Wednesday was a crazy day in a crazy year.
Everyday traders are confused and wondering what’s next … and the Russian invasion has added to an already uncertain environment.
However, it was a year ago that I first introduced the idea that Russia and China were plotting the demise of the US dollar as the sole global currency.
In a Power Income letter titled China’s Digital Currency Changes the Game, I revealed China’s strategic plan to provide an alternative to the US dollar and financial system.
One result of the plot? Neutralizing the damage brought on by sanctions.
That has never been more relevant.
Sanction-monious
The sanctions on Russia will certainly bring tremendous anxiety to countries that continue to rely on the dollar for trade … but they will also give a huge boost to China’s plan to lure trading partners into switching into the digital yuan and settlement system for trade.
A half-century ago the US experienced an OPEC supply shock.
Today we are weathering a Russian supply shock … and it will last for years, not weeks.
Why? Because it’s a buyers’ strike against Russia.
We are likely to see plenty of bankruptcies as collateral damage to freezing out Russian banks from the SWIFT system.
When you mess with the plumbing that facilitates liquidity you put the financial system in danger.
Today, I’ll share the dangers of weaponizing the financial system …
Key Banking Sector Signs of Risks
The Forward Rate Agreement (FRA) to the Overnight Indexed Swap (OIS) is a key indicator of funding stress in the banking system.
And iit is flashing warning signs.
The spread has been widening aggressively and money markets are showing intensifying levels of anxiety over it.
The gyrations in the spread suggest concern that funding costs for the dollar may continue to increase as the war in Ukraine intensifies.
This is a critical development that will expedite the process for counterparties to find an alternative to the US dollar for payment in trade.
China Could Provide an Alternative
If China provides the credit, the most likely way is via quantitative easing, providing a liquidity alternative to the US dollar.
That in turn would lead to a transfer in commodity trading from the US dollar to a regime dominated by China in the form of a robust euro/renminbi market.
The problem with this solution is, if China makes a move on Taiwan, even that backstop will be rejected.
If/when China settles the Taiwan issue, it can provide an alternative. But for now there is only one immediate alternative …
The only real solution is the only real money … gold and silver.
We know from history that counterparties to trade flock to a currency backed by gold because it stabilizes the value of the currency by putting restrictions on how much money the country can print.
Gold Is Attracting a Ton of Support
Mark Sebastian sent me the details of an interesting trade yesterday for the VanEck Junior Gold Miners ETF (Ticker: GDXJ) …
10,000 $GDXJ JAN20’23 70 calls at $2.60. (The stock is currently trading at 47.56.)
I am extremely bullish longer term on gold because it provides a solution for major global problem:
Gold is the solution for a fiat (paper) regime that is in decline as inflation devalues all global currency.
Check out the turnaround in the SPX/Gold Ratio …
Notice in the chart, the level the ratio turned down from and how far it can reverse as Inflation wreaks havoc on the stock market and fiat currencies.
Bring It Home
Tonight is extremely important to your trading.
The system that Andrew Giovinazzi and I have partnered on is producing wins over and over.
Live and Trade With Passion My Friend,
Griff