US scores own goal on gold

Will Bancroft takes a look at America and the West’s decision to force Iran out of the global payments system, SWIFT, and what these geo-politics mean for investors. Read more to learn if Washington may have stumbled again in its management of the dollar.

We noticed a few weeks ago Iran was shut out of SWIFT, the global payments system. We may assume this happened after America had put pressure on this private Belgian company. SWIFT, The Society for Worldwide Interbank Financial Telecommunication, is the keystone of the international payments system. SWIFT said it took the action in response to EU regulations issued against Iran. This has all been part of the ratchetting up of pressure on Iran. Obama is in an election year and he faces many pressures to be decisive and proactive.

In economic terms this is a bold act. SWIFT has very much been used as the West’s weapon that they have decided to use in an apparent act of economic war.

SWIFT, gold and barter

SWIFT’s reputation as an independent mechanism for facilitating and settling global trade has been sullied by this act. The SWIFT system enables large trade deals to be settled instantaneously, usually in dollars, the world’s reserve currency. As a result of this act nations such as China and India wishing to buy Iranian oil have had to find other means of settling oil trades outside of the SWIFT system, and thus outside of the petro-dollar.

China has continued to buy Iranian oil, and India mooted buying oil with gold. Subsequently India was told by Washington in no uncertain terms that “you’re either with us or against us” and not to do business with Iranian institutions. The Chinese and Indian authorities are not compelled; this has not been well received in Asia. China has once more issued comments about its abhorrence for unilateral behaviour, coercive actions and general bully boy tactics. Nations wanting to trade with Iran for valuable resources have been impacted by Western politics.

Washington trips over gold

What freezing Iran out of the global payments system has effectively done though is encourage barter deals around the world for settling trade. This may be a foolhardy endeavour for the managers of the world’s increasingly questioned reserve currency. In a recent interview with King World News, Jim Sinclair, mused on how this is a grave mistake for the West to make:

Now look at what you’ve done. You’ve shut down the wire transfer system to countries settling huge amounts of obligations, that used to be settled in dollars, and now you’re forcing them to barter. This does not shut down oil shipments out of Iran… what it really puts into place is an air shipment of physical bullion. What it really does, is say you can let a third party country keep your gold. You’re better, Germany, if you have it at home. What it does say is that trade will be settled in strange and difficult and different ways, but they’re not being settled in the dollar.
If excluding such significant amounts of trade from the SWIFT system, is by default undermining the dollar as the primary means of international settlement, the Americans may be shooting themselves in the foot. Will other settlement currencies for forced into earlier adolescence? Will these excluded countries not just build their own SWIFT system going forward? The trade victims of this move should naturally look for solutions and ways to limit future vulnerability.

History repeating itself?

It is ironic that this potential error in unintended consequences once more involves Iran, oil and gold. It feels like history is repeating itself, just in a more contemporary form.

In November 1979 the US government made another potentially crass move; America froze Iran’s gold held at the New York Fed. As Ferdinand Lips described it:

While the actions of the Iranians were an act of lawlessness, the American action was no less so. Immediately the central banks of the world realised their gold at Fort Know was not completely secure. It was preferable to buy gold and move it to its own vaults than leaving it within reach of a foreign power. With its assets frozen, Iran became so scared that it started to buy gold in Zurich. Iraq, its oil wealth was another buyer. This was precisely the spark that was needed to get the price of gold over $800 within a matter of weeks.
A rising and high gold price are not in the interests of the masters of our economies. The canary in the coalmine of the global financial system was singing even more loudly, and the management of our economic masters was being even more starkly questioned. Global political and economic stability was hardly advanced.

The decline of empire but steadfast gold

Fast forward to today, and it feels like we are witnessing another step in the death of an empire; the economic empire of the USA which a range of analysts believe peaked in the two decades immediately following the Second World War. Empires do hasten their demise with acts that appear from afar to be short-sighted and dim witted. Has using the SWIFT payments system as a tool of war proved a mistake that will hasten the decline of the dollar, and thus America? Wielding the SWIFT system in this way may be a trump card that other agents to the game allow you to only play once.

We ask these questions because it appears to us that America’s greatest interest should be in the longevity of the dollar, not unrest in the Middle East and higher fuel prices. In Currency Wars, Jim Rickards expertly articulates why America’s greatest strength, and weakness, is her reserve currency privilege. If this recent action, as part of the wider Iran strategy, proves to highlight this weakness then this is poor economics and politics on America’s part. Politicians are prone to err; that’s why we hold gold. In fact, these policy actions have only served to push gold further towards the centre of the monetary universe.

You have to choose [as a voter] between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold. – George Bernard Shaw