Separating noise from signal is always a crucial challenge for an analyst. It’s particularly tough to do during times of major geopolitical change. In such times, one side generally is gaining an ever more formidable edge as the other grows ever more desperate to keep its slide from getting worse. To that end, the weaker side typically piles on propaganda – i.e., noise – to make it appear as if the underlying trends are in its favor. The job of the analyst is to cut through that noise to discover what’s really going on.
Today, when you dial down the noise, the signals point to the U.S. having the weaker hand as the Global South’s gains continue. But I also see welcome signs that we could reverse our downtrend before we dig ourselves into a hole too deep to climb out of. Specifically, as we discuss later in this article, some of the desperation that’s apparent and that is ostensibly dangerous may just be noise, suggesting the chances of the U.S. changing course are greater than we’ve been thinking.
The clearest signals relate to military strength and point to the Global South continuing to gain on this front. Propaganda can obscure a lot, but military trends tend to be harder to cover up with misdirection because there are hard numbers that defy even the most sophisticated efforts to hide the truth – figures such as the level of destruction and the numbers of soldiers and civilians killed.
Today’s largest ongoing conflict is the war in Ukraine. Russia despite some aid from China and other allies is fighting it mostly on its own, but Ukraine is largely a proxy for the West. Specifically, its weapons and financing have come largely from the U.S. along with contributions from European countries.
If your only source of information has been mainstream news, you might have believed, at least until recently, that the war is close to a stand-off. But you’d get a different perspective from neutral media sources available on YouTube and Telegram. Other than briefly in 2023, the war has been one-sided in favor of Russia. Moreover, Russia has suffered fewer casualties than Ukraine. One reason the war has lasted more than three years is that Russia has sought to limit casualties, relying heavily on its superior weaponry to gain the upper hand. Until recently, Russia’s gains have been gradual, but these small, steady gains have led an overwhelming position.
Today even mainstream media has trouble denying that Russia is in control, with the question now being simply how much territory it wants. The most credible sources suggest Russia wants full control of the four oblasts that are largely Russian-speaking plus the Black Sea port of Odessa (founded by Catherine the Great). There’s widespread recognition that Russia doesn’t seek to control the entire country but wants to ensure the war ends with Ukraine forever barred from joining NATO. That might involve formally dividing Ukraine into different parts.
Russia’s powerful Oreshnik missile
It’s important to stress that Russia’s success comes from its superior weaponry. Russia’s technological edge has been enormous, exhibiting technologically superior air defenses and far superior missiles, especially its hypersonic missiles. And its most powerful missile, the Oreshnik, hasn’t even been a factor yet, other than for one test seven or eight months back.
That’s likely to change, with Russia poised to employ the Oreshnik in coming weeks to hasten the war’s end. It has been reported that since the missile’s initial test, tweaks have further enhanced its superiority over anything in the West. While intermediate-range Western missiles typically travel at Mach 1, the Oreshnik travels at speeds approaching Mach 20 and hits its target traveling at Mach 10 with temperatures that approximate the surface of the sun. Moreover, the missile is armed with six warheads, each which follows an evasive course to its target. Each of these six warheads has another six warheads, meaning the missile has 36 separate warheads. Western air defenses are powerless against it. If there are air defenses that could lessen the impact or another missile with similar characteristics, the only candidate would be Chinese weaponry. According to rough calculations, the Oreshnik is about 100 times more powerful than any comparable Western weapon, and its coming employment will cement the Global South as having the dominant military.
Countries allied with Russia or China may not have access to those countries’ most sophisticated weaponry but still will likely be able to obtain weaponry more advanced than anything in the West. Though both China and Russia were low-keyed about any arms supplied to Iran, it’s a good bet that the hypersonic missiles and air defenses that Iran used were supplied in part by one or both. And while the propaganda surrounding everything related to the Iran-Israeli conflict was very heavy, evidence indicates that Israel took a bad beating. One general rule when it comes to propaganda is that Google tends to tailor its responses to align with mainstream media. That said, if you google “Israel and Cyprus”, you will see that there has been a flood of Israeli refugees pouring into Cyprus. That along with information presented on Indian YouTube channels suggests Israel got by far the worst of it.
While on the subject of Israel, the entire world should hope it recovers. This speck of a country has produced giant successes in science and technologies. If the world becomes a place where all countries are pulling in the same direction, Israel will have a major role to play. That may help explain why both China and Russia kept mostly silent about any help they undoubtedly gave Iran.
Signs of a major change
A military edge arguably is the most important factor in any geopolitical contest. Still, it doesn’t necessarily translate into dominance in other spheres, including the economic sphere. The critical edge the U.S. retains over the Global South is that the dollar, though somewhat battered, remains the world’s reserve currency. Though trade in the U.S. dollar is conducted in an antiquated fashion through SWIFT, it still works, and countries are comfortable with it. Meanwhile, though, the BRICS countries have made no secret of their desire for a different reserve currency.
While the signals from the military front are clear, there aren’t comparably clear signals about the future of the world’s monetary system. But recently a major clue appeared. It suggests both that a big change is coming and – very welcome news – that the leading players, behind the scenes, are taking steps to ensure it doesn’t lead to economic catastrophe.
That clue was in Asia Times, an online publication widely read in the West. It recently published an article titled “New Tech, old hurdles: Why digital yuan won’t dethrone the dollar.” Its author, Anthony William Donald Anastasi, is an American who emigrated to China and has a mid-level position at a small Chinese business school. My sense is that this article was expertly crafted propaganda – with a twist. The twist is that while the digital yuan would be a critical part of a new monetary reserve currency, the article is meant to offer assurance that the new currency will be introduced gradually, or at the very least not be an abrupt overnight affair. I’d guess that it’s intended to address Chinese fears of economic chaos, which could follow a too-rapid shift out of the dollar. While that chaos might hurt the U.S. more than China, no country would be spared pain.
Why do I conclude that? The reasoning behind the article’s title is revealing. Several quotes stand out. For example: “The US dollar benefits from a robust institutional architecture over decades, including transparent central bank communications…” But in fact, this isn’t true: it’s an open secret that major banks are also major market manipulators. Indeed, in recent years the scale of manipulation, especially in the precious metals markets, has increased dramatically. The motivation is the fear that if the dollar starts falling too fast and the uptrends in gold and silver sharply accelerate, it could lead to conditions that trigger an economic catastrophe.
How vulnerable are the bullion banks?
These fears are not misplaced. The reason precious metal prices can be so easily manipulated is that the U.S. markets for gold and silver are paper-based. In other words, the vast majority of buying and selling doesn’t conclude with someone taking delivery of physical gold and silver. The manipulation to hold the metal markets lower comes in the form of very big short selling by the banks. Technically when banks short gold or silver, they are required to have access to the metals to satisfy potential buyers. In other words, they’re expected to have enough of the precious metals to cover the shorts, but if the derivatives trades aren’t settled in physical delivery, the short sellers can get away with not having access to enough metals. Only very recently have there been players who are demanding delivery of the metals underlying the contracts they have bought. If a sufficient number of longs demand physical delivery, the major bullion banks such as J.P. Morgan, Citi, and Bank of America, which typically have very large short positions in precious metals, could be in a world of trouble.
Years ago, Andrew Maguire was the first to find concrete evidence of this manipulation, and he remains well ahead of the curve today. He argues the risks extend beyond the effects of a frenzy of gold-buying leading to customers demanding gold that the banks don’t have. That’s because of a kind of pyramid of derivatives attached to these markets. In a best-case situation, the banks do technically own the gold. But banks don’t like to sit on assets that don’t earn interest, so they probably have leased much of their gold to other parties, who in turn have released the gold (or silver) to still other parties. The bottom line is that numbers as high as quadrillions of dollars could be on the line if gold and/or silver were to start flying.
And if you’re thinking the Fed could just print a quadrillion dollars, it’s not that simple. Such money-printing would be akin to trying to satisfy a massive thirst with saltwater – the more you drink, the thirstier you get. With precious metals, the more dollars that are printed, the greater the desire for gold and silver.
Returning to the Asia Times article, there was another quote meant to be reassuring or, more accurately, to distract from what is really going on. But it was anything but reassuring. It was: “China’s legal and regulatory frameworks governing finance remain comparatively opaque, presenting challenges for international investors seeking reliable protections for their assets.” This is actually frightening. Domestically, China already is on a gold standard meaning any Chinese citizen can exchange gold for yuan and yuan for gold. But that’s not true for countries that do business with China – or is it? Recently China anointed Hong Kong as the de facto worldwide center of Chinese trade. A major gold vault to be used in global trade was foundational to Hong Kong’s rising stature. Moreover, credible sources have said that Saudi Arabia not only will become a foreign host to the Shanghai Gold Exchange but also is in the process of acquiring major gold vaults.
It’s rhetorical to ask if there is anything that provides more reliable protection for your assets than gold. But guess how many times gold was mentioned in the Asia Times article? Not once.
While the U.S. and China are rivals, for reasons of survival they likely are working together. For the U.S., a transition to a new reserve currency without embarrassment or economic collapse could be spun as a victory. The most likely way this could happen would be a major, and we mean major, revaluation of the gold held by the U.S. For historical reasons, the 8,000 tons of gold the U.S. supposedly holds is valued at about $40 or so per ounce. Revaluing that gold to a very high number – say, $20,000 or more an ounce – would back up about 20% of U.S. government debt with gold. Moreover, I’d bet that even if the U.S. does not have the 8,000 tons, it will somehow find it and perhaps find even more. It won’t be disclosed that we actually borrowed a good chunk of that. The lender? Again, the question is rhetorical: the answer obviously is China, although other countries might also participate in this world-saving scheme.
The revaluation will bring about the end of the dollar as a reserve currency. One result will be much higher inflation. Remember that in this best-case, but I think likely, scenario, we still will have a lot of debt and will have to avoid a deep recession. In other words, there still will be great risks, but I think they will be manageable.
There are many caveats. If we don’t get this best-case outcome, there would likely be considerable economic chaos. On the other hand, If gold is revalued, the uptrend in gold and silver could pause. Though unlikely, gold could even fall to as low as $3,000 as part of a very complex arrangement among the major powers.
Any cash investors hold could be used to take advantage of such a possible temporary drop in metal prices. I’d still bet, however, that continued gains in the metals are more likely than significant drops. Overall the signals still tell us we’re in an environment in which portfolios should sharply overweight resources and especially gold and silver. Other positions should be leveraged to inflation – for example, investing in small caps could be one approach. And we continue to think that on balance foreign stocks will prove more reliable investments than U.S. equities. These are super challenging times, for investors and for the world at large, and we remain committed to keeping investors as informed as possible as to the realities out there, including the most unpleasant ones, and to hone in on the investments we believe can keep you financially secure.
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