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    Iran Wins as 9 Asian Central Banks Drop SWIFT and the Dollar

    Iran’s SEPAM bank messaging system has been accepted by 9 countries in the Asian Clearing Union as a replacement for the SWIFT system and use of the dollar in international trade. You read that right, 9 Asian countries just voted to drop the dollar in trade and to use Iran’s bank wire system in replacement for SWIFT, the Belgium-based system facilitating international trade for decades.

    We will discuss how this development is likely to affect the US dollar, and by extension, the precious metals such as gold and silver. But first, we analyze the metals technical chart to see where we are as we fast approach the start of summer.

    Gold and Silver Analysis

    The story of the week deals with sovereign central banks dropping the US dollar and SWIFT, so I think it makes sense here to examine the relationship of the dollar with the precious metals since Nixon removed the US dollar from the gold standard in 1971.

    Both gold and silver have outperformed the US dollar index, the DXY, since the 70s. The dollar has risen, to be sure, but the precious metals have risen at a much higher rate. What gives, I thought the dollar was the standard for international currencies.

    Well, it is; however, the DXY is a ratio. It measures the performance of the reserve currency against a basket of several other major sovereign currencies. Those currencies, by the ratio of the index, are the Euro (56%), Japanese Yen (13.6%), British Pound (11.9%), Canadian Dollar (9.1%), Swedish Krona (4.2%), and the Swiss Franc (3.6%). The index measures the value of the dollar against other fiat currencies, not the general prices of goods, energy, or precious metals.

    We can see that despite the US dollar being the dominant world trade currency in the last 50 years, it has not appreciated, relative to other currencies, the way the precious metals have. Plainly, gold and silver have measured the world’s currencies, including the dollar, and found them wanting!

    When we discuss de-dollarization, we see the significance in relation to gold in two ways. The first way is that the dollar is not appreciating against the other currencies meaningfully. It means the dollar is not a store of value over time. Secondly, the dollar weakness relative to other currencies has encouraged those countries to adopt gold as a standard-bearer measurement of relative value, and not the DXY index!

    The first and most obvious recent example is the top line ‘peg’ of the Russian Ruble to the gold price, such that as the Ruble rises in value, Russia just uses them to buy more gold. It keeps a lid on the Ruble price while allowing Russia to increase its gold reserves. Essentially, Russia is exchanging its oil profits for the metal instead of putting those funds into dollars, US treasuries, or anything supporting the dollar system. We wrote about this phenomenon some months ago and how brilliant of a plan it is for Russia, given their exposure to US trade sanctions.

    A more recent example was the formation of a gold-backed digital currency by Russia and China in a joint effort. We have also seen many other agreements throughout Asia, the Middle East, and now in Africa that eliminate dollars from the equation. And as we can see, the share of US dollars held outside the US as reserves by other nations has fallen precipitously in recent years.

    It is clear the dollar is on the way out, and other world currencies are filling the gap. While the dollar is still the most utilized currency in foreign trade, the trend is decidedly out of the dollar’s favor in international markets.

    The Macro View

    We are in a mid-inflation cycle period of deflation, as mentioned on previous blog articles. The deflation comes from consumers who are tapped out and need financial relief. That relief will come in falling prices, but the lack of concurrent wage level increases means the dollar stretches less far with every day that passes.

    The central banks react negatively to deflations, which scare them more than periods of high inflation which they believe they can control through monetary policy. Deflations, on the other hand, threaten to bring the whole house of cards down on top of them. It is a central banker’s worst nightmare. Expect that inflation will ensue as additional dollars work their way into our economy, not only from previous periods of money printing but from all those dollars being dumped overseas and working their way back to the US.

    Initial jobless claims are sticky at 262,000, the same as last month and higher than economists’ predictions that continue to rely on inaccurate data on employment promulgated by the BLS. See past articles for our criticism of the employment numbers, and the data suggesting we are worse off there than the government admits to. Most of the problems are in their sampling methodology and seasonal adjustments which are far from accurate over time.

    Manufacturing results are mixed, with the Empire State survey showing a modest 6.1, while the Philadelphia version of the survey yielded a loss of -13.7. Results on manufacturing continue to be both geographically mixed and volatile from month to month. I believe, from past recessions, that is behavior is predictive of a struggling economy on the last legs of a long bull market. Recessionary pressures are building and it is apparent in the numbers.

    Capacity utilization (as a percentage of total potential output) slowed to 79.6%, a 0.2% drop from last month. In a related measure, business inventories are up 0.2% which indicates not enough demand. I suspect more channel stuffing of inventories in various parts of the economy which will lower prices. But that does not apply to food or energy in the long term. Why? Because they are staples, and regardless of consumer financial health, people will buy food and heat and cool their homes. Those price components of the CPI inflation index are relatively inelastic, meaning consumers will pay for them regardless of price because they are essential to living.

    Story of the Week

    The story of the week comes to us from Iran and Asia. You see, 9 Asian countries just agreed to dump the SWIFT international financial system and the US dollar. A quote from the Islamic Republic News Agency, these countries are actively moving away from the dollar for international trade.

    “Last month, central bank governors of ACU member states decided at a summit in Tehran to create an internal financial messaging system to replace SWIFT in banking transactions between members of the bloc. The decision was in line with the efforts made by ACU members to reduce the domination of the US dollar in global trade.

    Iran’s CBI governor Mohammad-Reza Farzin said on May 24 that the bloc will diversify the basket of currencies it accepts for payment settlements to help the global de-dollarization bid. Farhad Morsali said that Iran’s SEPAM has been accepted by ACU members as an internal financial messaging system, according to a Saturday report by Fars News Agency.”

    So, these 9 Asian nations are working on their own international banking system to rival SWIFT. While that is being prepared, they felt so urgently about the need to leave the dollar system that why have adopted Iran’s in lieu of continuing to use the dollar. Some of these nations, including Iran, have been hurt by US sanctions adopted after the beginning of the Russia/Ukraine war.

    Those sanctions have had a downstream effect on many nations that trade with those that are being blocked by the US from trade. And all those countries are now banding together to build their own system outside the dollar and SWIFT. How far has this trend advanced? Per Reuters, Russia has been conducting a lot of its trade with Iran in their respective currencies.

    “That appears to have been successful, with Russian deputy prime minister Alexander Novak telling a recent press conference in Tehran that 80% of Russian-Iranian trade was now being conducted in their national currencies, the rial and the ruble.”

    Executive Summary

    Every long-term indicator for a gold and silver bull market is now flashing buy. I see no way that gold and silver make it out of this inflationary cycle without reaching very substantial new all-time highs. The process takes time and will occur over the next several years. But this is a very exciting time for the metals.

    The US dollar is being unceremoniously dumped from international trade as other countries work in tandem to build new monetary infrastructure. This is not a cheap nor fast process and indicates we are past the point of no return for the dollar. I see no way that countries come back to the dollar standard, so consider yourself fortunate for reading this article. You have been given time to prepare the way before the average person even wakes up to what is happening. By then, it will likely be too late for most to make the necessary financial preparations.

    The US economy is in a deflationary sub-cycle to what is an inflation super-cycle that will end up in the death of the paper dollar. However, inflation will be the chosen way out by the Federal Reserve. Fearing a deflationary collapse, they will open the spigots again and print as we have never seen before. Watch for inflation to make a roaring comeback as soon as you see the Fed reverse its current strategy. They will do that when deflation becomes too pernicious for them to ignore.

    Coin of the Week

    I am a big fan of the sunshine mint, and at time of this article the 1Kg silver bar is on sale. Perfect timing as the summer should be relatively quiet, with silver prices picking back up in the early fall. That is if we don’t see another major bank failure first.

    Disclaimer: All Market Updates are provided as a third party analysis and do not necessarily reflect the explicit views of JM Bullion Inc. and should not be construed as financial advice.

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