On April 21, Israel's cabinet advocated a counterattack on Iran, but the United States said it would not participate, and then Iran warned Israel and the United States that it would respond to a "larger response" if it retaliated, and on April 14 Iran launched its first-ever direct attack on Israeli territory, in response to Israel's previous attack on the Iranian embassy.
And just a week ago, Iran-related groups seized an Israeli-linked cargo ship in the Strait of Hormuz, one of the world's most important energy shipping routes, suggesting that the region has escalated with the threat of an open conflict between the two Middle Eastern countries and dragging down the United States.
On April 21, the U.S. House of Representatives voted to pass an aid bill to Israel, including $26 billion in aid to Israel, in which the U.S. said it would not seek conflict with Iran but would not hesitate to protect Israel, highlighting the risks that the broader Middle East conflict poses to the world economy, while financial markets remain on the sidelines.
All of this is a further indication that the Iran-Israel conflict is escalating and spreading across the Middle East, and if the U.S. eventually gets involved, oil supply shortage fears are expected to trigger a sensitive moment for the global oil market, which could hit the economy, businesses, and consumers with growth and inflation.
This suggests that the continuation of the Iran-Israel situation is boosting the rise in US inflation expectations, which will become clearer against the backdrop of the US March CPI and core PCE inflation data having risen more than expected, triggering a postponement of US interest rate cut bets until September, which also made the yield on the benchmark 10-year US Treasury note, which feeds inflation expectations, soar above 4.5% and was violently sold by global investors.
In this regard, Nuriel Roubini, an economist who successfully predicted the 2008 financial crisis in the United States, said in an interview with the media on April 15 that "the United States is about to usher in a series of bond defaults, officially detonating a stagflationary debt nuclear bomb that combines the inflation crisis of the 70s and the financial tsunami of 2008."
To add insult to injury, the U.S. Treasury is surging with new U.S. bond auctions and the situation in the Middle East is spreading to the shipping supply chain to stimulate the resurgence of the U.S. inflation beast, the U.S. fiscal is beginning to collapse, the budget deficit is soaring, and the dilemma of making ends meet is intensifying.
The U.S. Treasury Department showed in its latest monthly report released on April 11 that the U.S. deficit reached $236 billion in March, $40 billion higher than expected, which also made the total U.S. deficit in the first six months of fiscal year 2024 (October 2023 to March this year) as high as $1.065 trillion, the second highest on record, and the analysis predicts that the total federal deficit in fiscal year 2024 will reach $2.2 trillion.
It is worth noting that interest on U.S. debt continues to explode and has now reached a record $1.1 trillion, making the cost of national debt service in the United States reach an unprecedented high, and according to Bank of America, interest on U.S. debt will reach $1.6 trillion by the end of 2024, making it the largest single expense in the United States.
At the same time, the U.S. federal government is spending money far faster than it can earn, suggesting that the U.S. debt pressure has exploded and there is a possibility of implosion. High debt and higher interest rates in 2023 have put the U.S. fiscal debt service pressure at its highest level since 1996.
This also made the U.S. Treasury auction of 10-year and 30-year U.S. Treasury bonds with a total of $68 billion on April 19 and April 20 for two consecutive days.
Goldman Sachs economists also believe in a report released on April 20 that as the U.S. debt ceiling funds are exhausted again by June 2024, the risk of U.S. default this year may be as high as 80% under the uncertainty of the U.S. political and economic environment, which will further damage the financial prestige of the United States, coupled with the debt tsunami and budget deficit surge in the United States in fiscal 2024, which will directly affect the value of tens of trillions of dollars of U.S. Treasury bonds.
If the U.S. Treasury market, which is the cornerstone of the U.S. financial system, collapses or defaults, it will be no less than a major earthquake for the U.S. financial markets and the U.S. dollar, which will eventually cause the U.S. dollar to automatically lose its global reserve currency status and competitive advantage, and threaten the U.S. credit rating and directly weaken the U.S. Treasury's ability to sustain the world's largest debt Ponzi scheme.
In this regard, Dario, founder of the world's largest hedge fund company, said that the United States overprinted money, dragging the dollar into the crisis, and digital currencies linked to inflation or gold may be a better option, similar to inflation-indexed bonds.
According to the former Bank of England Governor Carney in an interview with the media in early January, the dominance of the dollar has caused problems for some oil-producing countries, and he believes that in the context of the paradigm reconstruction of the global financial order, the best way to reduce or bypass the role of the dollar is to create a fiat digital reserve currency that can be accepted and supported by central banks around the world, and replace it with a new digital basket system, similar to the International Monetary Fund's Special Drawing Rights (SDR) currency.
Then, according to the US financial website Zero Hedge reported on April 21 that the International Monetary Fund is preparing a financial change to say goodbye to the dollar, and global central banks basically admit that they plan to overhaul the dollar-based financial world and create a central bank digital currency (CBDC) system based on a unified ledger.
To this end, the International Monetary Fund has released a theoretical model of digital currency called XC, which will closely match the concept of SDR and bundle all central bank digital currencies with traditional currencies (US dollars and euros) under a financial system, making it a global digital reserve currency, making it easier for global central banks to make cross-border payments and automatically ending the US dollar's status as a global reserve currency.
This suggests that the current growing number of digital currencies may support the emergence of a new global monetary order independent of the US dollar, at which point gold may once again play the role of the commodity standard, and these digital currencies can directly link more and more global central banks around the dollar system, suggesting that the role of the dollar is effectively being revalued.
Similarly, Daily FX analyst David Cottle also suggested in an updated report on April 21 that oil-producing countries such as Iran, Venezuela, and Russia, which are restricted by the dollar, could innovate foreign exchange systems and use the commodity standard to issue digital currencies as a means to bypass the dollar. The petrodollar has entered its twilight and the post-Bretton Woods system is about to be born, at which point the anchor of alternative commodity currencies such as gold and crude oil is dawning."
The analyst suggested that Middle Eastern oil producers such as Iran, Iraq, and the United Arab Emirates could exchange some of their oil profits for gold reserves when the current price differential between gold and oil is high, just as global central banks swapped US bonds for gold, to support the prospect of building a global digital reserve currency system anchored to gold, because the price of oil priced in gold is less volatile and more stable than that denominated in dollars, which will become clearer in the context of the Iran-Israel conflict.
The latest development is that Iran's four banks are negotiating with multiple countries on the use of digital currencies for commodity settlements and financial transactions, and not only that, but as a key part of bypassing the petrodollar, another new development is that the Iranian foreign exchange website said in a statement published on April 4 that the yuan could also provide Iranian oil with another petrocurrency option, given the leading edge of the digital yuan and the fact that the renminbi has expanded its pricing power function in the Asia-Europe crude oil futures market.
According to the latest data from the Iranian Financial Tribune, as of March, Iran's share of the increase in RMB reserves in foreign reserves has reached 23%, and the analysis shows that most of the transactions in China's purchase of Iranian oil are settled in yuan, and Chinese buyers are buying at much lower prices than the market price, and almost all Iranian oil entering China is labeled as originating in Malaysia or other Middle Eastern countries, and these tankers usually turn off transponders when loading at Iranian ports to avoid detection.
China obtained a record 55.6 million tonnes of Iranian crude last year, or 1.11 million b/d, which is equivalent to about 90% of Iran's crude exports and 10% of China's oil imports, according to the latest data released on April 21 by two well-known shipping analysts, tanker tracker Vortexa Analytics estimates that China has imported more than 1.1 million barrels of Iranian oil per day, or about 13.4 million mt, for three consecutive months since the beginning of this year, suggesting that Iranian oil sellers, including the National Iranian Oil Corp, have shipped at least 69 million mt of Iranian oil to China in the 15 months to March 31.
Then, according to the chief banker of the Central Bank of Iran said on April 21, Iran will follow the development trend of global digital currency, will follow the pace of the Venezuelan Petrocurrency (PETRO), and plans to issue a digital gold coin (PayMon) anchored to physical gold as a payment method to achieve cross-border transactions, so as to facilitate the acceptance of global central banks, and it is expected that by June this year, contracts signed in the form of digital currency will be widely used in businesses, including the oil industry.
As part of this strategy, Iran's central bank has launched a new currency exchange center in November last year, allowing foreign currencies, including the renminbi and ruble, to be exchanged for gold for the first time, and promoting more access to gold in Iran is the most important goal of the center. In October last year, Iran successfully tested the digital rial currency and issued a series of regulations to commercial banks, paving the way for the issuance of a digital gold currency.
As early as November last year, Ghana, a gold-rich country in Africa, has proposed to use gold to settle oil, excluding the US dollar, which also means that one of the alternative currencies of the petrodollar, "oil gold", has begun to operate, beyond market expectations. At this critical juncture, something happened in the global gold market that surprised investors.
This is a continuing signal of China's build-up to its gold reserves, which reported an increase of 314t in the 17 months to March.
We check the latest data released by the World Gold Council and customs and find that in the 14 months to February this year, China imported a total of 1,659 tons of gold (please refer to the chart below for specific data details), of which 160 tons and 79 tons were respectively in the first two months of this year, and China imported 1,343 tons, 821 tons and 217 tons of gold from 2020 to 2022 respectively.
In particular, since last year, China's gold imports have been significantly higher than the average of the last five years, which further confirms our team's analysis that China has been increasing its gold purchases for months, suggesting that since China did not report an increase in gold reserves at the end of 2019, as of March this year, the latest publicly available data indicates that 4,354 tonnes of gold have arrived in China from major overseas gold markets such as the US and Europe.
We note that not only is China's gold demand increasing, according to the latest data released by the World Gold Council on 17 April, global central bank gold reserves increased by 58t in the first two months of 2024, sending global official gold reserves soaring to 35,976.2t. Global central bank peers, including those in the Middle East and Europe, bought a net of around 1,037 tonnes of gold last year, second only to the all-time high of around 1,082 tonnes set in 2022, suggesting that gold is still seen as an important investment and strategic reserve asset, and defines gold as a valuable strategic asset beyond market expectations. Among them, China is the largest buyer of gold among the world's central banks so far in 2023.
Immediately afterwards, Mike Ben Deley, Singapore's leading gold trader, said that now, while global central banks, including oil-producing countries, are selling US bonds, they are also actively buying gold as part of the openness of the de-dollarization strategy, because whether it is the riyal ruble or the yuan, there is gold behind it.
He further explained that the development of a gold-backed global digital reserve currency is expected to weaken the dollar's dominance and begin sooner than most expected, because when global central banks really need to address the ballooning and already insolvent US debt deficit, the dollar reset process is expected to begin, at which point financial markets may once again be pegged to gold or digital gold currencies, which could become a major trend in global currencies and officially ring the death knell for the collapse of US Treasuries, the core asset of the United States。
In particular, the expectation of a decline in demand for the US dollar in the global oil market will accelerate the process of the collapse of the world's largest debt Ponzi scheme built on the huge debt card house, weakening the dollar's ability to harvest seigniorage and pass on the risk of inflation. (ENDS)