The four-decades-long monopoly of the U.S. Petro-Dollar as the world’s reserve currency is coming to an end. Unfortunately, most Americans have no clue that when the Dollar loses its reserve currency status, life will get a lot tougher living in the U.S. of A. Let’s say, Americans will finally receive the “Precious metals religion.”
The U.S. Dollar Index fell considerably yesterday and is now down below a key support level. In early morning trading yesterday, the U.S. Dollar Index fell to 91.46, down 73 basis points:
According to technical analyst, Clive Maund, in his recent article, DOLLAR update as LOSS OF RESERVE CURRENCY STATUS LOOMS..., he stated the following:
In that article, Clive posted the following chart on the U.S. Dollar Index (USD index) and its key support level:
As we can see, traders are looking closely at the Key support area at 92.5 for the USD index. With the USD index now below that key support area, it could spell real trouble for the Dollar if it closes below that level at the end of the week. After the markets opened today, the Dollar fell to a low of 91.08. So, it looks like the Dollar will close this week well below the key support area.
The Reason for the Selloff in the Dollar
This may have been due to the disaster that took place in the 10-year U.S. Treasury Repo market today. According to Zerohedge’s article “We’ve Never Seen Anything Like This”: Repo Market Snaps As 10Y Suffers “Epic Fail”:
The pressure on the U.S. Treasury 10-year repo market is likely a reaction to what came out of the annual BRICS summit in China yesterday, According to the article, Escobar Exposes Real BRICS Bombshell: Putin’s “Fair Multipolar World” Where Oil Trade Bypasses The Dollar:
This announcement by Putin that oil trade should bypass the Dollar came a few days after China announced that they plan to start trading oil on their Shanghai Exchange in Yuan, which will be backed by gold. While we have heard for years that China was going to back their currency or trade with gold, we now see actual plans to start implementing it sometime this year.
By China backing its new oil trading benchmark in Yuan with gold, it provides countries with a great deal of confidence in trading oil in another fiat currency besides the U.S. Dollar. Thus, countries that acquire a lot of Chinese Yuan by trading oil don’t have to worry about devaluation as they can convert Yuan into gold.
This Is Bad News For the Saudi-Petro Dollar System
The Petro-Dollar system that has been the foundation of the world oil trade for the past four decades is now about to become obsolete. Even though many countries will continue trading oil in Dollars in the future, a larger percentage will likely move into trading oil in the Chinese Yuan as it provides a “gold-backed protection” against fiat currency devaluation.
Not only is the Petro-Dollar under severe pressure, but so is the Middle East’s largest oil exporter which was the foundation of this monetary system back in the early 1970s. Ever since the price of oil peaked in 2014 and has fallen by more than half to $49 currently, this has put an enormous strain on Saudi Arabia’s financial bottom line. In the past three years, Saudi Arabia sold over $250 billion of its foreign exchange reserves, which are mostly in U.S. Treasuries, to fund its national government.
Over the past three years, Saudi Arabia’s foreign exchange reserves continued to decline each month, except in June. As we can see in the chart below, Saudi Arabia’s foreign exchange reserves briefly increased in June, but according to most recently released data, fell to a new low in July:
Saudi Arabia’s foreign exchange reserves are now below the critical $500 billion level at $494 billion. Again, the low oil price is causing a lot of havoc in the Kingdom’s financial bottom line. Furthermore, Saudi Arabia has cut spending on oil projects and other areas. This has severely impacted the number of workers that the Kindom imports to work in its oil fields, etc.
According to data in the article, Fewer Pakistanis finding work in Saudi Arabia:
If we divide the total 452,598 workers in half that Pakistan exported to Saudi Arabia in 2016, it equals 226,300 workers. Thus, Saudi Arabia imported only 77,600 workers in Jan-Jun 2017, which is two-thirds less than the average for the same period last year. This means Saudi Arabia is cutting back considerably on the national government and state oil projects in 2017.
So, both Saudi Arabia and the Petro-Dollar are under severe stress as the low oil price guts the highly leveraged debt-based global economy. The notion that the U.S. Shale Oil Industry will allow the United States to become energy independent from Saudi Arabia and other Middle East oil exporters is pure nonsense.
I can tell you that the U.S. Shale Oil Industry is in BIG TROUBLE as the super-high oil production decline rates are gutting the financial balance sheets of the majority of the country’s domestic energy companies. I mentioned this in my article, TROUBLE FINANCING ITS DEBT: Massive Decline Rates Push U.S. Shale Oil Industry Closer Towards Bankruptcy.
In response to that article, several of my readers made comments suggesting that I was “cherry-picking” data by only providing some of the worst-case examples, such as Continental Resources. In the article, I presented information showing how Continental Resources didn’t have enough funds to pay its interest payment.
While Continental Resources is in more trouble than other domestic energy companies, it’s becoming increasingly difficult for most U.S. shale oil producers to pay their interest expense. To counter the claim that I am “cherry picking” data, I present the chart below from the EIA – U.S. Energy Information Agency:
According to the EIA, 68 publicly traded U.S. energy companies are now spending 75% as a share of their operating cash flow just to pay the interest on their debt. The industry’s debt service share of cash flow is up three times, from 25% just three years ago. So, no… this is not just a Continental Resources problem, it’s industry-wide.
Furthermore, additional evidence suggests that the U.S. Shale oil industry will NEVER be able to pay back its debt or let’s say, the overwhelming majority of its debt. Thus, the U.S. shale oil industry was never a commercially viable enterprise from day one. The insane business model of funding the drilling of shale oil wells by taking investor money that will never be paid back is another version of the famous PONZI SCHEME.
The announcement by China that it will start trading oil in Yuan backed by gold is the death knell of the U.S. Petro-Dollar system. As Saudi Arabia and the U.S. shale oil industry continue to disintegrate under the strain of lower oil prices, this will be the icing on the cake that pushes the Petro-Dollar system over the cliff.
The death of the Petro-Dollar will cause the precious metals prices to soar. Investors who have not yet taken a position in physical gold and silver should seriously consider it as China’s announcement to trade oil in Yuan backed by gold was a BIG WARNING that the days of the U.S. Dollar world’s reserve currency status are coming to an end.
About the Author:
Independent researcher Steve St. Angelo started to invest in precious metals in 2002. In 2008, he began researching areas of the gold and silver market that the majority of the precious metal analyst community has left unexplored. These areas include how energy and the falling EROI – Energy Returned On Invested – stand to impact the mining industry, precious metals, paper assets, and the overall economy.