Trump Administration: Death for the Petrodollar? Gold's Coming Ascent...
The Shifting Global Economy
The entire global economy is shifting and realigning in the wake of November 8. Old paradigms may be crumbling as a brave new world is starting to dawn. Will the dollar manage to retain reserve currency status after Trump starts tearing apart trade deals? Does Trump have a clear understanding of currency markets, and the real strength behind the dollar? We can only hope, but swirling underlying currents in geopolitical affairs are telling us the petrodollar system’s days are numbered. We see 4 major threats to the petrodollar:
What is the petrodollar system?
In a nutshell, the “petrodollar” replaced the gold standard back in the 70’s under Nixon. Instead of backing the dollar with gold, a deal was brokered with Saudi Arabia to back the dollar with oil by making the dollar the sole currency of the oil markets. This means if a nation wants to buy oil, it must obtain dollars first. Of course, this greatly increases the demand for dollars, making our ability to print and spend our currency – without hyperinflation - as limitless as the oil supply. What do Saudi Arabia and other OPEC countries get from us in exchange for this boost to our currency? Military might. We sell them weapons and use our military to intervene in the Middle East in the interests of our OPEC allies, especially Saudi Arabia. So instead of being backed by gold, the dollar has been backed by oil, backed by military strength and interventionism. This arrangement has been humming along for several decades now, but recent events could be threatening to unwind it all.
4 major geopolitical factors to watch
In light of the coming Trump presidency, there are 4 key geopolitical situations that could have a major impact on gold and the dollar. Lear Capital continues to monitor these dynamics for investors:
1. US shale oil and the drive for energy independence
The emergence of hydraulic fracking and the push for energy independence for the United States has become an economic threat to oil producing countries. Saudi Arabia’s economy relies heavily, almost solely, on oil exports. This new technology for oil extraction means less oil dependence for us, and less geopolitical power for the Saudi regime.
2. OPEC oil glut, low oil prices
It is strongly suspected that recent low oil prices are an economic defensive measure against emerging and new energy technology. Other OPEC nations and oil producers have been begging the Saudis to cap their oil output to allow prices to catch up. This glut has flooded the market and severely depressed oil prices globally. The result – and the likely purpose – is to sink alternative fuel makers and US frackers who need a higher price per barrel to maintain profitability. US energy markets have suffered. Oil producing nations are suffering. The Saudis are even suffering – and selling off US treasuries to stay afloat! But to them this is merely short term pain in their long term battle for survival.
3. Trump election, no affection for Saudi Arabia
Trump has been talking tough on Saudi oil dependence. While Hillary Clinton had a relationship with the Saudi royal family, Donald Trump does not. He has even threatened to ban Saudi oil altogether, causing some tough talk from them in return. Is this all just another Trump negotiation strategy? Or will he send Middle East-US relations into a complete tailspin?
4. Major oil discovery in Texas
To add another major wrinkle, the US Geological Survey just announced an astonishingly large oil deposit in central Texas, worth nearly $1 trillion at today’s prices! This raises the question – do we really need Saudi oil at all?
The answer is – we don’t.
But what we DO need is the support for the dollar that OPEC provides. If OPEC starts selling oil for other currencies, it would be the equivalent of a nuclear bomb for our economy. Our reserve currency status would be severely undermined. Treasuries would see a major sell-off and inflation would hit us here at home in ways we’ve never seen before.
The dominoes are lining up. We find ourselves in a very precarious position right now, in spite of the rosy optimism of the DOW and Wall Street’s honeymoon with Donald Trump. If certain things start to happen, a precipitous crash could hit us QUICKLY.
NOW is the time to shore up your position and brace for the storms.
Lucky for us, the markets have put GOLD on SALE!
This is a great buying opportunity and there are many reasons to buy. Precious metals prices are DOWN. Wall Street has decided that a Trump administration is going to be great for business. We hope that is true. Some of the ideas floated on the campaign trail about deregulation and tax cuts could certainly be a boon to the business world.
But the fundamentals haven’t changed. We still have $20 trillion in debt and a struggling economy. It would be great if Trump really could “drain the swamp” and cut bureaucratic bloat and expense. Wall Street seems to believe it, sending the dollar up and gold down. This is great news for gold’s true believers. You can get a lot more gold for your money today.