Macro Update and Gold overview

Getting into the Commodities and Geopolitical world makes sense from here. There was a flurry of commodity/currency and some geopolitical agreements over the past week

• -China purchased LNG imports from the French energy supermajor Total (TTE) using yuan for settlement, from the United Arab Emirates. This milestone is pretty significant, considering that it’s occurring with a non-pariah state (e.g. not Iran or Russia or Venezuela).
• -Meanwhile, Brazil and China agreed to drop the dollar for currency exchange, which reduces friction for Brazil and China to trade in their own currencies. Brazil is one of the biggest commodity exporters and China is the biggest commodity importer while exporting a lot of electronics and manufactured goods, so they do a lot of bilateral trade.
• -Additionally, Brazil’s central bank released numbers last week showing that the yuan has flipped the euro as the second-largest currency in their foreign-exchange reserves. Until 2018, Brazil had no yuan in its central bank reserves, and this past quarter has 5.37% exposure to it. They only have 4.74% euro exposure. The majority is in dollars, but that’s likely past its peak percentage.
• -The Shanghai Cooperation Organization includes much of Asia as members, and along with BRICs is a rival international coalition comparable to the G7. The SCO includes full members, observing members, and dialogue members. Saudi Arabia has now joined as a dialogue member, which is noteworthy, given Saudi Arabia’s long-lasting security agreements with the United States.
• -At the same time, Saudi Aramco agreed to begin construction on a new $12 billion refinery in China. They also made a set of Chinese refinery stake acquisitions, and overall have tightened their energy partnership with China.

When analyzing non-petrodollar energy and trade agreements, analysis tends to be very polarized.

On one hand, there’s been no shortage of “imminent death to the dollar” headlines over the past couple of decades, every time China or some other country makes a currency move of this sort. On the other hand, there are a lot of “there’s absolutely no change for the dollar’s reserve status on the horizon and anyone who says otherwise is a conspiracy doomer” takes as well.

I think the reality is pretty clearly in the middle. Decades ago, China was small compared to what it is now. It’s now the #1 or #2 economy by most metrics, including the largest importer of energy and commodities, and the largest trading partner with the majority of countries in the world. And multiple countries have the incentive to diversify their payments and foreign reserves to minimize their vulnerability to sanctions or asset seizures by any single country.

Around the margins, it seems clear that we’re shifting towards a more multi-polar world in terms of regional powers and currency agreements. China still has capital controls, which makes their currency/bonds broadly unattractive as a reserve asset. However, due to their economic size and trading relationships, they have a significant ability to present an alternative payment and intermediate-term savings ecosystem for various “BRICS” or “BRIICSS” countries. In addition, foreign central banks have been consistently increasing their gold tonnage ever since 2009, which was a reversal of a multi-decade trend from the 1970s to 2009 of dwindling gold tonnage held by central banks.

What this suggests is that around the margins, the percentage of U.S. federal debt held by the foreign sector is likely to decrease. It’s already been on the decline since 2013, as U.S. federal debt kept increasing and foreign holdings of it went sideways: