China is Replacing The Dollar With Gold

Every dollar you've ever saved is under attack.

Your bank account, your 401k, your pension and your kids' college fund all directly or indirectly sit in a currency that China just built a weapon against.

If you're a gold holder, this is great. If you hold US dollars... not so much.

But what has China built and why?

Well, this all happened on July 7th. China built a system that lets any country ditch the dollar and get paid in gold instead.

Mainstream media covered it as a boring infrastructure story but this is much bigger than anyone is letting on.

By the end of this newsletter you'll understand what China built, why half the planet has been waiting for it, and how it changes my investment strategy.

Why the World Wants an Exit

To understand why China are doing this, we should talk about how the dollar works.

For the last 82 years, countries would sell the world their oil, fertiliser, shoes, phones and basically anything and would get paid in dollars.

They would then park those dollars in US government debt because America was the safest borrower on Earth.

Buying US government debt means lending money to America.

The U.S takes that borrowed money and spends it on whatever it wants.

In a nutshell…

America prints dollars and buys things from the world → The world takes those dollars and lends them straight back to America → America spends the borrowed money and the cycle repeats.

It's arguably the greatest financial deal in history (for America haha.)

But the system is breaking. Since 1999 the share of US Treasuries held by foreign banks has dropped from 71% to 56%.

And this chart will only get worse with what China has just built.

What China Switched On

On July 7th, Hong Kong launched a gold clearing system.

This is plumbing that moves money and assets between banks when they trade with each other. London has run the world's gold plumbing for decades.

China just built its own.

41 institutions took part in the first settlements including 18 banks, 4 mining companies and 5 refineries.

The way it works?

Bank of China runs the vaults and the system that connects directly into the Shanghai Gold Exchange. Gold now moves between Shanghai and Hong Kong vaults as one network.

Say you're an oil producer selling to China and you get paid in yuan but you don't want to hold yuan... why would you? China didn't have an answer for this before.

But now, you can swap it for gold bars whenever you like. Real bars in a vault in Hong Kong. More vaults will be coming soon to other BRICS nations so countries do not have to trust Hong Kong.

But it's not just about holding gold, you can borrow yuan against them, or use them to settle trade with other countries.

In this process, the whole chain never touches a dollar or US government debt.

But why did China do this?

For starters, nobody trusts the yuan on its own. Beijing knows this better than anyone, so they've put gold behind it, the one asset everybody trusts.

To enhance its trust, four of the banks clearing gold in Hong Kong, HSBC, JPMorgan JPMoron, UBS and Citi, also run London's gold clearing system.

Of course this lot have their hands in it haha.

Why America Can't Ignore This

Every country that settles trade in yuan and gold is one less buyer of US government debt.

America desperately needs those buyers because it sits on roughly $40 trillion of debt and already spends more on interest than on its military.

They also spend $2 trillion per year more than they earn, and it's covered by borrowing. So if nobody wants to lend them that $2 trillion anymore, they're in serious trouble.

Fewer buyers means America pays more to borrow, the same way a bank charges a risky customer higher interest.

Higher interest costs → bigger deficits.

Bigger deficits → more money printing.

More printing → weaker dollar.

Weaker dollar → more countries head toward the exit.

Government aside, the people hit hardest are those sitting on dollars.

And I don't mean your grocery money for this month, I'm talking about your long term "savings". Because they aren't really savings.

1 dollar saved in 1971 has lost roughly 87% of its buying power.

1 dollar saved 25 years ago in 2001 lost 50% of its buying power.

I imagine 1 dollar saved today will lose 90% of its buying power by 2051.

How This Affects My Strategy

Roughly 30% of my portfolio is in metals, mostly physical gold and silver.

Here's a deeper dive into my strategy.

Hold physical metals

China's entire system settles in real bars.

The people designing the next monetary system clearly don't trust paper claims on metal and neither do I.

There is no price target

Gold is a hedge for us and the backbone of a monetary system for China.

No government is staring at a chart waiting to dump their gold for profit.

Remember, you don't trade gold for money because gold is the money. I don't have a price target for gold. Do you?

Have patience

I have a theory that Trump wants a strong dollar until the midterm elections to help his campaign.

That's a short term thesis.

But China's system is built to run for decades and their buyers are central banks and states who can sit in a position for 10 years without blinking.

Gold might do nothing this year or next.

So you have to be patient and trust that you're on the right side of the market.

Should I Do a Live Q&A

By the way I'm thinking about holding a live Q&A on Zoom. What do you guys think? I've had a few people ask for one. I feel a bit weird about it though.

Like why would anyone want to do a Q&A with me? Anyway if you do then respond to this email and let me know.

Cheers legends!