a deputy from the Republican People's Party (CHP), has told Turkish daily Today's Zaman.
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... Turkey imported 251.4 metric tons of gold since January - the biggest tonnage increase since at least 1995 (a rate almost 60% more than 2012's average monthly rate). Turkey was the fourth-largest buyer of gold last year, after India, China and the U.S., World Gold Council data show.

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Reports that Russia and Iran were negotiating a ...

... $1.5 billion-a-month oil-for-goods deal was first revealed in news reports last week and threatens to undermine the credibility of White House claims that Iran would receive only $7bn in phased and reversible sanctions relief in exchange for nuclear concessions, experts said.

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"If the reports are true, such a deal would raise serious concerns as it would be inconsistent with the terms of the P5+1 agreement with Iran and could potentially trigger US sanctions," Caitlin Hayden, spokeswoman for the White House National Security Council, told Reuters who first reported the existence of the deal.

On Sunday the so-called P5+ 1 grouping of world powers - Britain, China, France, Russia and the United States plus Germany - announced it had reached agreement with Iran on the terms of a six-month interim agreement which will come into effect on January 20.

Under the terms of the interim deal agreed in November, Iran agreed to suspend parts of its nuclear enrichment programme that Western powers and Israel say is a thinly-disguised attempt to develop a nuclear bomb.

The six months of "breathing space" is designed to create a window of opportunity for a comprehensive agreement. In return, Iran was granted limited sanctions relief that was valued at $7 billion (GBP4.25bn) by the powers.

The White House admission that it was concerned that Russia could already undermining the sanctions regime came as Barack Obama again urged Congress not to pass fresh sanctions legislation designed to keep pressure on Tehran as the negotiations proceeded.
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