THE ‘CORNERING OF COMMODITIES’ GAMBIT

Gordon T Long

Global Macro Research | Macro-Technical Analysis

STRATEGIC INVESTMENT INSIGHTS

COMMODITIES

THE ‘CORNERING OF COMMODITIES’ GAMBIT

As John Connally Jr., President Richard Nixon’s Treasury secretary, put it in 1971 to his astonished G-10 counterparts:

“The Dollar is our Currency, but your problem!”

It was reflective of the international economic turmoil at the time which ushered in Nixon taking the US off the Gold Standard, the creation of the Petrodollar Agreement with Saudi Arabia and eventually Fed Chairman Paul Volcker taking the US Fed Funds Rate to 20% to stop surging US inflation. it was the foundation for forty years of sustained high standards of living for middle class Americans.

THE OPENING STRATEGIC GAMBIT

Great chess masters always have strong opening Gambits which quickly place their opponents on the defensive. By quickly placing their opponents on the defense and keeping them ‘off balance’ the masters force force opponents into weak positions that eventually lead to a successful “checkmate”. This is exactly what Russia, China and their broad array of closely aligned commodity countries are currently endeavoring to do.

In two shockingly simple announcements, tying the ruble to gold for domestic credit institutions and insisting that payments for energy will only be accepted in rubles, Russia has slyly and effectively put in motion an end to the fiat dollar era that has ruled the world since the suspension of Bretton Woods in 1971 to today.

Today Russia and other commodity rich countries are saying to the US and the entire G-7:

“Our Commodities, Your problem!”

We recently outlined the immense impact of a potential crumbling Petrodollar. Vladimir Putin has taken as his model the 1973 Nixon/Kissinger agreement with the Saudis to now only accept US dollars in payment for oil and to use its dominant role in OPEC to force other members to follow suit. As the World’s largest energy exporter, Russia has announced it will only accept rubles as payment, repeating for the ruble the petrodollar strategy. Even Saudi Arabia is bending with the wind and accepting China’s renminbi for its oil, calling a symbolic end on the Nixon/Kissinger petrodollar agreement.

THE ACHILLES HEEL OF DEVELOPED NATION IS THEIR DEPENDENCY ON COMMODITY IMPORTS

The EU’s developed economies (their prime nation export shown to the right) is reflective of modern developed economies.

They are singularly focused on value-added goods,For the EU that reflects Automotive Cars and Trucks dominate exports for nine countries and vehicle parts are a top export for other places, like Poland and Romania. France stands out here with its top exports being aerospace-related, which like the rest is dependent on imported commodities for its survival. Recent Covid related supply chain shortages have made this abundantly clear to all!

South Korea, Japan, UK and the US are exposed in exactly the same manner.

THE STRUCTURAL SHIFT TO COMMODITY CONTROL

ALIGNMENT OF GLOBAL COMMODITY SUPPLIERS

BRICS (Brazil, Russia, India, China, South Africa) have now reached a group of 17 countries. The BRICS work in close alliance with initiatives led by China which include:

ROAD & BELT INITIATIVE: As of January 2020, 138 countries have signed on to the BRI, ranging from Italy to Saudi Arabia to Cambodia.
SHANGHAI COOPERATION ORGANIZATION: The Shanghai Cooperation Organization (SCO), also known as the Shanghai Pact, is an 8 nation transcontinental political, economic, security, and military alliance. In terms of geographic scope and population, it is the world’s largest regional organization, covering approx. 60% of the area of Eurasia, 40% of the world population and more than 30% of global GDP. (Non BRICS members include: Kazakhstan, Krygyzstan, Pakistan, Tajikistan & Uzbekistan as well as additionally 4 Observer States, 6 Dialogue Partners and 4 Guest Attendee States. This totals 22 Central Asian nations).
AFRICAN TRADE AGREEMENTS: China is now the largest trading partner of Africa. Bilateral trade agreements have been signed between China and 40 countries of the continent. In 2000, China Africa Trade amounted to $10 billion and by 2014, it had grown to $220 billion. Of these countries, China’s government financing is the principal creditor of three countries: Congo-Brazzaville, Djibouti and Zambia. Between 2001 and 2018, China loaned approximately $126 billion to African countries. Between 2001 and 2018, China invested $41 billion in FDI. Beijing plans to invest over $300 billion in Africa to increase African exports and help close the large trade gap with China.

The commonality is they are dominated by Commodity Export economies historically dependent on the US dollar for i) pricing their export products and ii) (until the Financial Crisis) financing their economies.

The vast majority of exports of many nations are derived from natural resources. Fuels, metals, minerals, and organics make up over half of all top national exports. Meanwhile, food and produce, which includes commodities like sugar, coffee, fish and soybeans, also could be classified this way as well – and they make up a further 18.7% of top exports. Control now rests with the aligned nations shown above and led by China and Russia.

THE GLOBAL”MULTI-POLAR” SHIFT

We have written extensively of the coming New World Order, which is centrally about the inevitable shift from a Uni-Polar to Multi-Polar world. The incumbent Uni-Polar is centered around the US and the aligned developed G-7 nations. The shift presently underway is to a Multi-Polar world dominated by non-dollar economies led by China and Russia and centered on Commodity controlled financing. Let me explain, since the western media is under the control of a different narrative.

Tyler Durden at ZeroHedge spells it out based on a lot of work originating from the Hungarian Money Flows and Funding expert Zoltan Pozsar.

“The Global economy has reached the stage of such serious imbalances that Central banks now have a very hard task at hand – they can slow/stimulate demand via the nominal credit channel by playing with the the price of money, but they cant do a thing about commodities.They can print money but they can not print oil, iron, or wheat, nor VLCCs or other ships.The price level of commodities is presently underpinned by a healthy, well-functioning banking system (demand needs credit; if there is no credit, there is no demand and prices fall), but also a healthy, well-functioning world with efficient and open sea routes (demand needs commodities, and if there are no commodities, prices rise fast).

The core problem is If the banking system gets gummed up and OIS-OIS bases widen, credit gets more expensive and that saps demand, and if the commodity trading system gets gummed up, commodities get more expensive, and that saps demand too. But the former is a nominal (credit) shock that leads to much lower prices, and the latter is a real (trade) shock that leads to much higher prices. Real growth slows either way, but in the former case, nominal activity falls faster than prices, and in the latter case, prices rise faster than nominal activity which means stagflation.”

As I mentioned, the leading global thinker in this area is acknowledged to be Zoltan Pozsar who believes the shift to a Multi-Polar world will usher in a new Bretton Woods III, (whether officially or just practically). He envisages it evolving into the following systemic representation:

“Three points make a triangle

Between the left and top vertices we have notions of trade and time, and between the right and top vertices we have notions of trade and time too, where trade and time refer to currency trade and lending, and commodity trade and shipping, respectively. Between the bottom two vertices we have the monetary arrangement of the Uni-polar world: Bretton Woods II, where banks create eurodollars and OPEC and China buy U.S. Treasuries with eurodollars. But this was not meant to be happily ever after Henry Kissinger is not Hans Christian Andersen and realpolitik isn’t a fairy tale.

So instead of one triangle, we now have two…price stability in the middle and two other types of stability (financial and price stability) at the extremes.

A Multipolar (duo-polar) world needs two triangles to work, or rather, to co-exist.

The triangle on the left is the same as the one before, and the one on the right is the same as the one on the left conceptually, but it’s anchored by a different currency euro-renminbi instead of eurodollars.

In Pozsar’s depiction of the Bretton Woods III reality, the two triangles are mirror images of each other, so that they have the geopolitical vertex in common because the second triangle grew from the first one due to a geopolitical conflict.

The top vertex of the second triangle is connected to the other two vertices by concepts of trade and time too: the left and top are connected by the concepts of commodity trade and time, and the right and top are connected by the concepts of currency trade and lending. But here, renminbi for other currencies instead of U.S. dollars for other currencies and between the bottom two nodes, we have the monetary arrangement of the new world order: Bretton Woods III, where banks create euro-renminbi and where euro-renminbi balances are accumulated to buy Chinese Treasuries (inevitably, but not imminently), outside money like gold instead of G7 inside money, and commodity reserves instead of FX reserves.

… commodity reserves will be an essential part of Bretton Woods III, and historically wars are won by those who have more food and energy supplies food to fuel horses and soldiers back in the day, and food to fuel soldiers and fuel to fuel tanks and planes today.

…. the co-existence of the two triangles then has huge implications for the course of inflation in the East versus the course of inflation in the West. This is serious: Bretton Woods II served up a deflationary impulse (globalization, open trade, just-in-time supply chains, and only one supply chain [Foxconn], not many), and Bretton Woods III will serve up an inflationary impulse (de-globalization, autarky, just-in-case hoarding of commodities and duplication of supply chains, and more military spending to be able to protect whatever seaborne trade is left).”

SUPPLY DISRUPTIONS, ALLOCATIONS & SCARCITIES ARE NOT TRANSITORY!

The world is currently facing serious supply disruptions in commodities which are not related to Covid, nor Climate Change. They are not transitory!

Resource Scarcity per capita is now a real problem as a result of specific regulatory developments, investment return hurdles and political policies. They were a result of a combination of cunnningly crafted planning, in concert with poor (to the point of negligent) political planning!

Due to the length of this newsletter we will need to continue the exploration of the dramatic secular changes in commodity supply in an up coming video / newsletter.

1. ENERGY: Oil & Gas
2. HARD COMMODITIES: Metals, Minerals and Rare Earth Elements
3. SOFT COMMODITIES: Food

CONCLUSION

I am frankly appalled at the brutality and aggression presently being evidenced in the Ukraine. However, it should not take away from the reality that the dollar and Western currencies, not the Russian Ruble, will have the greatest difficulty dealing with the end of fifty years of economic financialization.

In our latest Macro Analytics video with Charles Hugh Smith we highlighted the looming shifts underway in discussing the slide to the right.

As one of the best “What is Money” experts out there, Alasdair Macleod of GoldMoney just released a paper supporting our recent newsletters on the folly of US Sanctions (CIPS & SPFS) to halt Russian aggression in the Ukraine since Russia was fully prepared (and expecting them) while like a boomerang are hurting us even more!

It may have achieved a partial blockade on Russia’s export volumes, but compensation has come from higher unit prices, benefiting Russia and costing the Western alliance.

The consequence is a final battle in the financial war which has been brewing for decades. You do not sanction the world’s most important source of energy exports and the marginal supplier of a wide range of commodities and raw materials, including grains and fertilizers, without damaging everyone but the intended target. Worse still, the intended target has in China an extremely powerful friend, with which Russia is a partner in the world’s largest economic bloc — the Shanghai Cooperation Organization — commanding a developing market of over 40% of the world’s population. That is the future, not the past: the past is Western wokery, punitive taxation, economies dominated by the state and its bureaucracy, anti-capitalistic socialism, and magic money trees to help pay for it all.

Despite this enormous hole in the sanctions net, the West has given itself no political option but to attempt to tighten sanctions even more. But Russia’s response is devastating for the western financial system. In two simple announcements, tying the ruble to gold for domestic credit institutions and insisting that payments for energy will only be accepted in rubles, it is calling an end to the fiat dollar era that has ruled the world from the suspension of Bretton Woods in 1971 to today.

RUSSIA & CHINA ARE PLAYING THE OPENING GAMBIT — AND WE ARE NOW ON THE DEFENSIVE!

“The ending of the financially based system is being hastened by geopolitical developments. The West is desperately trying to sanction Russia into economic submission, but is only succeeding in driving up energy, commodity, and food prices against itself. Central banks will have no option but to inflate their currencies to pay for it all. Russia is linking the ruble to commodity prices through a moving gold peg instead, and China has already demonstrated an understanding of the West’s inflationary game by having stockpiled commodities and essential grains for the last two years and allowed her currency to rise against the dollar.

China and Russia are not going down the path of the West’s inflating currencies. Instead, they are moving towards a sounder money strategy with the prospect of stable interest rates and prices while the West accelerates in the opposite direction.

Alasdair Macleod via GoldMoney.com ,

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