The “Axis of Gold” Will Drive Gold Higher by the End of 2018

A major blind spot in U.S. strategic economic doctrine is the increasing use of physical gold by China, Russia, Iran, Turkey and others both to avoid the impact of U.S. sanctions and create an offensive counterweight to U.S. dominance of dollar payment systems.

This is the Axis of Gold.

This gold-based payments system will dilute and ultimately eliminate the impact of U.S. dollar-based sanctions.

Gold offers adversaries significant defenses against these dollar-based sanctions. Gold is physical, not digital, so it cannot be hacked or frozen. Gold is easy to transport by air to settle balance of payments or other transactions between nations.

Gold flows cannot be interdicted at SWIFT, the international payment system. Gold is fungible and non-traceable (it is an element, atomic number 79), so its origin cannot be ascertained.

We have a lot of data to support the claim that the Axis of Gold exists and is gaining strength.

We know that for example, Russia has tripled its gold reserves in the last ten years. It’s gone from about 600 tons to over 1800 tons of physical gold, and is moving very quickly towards 2,000 tons. That’s an enormous amount of gold.

China is also amassing physical gold at an astounding rate. Like Russia, it has tripled its gold reserves, officially from 1,600 tons to 1,800 tons.

But we have very good reason to believe China actually has a lot more gold than that.

China might actually own up to 4,000 tons of physical gold. We don’t know the exact number because China is highly secretive about its gold acquisitions. But that’s a reasonable estimate. China is also the world’s largest gold producer with mining output of about 450 tons per year.

Iran also has an enormous amount of gold. Iran received billions of dollars in gold from the Obama administration as bribes to join in the now discredited nuclear deal (the “JCPOA” or Joint Comprehensive Plan of Action) to limit Iran’s nuclear weapons program.

Iran has also received gold imported from Europe via Turkey, but the exact amount is unknown.

We don’t have any insight into how much it has because it’s also highly nontransparent. But in the first quarter of 2018, Iranian gold bar and coin purchases more than tripled.

Turkey is also acquiring enormous amounts of gold, which should not be surprising given Turkish president Recep Erdogan’s recent comments questioning the role of the dollar in global trade.

So that’s the Axis of Gold. Again, evidence for this Axis of Gold is overwhelming.

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I have contacts in the national security industry community who have, in their own roundabout way, been able to confirm that to me, so it’s very clear that’s what’s happening.

This is the type of information you don’t see in the headlines. This is very granular, but it’s all going on behind the scenes.

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Meanwhile, U.S. trade sanctions on China, Russia and Europe are just beginning to bite. Trump’s new sanctions on Iran may be the last straw in the world’s willingness to tolerate what is perceived as U.S. bullying through the use of dollar-based sanctions.

These headwinds are illustrated in the chart below. This shows the customers for oil exported by Iran. China is Iran’s largest oil customer by a wide margin. China’s need for imported oil is huge and Iran’s need for hard currency from its oil exports is existential.

If the U.S. makes it impossible for Iran to pay or receive dollars or other hard currencies for its oil exports and machinery imports, Iran will have to resort to other payment channels. China would be willing to pay Iran in yuan, but Iran’s appetite for yuan is limited.

As mentioned above, an obvious solution is for Iran and China to settle their balance of payments accounts in gold.

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Trump’s sanctions on Iran are a double-whammy.

On the one hand, they impede global trade and growth; especially in Europe where growth was already slowing down before the sanctions. On the other hand, the Axis of Gold will create enormous demand for physical gold as an alternative to dollar payments vulnerable to U.S. sanctions.

At the same time, the Axis of Gold creates huge embedded demand for gold as the Axis nations build out an alternative to the dollar payments system.

But right now gold mining output is flat, western central bank sales of gold have ceased, and acquisition of gold by the Axis is increasing.

With limited output, limited western sales, and huge eastern purchases, it’s only a matter of time before a link in the physical gold delivery chain snaps and a full-scale buying panic erupts. Then the price of gold will soar regardless of paper gold manipulations.

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Meanwhile, Fed tightening combined with weak growth will push the U.S. economy to the brink of recession later this year.

That will cause the Fed to reverse course and pause in their path of rate hikes. The pause will come possibly in September, and almost certainly by December. The perception of the Fed flipping from tightening to ease will remove a major headwind to higher gold prices and create a tailwind.

Future Fed ease combined with strong demand for physical gold will result in much higher gold prices by year end. The next few months could still be a bumpy ride for gold, but late summer and fall look promising for much a push to $1,400 per ounce or higher.

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The exchange of oil for gold is the mechanism that will likely be the mechanism for fracturing the paper [gold] market. Because the oil market is 20 times bigger than the gold market in terms of daily production revenue. So only a small amount of oil has to be settled in gold in order to really stress the paper market, and the paper market fails when you can't deliver the metal any more at the paper price.

China encourages citizens to buy gold on the nightly news.

March 26, 2018 - Introduced petro-Yuan oil contract in Shanghai.

It's difficult to buy and sell oil in Yuan because it is such a underutilized currency globally - there's only about 2% of the daily transactions occur in Yuan. So what China has allowed is for Yuan to be converted into physical gold at the Shanghai gold exchange international board which permits from that free trade zone export of gold back to the producers.

Why that's important is because the sheer size of the oil market is 20x that of the daily gold market in terms of dialy production. So a relatively small amount of oil settling in gold payment can eat up a lot of the world's gold supply.

As a footnote, Russia for years now has been receiving gold bars in payment for its oil exports to China.

I expect the petro-Yuan/gold settlement is going to have a material impact on the New York and London digital gold markets.

Russia is receiving gold for oil and Iran five years ago was trading gold for oil to get around the sanctions at that time and it appears they may be going back to that again because of the reapplication of American sanctions.

Just to give you a sense, Iran exports about 2.5 million barrels a day, and if we use $1400 gold and $80 oil, if Iran settles those 2.5 million barrels of oil in gold, then that would amount to about 40% of the world's gold mining supply; and there are bigger exporters of oil out there.

So Iran and Russia together, along with China seem to be focused on resetting the global medium of exchange.

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PMBug said:

It seems only logical that the "pariah states" will seek to establish alternative payment systems in the face of long term economic sanctions from the US. If they can't deal in dollars, they will deal in something else. So what is the USA going to do when economic sanctions lose their teeth?

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