(Original title: The President of Brazil called out to 11 countries to abandon the US dollar: de-dollarization, debt distress and opportunities for gold and oil)
Recently, it was reported that Brazilian President Lula called on the 11 countries to abandon the US dollar. Brazilian President Lula said that he hoped to get rid of the dependence on the US dollar by creating the South American Common Currency in order to seek autonomy in economic, trade and commerce.
With the major changes in the global monetary system, why are the calls for de-dollarization getting louder? Which global assets will benefit from this trend? On May 26, Guolian Securities released a research report “Great Changes in the Global Monetary System: De-dollarization, Debt Distress, and the Opportunity of Gold and Oil”, which made a preliminary discussion.
Russia-Uzbekistan conflict accelerates short-term “de-dollar”
The weaponization of the dollar has accelerated the process of “de-dollarization”. The United States and its allies have frozen more than $58 billion in assets of sanctioned Russians, including half of Russia’s central bank’s foreign exchange reserves. The proportion of the US dollar in the global official reserve currency has shown a long-term trend of slow decline.
The Dollar Supply Dilemma: The Global Credit Monetary System and the U.S. Debt Dilemma
As the U.S. dollar is an international currency, the credit of the U.S. government is the endorsement of the currency, and U.S. treasury bonds have become the cornerstone of credit similar to gold. As of now, the total national debt of the United States has reached 31.4 trillion US dollars, which is equivalent to more than twice the value of all gold. By the end of 2022, the ratio of US national debt to GDP has exceeded 120%. Starting from the Federal Reserve’s interest rate hike in 2022, the average interest rate on national debt has risen by about 1pct, and the additional US$300 billion in interest payments is equivalent to more than 20% of the annual deficit, which will put significant pressure on the finances. Spending cuts have been one of the central issues in negotiations over the debt ceiling.
Dollar demand weakens: Foreign countries reduce holdings of U.S. debt in the second half of globalization
From a global macro perspective, globalization has created a demand for the US dollar as an international currency. The apex of globalization occurred in 2008, when global trade accounted for 61% of global GDP. The stagnation of globalization is the background of the current “de-dollarization”. More than $7 trillion in U.S. national debt is held by overseas investors. Since the outbreak of the Russia-Ukraine conflict, the recent year-on-year decline in foreign holdings of U.S. debt has not occurred in the past 10 years. Foreign countries have reduced their holdings of U.S. treasury bonds by a total of 360 billion U.S. dollars, of which the official reduction is 423.3 billion U.S. dollars, and private holdings are increased. $63.3 billion.
The scarcity and natural hedging properties of gold make the value of gold may usher in a revaluation
Gold is scarce, and mining costs continue to rise. In 2022, the global average total maintenance cost will exceed US$1,250 per ounce. According to the World Gold Council, the supply and demand of gold are in a tight balance. On average, the annual supply in 2013-2022 is only 340 tons more than the demand, which is close to 8% of the total demand. Gold has natural currency attributes and is a natural safe-haven asset. Gold remains an important reserve asset for central banks around the world. Since the Russia-Ukraine conflict, the country with the largest increase in gold reserves is Turkey, followed by China. The total increase in the top 10 countries exceeds 430 tons. As global geopolitical risks rise, it is a favorable factor for gold, and the value of gold may usher in a revaluation.
Petrodollar faces challenges, OPEC production cuts may support oil prices
Oil is the single most important commodity in global trade, and the United States becoming a net oil exporter may bring about two important changes: the basis of petrodollars may be shaken, and there will be no outflow of net petrodollars; on the other hand, the United States and The relationship with other oil-producing countries has gradually evolved from being the largest customer to being a market competitor. The “voluntary” production cut cycle of many OPEC+ members will continue until December, the crude oil market may face supply shortages, and oil prices and inflation may face upside risks. The gold-to-oil ratio indirectly reflects the strength gap between the United States and the second largest economy. The larger the gold-to-oil ratio, the smaller the economic strength gap with the United States. Assuming that the oil price is maintained at US$70-80 in the five years from 2023 to 28, then under this assumption, referring to the historical gold-oil ratio, we believe that the reasonable range of the gold price should be US$1,400-2,400.
Risk warning: the risk of the Federal Reserve’s continued hawkishness, the risk of geopolitical conflicts exceeding expectations, the tightening of financial conditions beyond expectations, and the risk of deviation in price forecasts
This article comes from: Financial circles
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2023-06-01 05:53:26
