Earlier today, the poster "Wallstreet1112" provided the following summary link: https://www.thehedgelesshorseman.com/gold-silver-stocks/novo-resources-know-think-know/ It is a wonderful link that provides a description of the
stage in which this NVO play is being introduced. However, the link got me thinking about the actual
theatre in which the stage is set. And today, I would like to summarize this most interesting theatre.
Once again, my apologies for an abnormally long post but the total subject matter requires some detailed explanation. For those that cannot spare 15 minutes, simply ignore it and move on.
I want to once again highlight three critical subjects that are intrinsically tied into this NVO story and the Pilbara Wits-2 reality that is emerging. The ramifications go well beyond most of our post discussions that are centered around NVO company management, resources estimates, and investment risk/rewards.
What many of us Long-Term Investors need to understand is the global financial context and geopolitical landscape in which this story is unfolding. And for the ones that have another decade of investing ahead of them, why they need to position themselves for one the great generational opportunities to come along in over a century.
The first two points below represent routine subject matter that appears on posts (and have been generally addressed already), so I have provided the post titles with the associated web-links. For those of familiar with them, you can choose to ignore re-reading them.
However, Point 3) will be the subject of today’s post. It is really the most complex and it touches us all in our daily lives. Let me commence by first explaining the “Financial System” that is currently on the verge of collapse.
This golden story begins with the seemingly unrelated relationship of the US Dollar and the Global Energy market, but the reality of these commodities couldn’t be more closely linked.
The Petrodollar: System, History, How It Recycles, and Will It Collapse (key excerpts)
The petrodollar is any U.S. dollar paid to oil-exporting countries in exchange for oil. Since the dollar is a global currency, all international transactions are priced in dollars. As a result, oil-exporting nations must receive dollars. That makes their national income dependent on the dollar's value. If it falls, so does the government's revenue. As a result, most of America's trade partners also peg their currencies to the dollar. That way, if the dollar’s value falls, so does the price of all their domestic goods and services. That helps these countries avoid wide swings in inflation or deflation. The United States uses the power of petrodollars to enforce its foreign policy. But many countries don’t fight back. They are afraid it would mean the collapse of the petrodollar. For example, the United States sanctioned Iran for refusing to halt its development of potential nuclear weapons. Similarly, it hit Russia with trade embargoes for invading Crimea and creating a crisis in Ukraine. As a result, these countries signed a five-year trade deal with each other that is worth $20 billion. Critically, it is not priced in dollars, and it includes the sale of Iran's oil. The United States and Saudi Arabia negotiated the United States-Saudi Arabian Joint Commission on Economic Cooperation. They agreed to use American dollars for paying against oil contracts. The U.S. dollars would be recycled back to America through contracts with the U.S. contractors. (Source: "Saudi Arabia: Background and U.S. Relations," Congressional Research Service, December 16, 2009.) Since then, oil-exporting countries have become more sophisticated. They now recycle their petrodollars through sovereign wealth funds. They use these funds to invest in non-oil related businesses. The profits from these businesses make them less dependent on oil prices. Here are the world's largest petrodollar recyclers ranked by assets in 2016: ·
Norway Government Pension Fund --$922.11 billion. ·
U.A.E. Abu Dhabi Investment Authority--$828 billion. ·
Kuwait Investment Authority--$524 billion. ·
Saudi Arabia SAMA--$514 billion. ·
Qatar Investment Authority--$342 billion. ·
Saudi Arabia Public Investment Fund--$183 billion. ·
UAE Abu Dhabi Mubadala Investment Company--$125 billion. ·
UAE Abu Dhabi Investment Council--$110 billion. ·
National Development Fund of Iran--$91 billion. ·
Russia National Welfare Fund--$72.2 billion. ·
Libyan Investment Authority--$66 billion. ·
Kazakhstan National Fund--$64.7 billion. ·
Kazakhstan Samruk-Kazyna JSC--$60.9 billion. ·
Alaska Permanent Fund--$54.8 billion. ·
Brunei Investment Agency--$40 billion. ·
Texas Permanent School Fund--$37.7 billion. ·
UAE Emirates Investment Authority--$34 billion. ·
Azerbaigan State Oil Fund--$33.1 billion. Recently, Venezuela and Iran also signed oil contracts in their currencies instead of petrodollars. China called for a replacement of the U.S. dollar as a global currency. Ironically, it is one of the largest foreign holders of the dollar. Will these rogue attacks on the dollar cause a collapse? “No”, at least not for the near future is the common belief. Basically, the consensus remains (especially in the West) that there is no viable alternative to the US petrodollar system. To control the world, one only needs to control the world’s Energy Trade (and not the actual supply). In order to curtail the world’s dominant empire and its financial system, one needs to loosen the US monopoly on the global energy trade – or more succinctly – one needs to destroy the Petrodollar system. Most do not believe this is possible, the reality of the situation is closer than most think:
An alternative to the current Petrodollar System is being constructed at and accelerating pace. Now, to the details of Point 3) listed at the beginning of this post.
China's Gold-Backed Oil Futures: A Threat To The U.S. Dollar, A Boon For Gold (key excerpts)
China has recently announced a new crude oil benchmark that's similar to Brent and West Texas Intermediate (WTI) and based in Shanghai. This has the potential to become an important oil benchmark since China is the world's top oil importer. The new oil futures contract will be in yuan as opposed to the U.S. dollar (USD). Since some oil exporters might hesitate to accept yuan as payment, China is making the yuan convertible to gold. This could potentially have a significant impact on currency, bonds, oil, and gold markets. Total oil imports in the world currently amount to 45 million barrels per day. China is responsible for 8 million barrels per day of oil imports. However, the futures volume of oil traded far surpasses the actual oil imports. Currently, WTI brings in roughly 1 million contracts per day, and Brent's futures trade amounts to half of that. Each contract is equivalent to 1,000 barrels of oil. Therefore, a rough estimate for the current oil futures traded in the world amounts to 1.5 million contracts, or 1,500 million oil barrels per day. This volume is roughly 30x the physical oil demand for imports. All this volume is currently traded in USD, which contributes to the high demand for the currency -- hence the name "petrodollar." 240 million barrels of oil per day at $50 per barrel amounts to $4 trillion in annual trade. This means roughly $4 trillion will eventually be sold and converted to yuan. This will have a significant negative impact on the value of the USD, all else being equal. Lower dollar value with respect to other currencies could lead to an increase in U.S. inflation, at a time when the economy is facing the end of a cycle or a recession. The benefit of the new oil futures contract for gold price is twofold. For one, a drop in USD value leads to an increase in the gold price. Gold is mainly priced in USD, so it tends to move in the opposite direction. Two, China is backing yuan with gold for the new oil futures contract. We can say with certainty that not all of the $4 trillion trade volume will be redeemed in gold. If we assume China will at least have enough gold reserves to immediately back 10% of the trade volume, that means $400 billion worth of gold would be needed. China's official gold reserves have been increasing in the past few years at an increasing pace (now we know at least one of the reasons). The current gold reserves in China stand at 1,800 metric tons. At $1,300 per ounce, it adds up to $74 billion. In order for China to sufficiently back the yuan with gold, current reserves need to increase fivefold to around 8,000-10,000 metric tons (leading to a $400 billion equivalent gold reserve). Current gold production in the world is around 2,500 metric tons, half of which is used for jewelry. In order for China to increase its gold reserves to meet the requirements for the gold-backed, yuan-based oil futures, a significant amount of gold needs to be purchased. The increase in demand will inevitably increase the gold price. Additionally, the higher the gold price, the less of it China will need to meet its obligations. Therefore, China will potentially have an interest in keeping gold prices up in the future. Current Observations What do Iran, Russia, Libya, China, and Venezuela (who is an imploding nation resorting to eating their own pets) all have in common? They have all been deemed threats to the United States. But since none of them have parked their navies just off shore of the US, none have flown threatening air force jets near US airspace, and none have amassed their armies near US borders, what exactly are they threatening?
The answer is simple. All of these nations have chosen to go off of the petrodollar system to trade their oil and gas commodities. They have chosen to use other forms of payment than the $US. And that is an overt threat to the present “Financial Order of Empire”, and it’s tantamount to a declaration of war.
Similarly, ideological abominations like the monarchies of Saudi Arabia and Kuwait (that are opposite to the American value system) are declared allies of the US. This is because they are pillars and supporters of the current Petrodollar system.
One important note as highlighted by Federico Pieraccini via The Strategic Culture Foundation: “De-dollarization for Beijing, Moscow and Tehran has become a strategic priority. Eliminating the unlimited spending capacity of the Fed and the American economy means limiting US imperialist expansion and diminishing global destabilization. Without the usual US military power to strengthen and impose the use of US dollars, China, Russia and Iran have paved the way for important shifts in the global order. The US shot itself in the foot by accelerating this process through their removal of Iran from the SWIFT system (paving the way for the Chinese alternative, known as CIPS) and imposing sanctions on countries like Russia, Iran and Venezuela. This also accelerated China and Russia’s mining and acquisition of physical gold, which is in direct contrast to the situation in the US, with rumors of the FED no longer possessing any more gold. It is no secret that Beijing and Moscow are aiming for a gold-backed currency if and when the dollar should collapse. This has pushed unyielding countries to start operating in a non-dollar environment and through alternative financial systems. A perfect example of how this is being achieved can be seen with Saudi Arabia, which has represented the crux of the petrodollar. Beijing has started putting strong pressure on Riyadh to start accepting yuan payments for oil instead of dollars, as are other countries such as the Russian Federation. For Riyadh, this is an almost existential issue. Riyadh is in a delicate situation, dedicated as it is to keeping the US dollar tied to oil, even though its main ally, the US, has pursued in the Middle East a contradictory strategy, as seen with the JCPOA agreement. Iran, the main regional enemy of Saudi Arabia, was able to have sanctions lifted (especially from Europeans countries) thanks to the JCPOA. In addition, Iran was able to pursue a historic victory with its allies in Syria, gaining a preeminent role in the region and aspiring to become a regional powerhouse. Riyadh is obliged to obey the US, an ally that does not care about its fate in the region (Iran is increasingly influential in Iraq, Syria and Lebanon) and is even competing in the oil market. To make matters worse for Washington, China is Riyadh’s largest customer; and considering the agreements with Nigeria and Russia, Beijing can safely stop buying oil from Saudi Arabia should Riyadh continue to insist on receiving payment only in dollars. This would badly hurt the petrodollar, a perverse system that damages China and Russia most of all.” And since Pax-Americana has no other recourse to protect the Financial Order by which it has prospered over the last 50 years (since the 1971 ending of the
Bretton Woods System), it has now reverted to the “weaponization” of the US dollar as an alternative: Basically to destroy, remove from power, or threaten punitive economic sanctions against any government that goes against this Order. War being a valid tool at its disposal.
Old men will always engineer the gameboard and associated conflicts to protect their fortunes, young men and women will always be called upon to play the game out – sometimes with deadly outcomes. As a father whose nationality is tied to the West, I explain to my boys that they must understand what they may be called to fight for. It will not be in defense of flag, religious belief, or nation. It will be in support a financial system that is tired, corrupt, and no longer valid. A most sinister and immoral cause.
In Summary: As investors in this Pilbara story (be it through NVO, ARV, KL, etc) and other district size gold prospects like the Golden Triangle in Canada’s BC province and Africa’s Upper Volta (now named Burkina Faso), we will also need to consider more than just a paradigm shift in geology. There is also a greater macroeconomic paradigm shift that is aligning beneath us that will bring us all into uncharted territory.
We need to acknowledge:
- Global Power will always be defined as the control of the Global Energy Trade. The US dollar reserve currency status (the petrodollar) is undergoing a challenge to its dominance.
- In order to wrestle this control away from Pax-Americana and the petrodollar system, a new system is being constructed in Eurasia. A system that will need to accommodate a $4 trillion / annum economy.
- This New Financial Order – the New Energy Trade system - will be based on a currency backed by gold reserves. A currency other than the $US, with direct convertibility to gold. It will be the basis of the new Pax-Eurasian empire. Along with China, Russia is already one of the declared architects.
- The greatest gold bull market in human history has already commenced, and will go on for years. A gold market that will be the back-stop foundation of the next Reserve Currency.
- And finally, for those of you that think that Wits-2 may flood the market with over-supply: No chance under the above scenario. The amount of gold required to dethrone the Petrodollar system will keep Wits-2 busy for decades. It will be challenged to supply the gold required.
Regarding the Big Money that may soon enter the Pilbara, an investor needs to look at other world class gold deposits managed by the likes of Ivanhoe Mines for indications. The partners in these developments are not other Majors from the West. They are the national governments and SOEs (State Owned Enterprises) of Asia – mostly China.
Australia is in the rocket chair if this Wits-2 story materializes. If the Aussie government plays their cards prudently, they will be a major supplier of the core commodity (gold) that will support the global energy trade in this century. I know this all sounds a bit abstract, but the facts are pointing to such a new world order. And in the infinite wisdom of Mother Nature, she may have placed the new “Fort Knox” in the most geographically secure place on the planet. All for own good I must add.
As for many people on this Earth it will be nice to see the end of the current financial system which no longer serves many of us well, and especially the nations that have chosen to exit the system (and that includes American service men and women who have also being asked to enforce the current order with their blood).
And that summarizes the Theatre in which the NVO and Pilbara Wits-2 stage play is being set.
Tx
P.S. I warned you all in advance that I would subject you to such a post. So please refrain from questioning my sanity. After half a century of “living the dream”, I will admit that it may be one of those items I have lost along the way.