The past week was packed with news of all sorts. We had news out of the Ukraine where a couple of cease fires ended before they started. The British scrambled fighter jets against Russian aircraft. ISIL marched through Iraq slaughtering 1,000’s including the judge who sentenced Saddam Hussein to death. There was a Fed meeting along with “end the Fed” riots in Germany of all places. Shanghai announced that their physical gold exchange would go live in the 4th quarter (do you wonder at all about the timing of this?) and the “missing collateral” situation for base metals has begun to spread. Lots and lots of big news but one “little” piece of news caught my attention more than anything else.
TASS announced on Friday that Russian foreign minister Sergei Lavrov would meet with Saud al Faisel, the Saudi’s foreign minister. It was reported that the two would speak about the situation in Syria, Iraq and also “energy.” Why did this piece of news stick out at me like a sore thumb? For several reasons, first, Russia and Saudi Arabia have had opposing views on Syria. Saudi Arabia would like to see the Assad government fall so that a pipeline could be constructed and the Russians if you recall supported Mr. Assad back in the Fall when President Obama was about to unilaterally bomb them. I believe that Russia and Saudi Arabia are also on separate sides when it comes to what is happening in Iraq. Mr. Putin has publicly pledged support of Iraq’s leader Mr. Maliki while ISIS is Sunnis with the support of the Saudis. This part we know about, the talks on “energy” in my opinion are the most interesting part and I’ll explain why.
I have no information whatsoever to prove what I am about to write, it is strictly my opinion but I think that it makes sense. We do know that China and Saudi Arabia have been busy doing energy deals. We also know this of China and Russia together. As Russia and Saudi Arabia have “differing views,” it would not surprise me if China was the one who set up this “date” between the two “to make nice” with each other.
China knows that Saudi Arabia’s stance of only accepting dollars for oil is THE ONLY thing left holding up the dollar. If you look at what China has done and of course what Russia is doing, they are preparing for (actively promoting in the case of Russia) a “de” dollarized world. I believe that China knows that the dollar will lose reserve status one way or another, with or without Saudi Arabia being the one who pulls the plug. I think that the Chinese want this to happen cleanly and without bickering between two of their partners, Russia and the Saudis. It is important to understand the Eastern mentality here. Getting the job done is most important; however, how it looks publicly is also important. If the Russians and Saudis can somehow bend their views and come to agreement (or just agree to disagree because they were told to) then the stage is almost 100% set.
I have said many times that when Saudi Arabia announces that they will accept currencies (or gold?) other than dollars, the Western financial system will probably fall within a two week time frame. If Saudi Arabia were to announce that they would no longer accept any dollars from the U.S. or anyone else, this time frame tightens up to “overnight” in my opinion.
If you look at this from a distance, China has done everything they needed to do to make ready for the dollar being abandoned. They became the largest creditor to the U.S., our “banker” in other words. They have built out infrastructure, plant and equipment and done so “on credit” in many cases. They have scoured the globe and made deals where they have tied up the future supply of many commodities and done so by promising to pay dollars in many cases. This way they can “spend” some of their hoard and get something real in return. They have the ability to make our interest rates rise by selling their treasuries and it appears that they have already imported much of our exported gold. Yes, they have had talks and done supply deals with Saudi Arabia but there is one thing missing.
The missing “player” to the team is Saudi Arabia. Yes Saudi Arabia trades with China but they are still as of now on “America’s team.” If I had to guess, Mr. Lavrov is probably pledging Russian military “protection” if the Saudis changed teams. In my opinion the Saudis already know exactly what Mr. Lavrov will (or has already) propose because it is what the Chinese desire. The Chinese need Saudi Arabia for their energy supply. Yes, but more importantly they need them to torpedo the dollar. “Publicly” if the Saudis make an announcement of accepting other currencies then the Chinese cannot be blamed for blowing up the West’s financial system. In fact, the Chinese can say, “Hey, we took a beating on our treasuries, we are the ones who got stiffed!” Publicly, the Saudis can say something like “we already have too many dollars, we wish to diversify.” In this manner, it will look to the rest of the world as logical. Do you see what I am saying here? The Chinese know the end game but they do not want to arrive there “ugly.” They are dignified people and appearance is very important to them. Don’t get me wrong, they are fierce business people willing to fight it out but the appearance of “how” they do business is very important to them.
Again, as I said above, this is my opinion. I have no fly on the wall or inside information at all but this does make sense to me now that a top level meeting between Russia and Saudi Arabia has occurred. It is my opinion that on any given day the Saudis will announce that they are “changing teams.” I would suspect that they will do this in a very dignified manner just as Mr. Putin has handled the Russian foreign affairs. I don’t think that there is any chance that the Saudis will initially “shun” or refuse dollars. They won’t need to; they will wait to see what happens. “What happens” as in how badly the dollar falls from this news. They may only need to wait a very short time before others begin to refuse the dollar, in this manner they can simply exit the dollar with the rest of the crowd…rather than being the ones screaming fire in an over populated dollar crowd.