By Patrick A. Heller
Amid all the
news of the past several weeks that has been
extremely supportive of higher gold prices in
the short- and long-term, a real bombshell
exploded early last week.
On Oct. 5, The Independent, a London newspaper,
carried a story by Robert Fisk reporting that
China, Russia, France and at least four nations
of the Gulf Co-operation Council were secretly
negotiating to abandon use of the U.S. dollar
for payment of oil contracts. Fisk attributed
this information to Middle East officials and
bankers in Hong Kong.
If this comes to pass, in lieu of the U.S.
dollar, new contracts would be settled by a
market basket of currencies including the
Chinese yuan, Japanese yen, European Union’s
euro, a new Gulf Co-operation Council currency –
Should this occur, the value of the U.S. dollar
as the world reserve currency would take a
severe blow. Gold, by being officially
recognized as a form of money, would become much
more in demand and experience a major price
As this report spread across the globe, reaction
was quick and strong. Top officials in Saudi
Arabia, Japan and Kuwait denied the existence of
these secret talks. But, around the world,
buyers jumped to buy gold. On Oct. 6, gold’s
price soared to record levels against the U.S.
dollar (ignoring inflation).
On Oct. 6, Max Keiser, the journalist who broke
the story earlier this year about the German
central bank gold holdings being stored in the
vaults of the New York Federal Reserve Bank,
said his contacts in Paris, Russia and the
Middle East confirmed Fisk’s story. Keiser also
said that gold may make up as much as 50 percent
of the new market basket payment system.
Fisk is a highly respected journalist, having
been awarded Britain’s International Journalist
of the Year award seven times. He is based in
the Middle East and is considered to have the
best network of Middle East contacts of any
member of the media.
Over the balance of last week, more details were
unveiled. The transition to the new payment
system is to be completed by 2018. Apparently
U.S. officials were aware of the occurrence of
these “secret” meetings but were not informed as
to what transpired. One or more representatives
from Brazil attended one meeting, but that
country has not yet committed to be part of this
agreement. Though not yet involved, the
government of India has asked to be included in
Almost as damaging as this agreement is to the
future value of the U.S. dollar was one of the
components of the new payment system. Five of
the six nations of the Gulf Co-operation Council
still have their currencies tied to the value of
the U.S. dollar (the other country, Kuwait, also
did until a year or so ago). As part of this
agreement, a new Gulf Co-operation Council
currency would be established to circulate in at
least Saudi Arabia, Kuwait, Bahrain and Qatar.
This new currency will be based on a basket of
currencies that will almost certainly include
gold and may exclude the U.S. dollar.
Between the establishment of an independent GCC
currency and the potential pricing of many oil
contracts for payment by other than the U.S.
dollar, that would make at least $2 trillion of
U.S. currency and debt now held by foreign
central banks no longer needed for international
commerce. In fact, these central banks would
have to ship the U.S. dollars and Treasury debt
back to the United States in order to buy the
gold and other currencies that will be needed to
pay for oil or to back the new GCC currency.
Once this much money comes back to the United
States, where the sellers expect to receive
goods and services for the paper, the effect on
the U.S. economy is almost certain to be
devastating. Whether or not the U.S. dollar
could even survive as a circulating currency is
now a legitimate question.
You can be sure that there is a lot of
behind-the-scenes maneuvering going on. U.S.
officials are probably seeking to water down the
proposed currency basket and draw out the time
frame, as I don’t think they have realistic
prospects of killing this proposal.
But, in the most optimistic scenario for the
U.S. government and the U.S. dollar, where it
might turn out that these alleged secret
meetings are a complete hoax, or that all of
these plans by the various nations are
abandoned, I still think that the U.S. dollar is
On Oct. 6, 2009, the entire world saw just how
quickly the value of the U.S. dollar could fall.
From that day forward, central banks and foreign
investors will include in their financial
planning the risk of the failure of the U.S.
dollar. From now on, the U.S. dollar is on a
deathwatch. It might take years for the value of
the dollar to fall so far that it is no longer
viable for international commerce, but I think
the end is inevitable.
On the other hand, now that gold is being
discussed as a form of circulating money again,
expect its value to soar against all paper