As Russians Prepare for an Impending Dollar Crisis, Chinese Threaten Treasury Nuclear Option

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Photograph Appears Courtesy of the Financial Times

The latest statistics are out for central bank gold purchasing, and they show that Russia has yet again increased its substantial and expanding gold reserves for the month of April. Moscow grabbed up another 15.55 tons of gold, bringing its impressive reserves up to 2,183.46 tons as of the latest Central Bank of Russia press release on the subject.

This means that Russian gold holdings have already risen by 71.53 tons in only the initial four months of 2019. Last year they increased them by 274.3 tons, for their fourth year in a row of over 200 tons per year growth in gold reserves. Over this same period in 2018, Moscow liquidated practically all of its once-considerable stock of U.S. Treasuries, bringing their dollars reserves down from 46 percent to only 22 percent.

What do the Russians understand that you do not in their earnest preparations for an impending dollar crisis? They know that gold makes sense in an IRA. It is high time to learn from their example and stockpile some of your own IRA-approved gold by considering the top five gold coins for investors today.

Attitudes Towards The Global Dollar Standard Are Rapidly Changing

It matters greatly what the Russians and other nations think about dollar reserves for an important reason. The globe has existed on a dollar-based reserve system and standard since America dumped the gold standard under then-President Richard Nixon back in 1971. As economist Peter Schiff from the Euro Pacific Group points out:

“That was fine when the dollar was backed by gold, but now the dollar is backed by nothing. So, if you're backing your currency with a currency that's backed by nothing, well, then your currency is backed by nothing. I think the next recession when the Fed goes back to zero and when we launch QE4, I think the dollar's role as a reserve currency is going to be questioned, and central banks need an alternative. And the only viable alternative to back up their own currency is real money, which is gold.”

The U.S. has only exacerbated the process by utilizing its dollar's unique position as a weapon against other nations. Schiff pointed out that this practice is highly unpopular overseas:

“Other countries don't like this, and to the extent that they can move away from the dollar, well then they kill two birds with one stone. And one way of doing that is to increase their gold reserves now while gold is still cheap. Because when the dollar really starts to tank, the price of gold is going to soar. Russia, right now, obviously wants to buy as much gold as it can while the price is still relatively cheap. That allows it to build up a bigger hoard of gold to replace the diminished value that the dollar is going to play as a reserve currency.”

Clearly this international conspiracy in the making is no laughing matter. It is something that you need to take seriously as a very real possibility for the future of your entirely dollar-based investment and retirement portfolios.

China Buying Gold As It Considers Its Nuclear Treasury Option

The problem is more threatening because the Russians are not the only major players who are buying gold these days. Embroiled in a vicious trade war with the U.S., the Chinese are also acquiring the yellow metal. It helps them to strengthen the value of their own currency the yuan through selling dollars for gold. The Chinese may also be trying to fight back using their enormous stockpile of Treasuries and the threat of selling them for gold. It could be a crippling blow to the U.S. economy and dollar all at once if they accelerate the pace of this.

This is exactly what statistics reveal that the Chinese are doing now. They sold off their largest quantity of American Treasuries in almost 2.5 years for the month of March as this chart below reveals:

This happened at the same time as revived fears surfaced that the Chinese could be planning to actually use their so-called nuclear option to sell off an even larger block of their U.S. held debt as revenge for the additional American trade war tariffs.

For the month of March, Beijing sold an incredible $20.45 billion worth of their Treasuries. This represented the largest dumping of American debt from China dating back to October of 2016. The Chinese had paused their 2018 Treasury divestment for four months but have now resumed it with a vengeance.

For the entire year 2018, China sold off around only $50 billion of them after dumping their American debts five consecutive months in a row through October. China's current holdings of American Treasury debt amount to $1.121 trillion. It sounds like a lot, but this is actually the lowest total since May of 2017.

Other Countries Also Selling U.S. Treasuries

Other foreigners were selling Treasuries as well, as they liquidated an additional $12.53 billion of American government debt for March. Despite all of the Treasuries' dumping, China is still the largest creditor to the United States. This gives it powerful leverage with the U.S. Even if the Chinese only paused their bond purchasing it would cause the U.S. government enormous problems. The U.S. is busy adding billions of dollars in Treasuries to the market to pay for ballooning deficits. Someone has to buy them. The American government's deficit hit a new record high of $234 billion for February.

In one respect at least, the Chinese are following the Russians lead. As they are busily eliminating Treasuries from their stocks, they are also aggressively buying gold. China also increased its gold reserves for a fifth consecutive month in April. What's more, they seem to be increasing their rate of gold purchases.

This begs an important question: could the Chinese actively sell off their U.S. bonds wholesale as punishment to America for sticking Beijing with tariffs in the trade war? Consider that just two weeks ago the U.S. Treasury experienced a weaker auction indicating poor demand for their paper. The resulting higher interest rates signify that the federal government will be forced to pay still more interest on financing its huge $22 trillion in debt.

If the Chinese invoked their so-called nuclear option, this would massively increase the borrowing costs for the financially weakened American government. It would probably crush the dollar in consequence. The Chinese are well aware that they can not outdo President Donald Trump in the tariff game. This is a matter of fact as the U.S. out-imports the Chinese. So the Chinese instead would utilize their $1.11 trillion of Treasury holdings as the best leverage that they have.  The editor of the Chinese state-owned newspaper Global Times put this threat into words this past week when he stated:

“Many Chinese scholars are discussing the possibility of dumping U.S. Treasuries and how to do it specifically.”

Could the Chinese Really Use Their Nuclear Option?

While many analysts think this may be bluster, it is a distinct possibility. A fire-side sale on Treasuries would also hurt the Chinese, reducing the value of their reserves in the process and possibly destabilizing their currency the yuan along the way.

China's proverbial ace in the hole is that they do not have to sell off all of their Treasuries to cause a massive effect on America's interest rates. By dumping a comparatively small amount of their holdings, they could force U.S. rates significantly higher. The American economy built on debt has precious little ability to absorb higher and rising interest rates anymore.

This is why you need to investigate a gold IRA rollover versus a transfer now while you still can. The IRS has made it even easier for you as they now let you buy gold in monthly installments. Just make sure to buy from reputable top gold IRA companies and bullion dealers when you do.

David Crowder
David Crowder

W.D. Crowder is an American published author. His background and areas of expertise include history, economics, expatriate living, international relations, investments and personal finance. A widely read and top of his class graduate of Stetson University, he obtained his bachelor of arts degree in History with minors in Latin American Studies and International Relations and a special emphasis in Economics. He was President of his Phi Alpha Theta (National History Honors Fraternity) Stetson University chapter and a Phi Beta Kappa (National Honors Fraternity) member.

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