SIGNIFICANT DEVELOPMENTS IN THE PRECIOUS METALS MARKET: Where We Go From Here

By the SRSrocco Report,

As the U.S. Stock Market Bubble continues upward toward a giant pin, there are some interesting developments that precious metals investors will find quite interesting.  Yes, there"s still a lot of life left in the precious metals, even though pessimistic market sentiment has frustrated a lot of gold and silver investors.

Also, even though precious metals investment demand in the U.S. has fallen 40+% compared to the same time last year, it continues to be strong in other parts of the world.  For example, German physical gold bar and coin demand increased 8% in the first half of 2017 versus the same period last year, while U.S. fell by 45%.  Moreover, flows into European Gold ETF"s hit a record during the second quarter of 2017:

Now, if we look at what is going on with gold and Central Bank demand, Russia takes the first place.  According to the article by Smaulgld, Russia Steps Up Gold Purchase With Massive Buy In September:

In September 2017, the Central Bank of Russia added 1.1 million ounces (34.2138 tons) of gold to her reserves, raising her total to 1779.119 tons or 57.2 million ounces.

Central Bank of Russia has added 5.3 Million ounces (approximately 165 tonnes) in 2017 through September.

If you haven"t already checked out Louis"s work at Smaulgld.com, I highly recommend you do.  So, as the German public and Russian Central bank continue to increase their gold holdings, Americans have cut back considerably, or worse... have been liquidating.  Furthermore, the U.S. gold market is suffering another supply deficit this year.  As of July 2017, U.S. gold mine supply and imports totaled 288 metric tons (mt) while exports were 290 mt.  Thus, we have exported ALL of our gold mine supply and imports overseas.  (NOTE:  1 Metric Ton = 32,150 troy oz.)

You see, the Federal Reserve and Wall Street have done a marvelous job in totally lobotomizing the American public in regards to gold as money.  American citizens have no idea that the printing cost of $1,300 worth of $100 bills (13) costs $1.95, whereas one ounce of gold valued at $1,300 production cost is $1,150-$1,200.   The U.S. Dollar was backed by gold up until 1971 but is now backed by the $20+ trillion in debt.

Surge In U.S. Debt Props Up Stock Market

As I mentioned in a previous article, it was uncanny how the ONE-DAY $318 billion increase in the U.S. debt on Sept 8th marked the peak in the precious metals prices while the Dow Jones Index bottomed.    The next two charts show how an increase in debt impacted REAL MONEY negatively while it pushed the DOW JONES further into bubble territory:

You will notice in the GOLD chart that the Dow Jones Index remained flat right up until Sept 8th.  Since Sept 8th, the Dow Jones Index increased 1,670 points (+8%) while gold fell $85 (-6%) and silver declined $1.30 (-7%).   I get a laugh at the news how the U.S. hit an astonishing 3% GDP in the third quarter.  It"s amazing what debt can do to prop up markets and GDP.

So, how much has the U.S. Debt increased since Sept 8th?  According to the figures at the TreasuryDirect.gov, a bunch:

In just seven weeks the wizards at the U.S. Treasury increased the total government debt by a whopping $600 billion (actually $595 billion to be exact).  Again, amazing things can be done to the economy when you pump $600 billion into the market.  Who the hell knows where this money goes, but I can guarantee that it continues to allow Americans to buy cars, homes and the millions of products and gadgets we most certainly can"t live without.

UPDATE:  The folks at TreasuryDirect.gov just updated the total public debt for Oct. 26th.  I thought you would like to know they added another $14 billion yesterday, to $20,453 billion up from $20,439 billion on Oct 25th:

So, another $14 billion to make sure everything continues to run smoothly... or they hope and pray.

U.S. Interest Expense On Its Debt Hits Record In 2017

The downside to printing money and increasing debt is the little annoying problem called rising INTEREST PAYMENTS.  Even though the Fed has been successful in lowering the interest rate, the U.S. Government paid the largest amount of interest expense ever this year.  In fiscal 2017, the U.S. Treasury forked out $458 billion worth of the American"s hard earned money just to cover its interest expense:

If we look at the historical data on the annual interest payments, this year"s $458 billion was not much higher than the $454 billion in 2011.  The reason for that was the average interest rate on our debt in 2011 was 3.1% versus the 2.3% for fiscal 2017.  Thus, a falling interest rate on rising debt levels keeps the interest payment from surging higher.

For example, in 1988, the interest expense was $214 billion on total public debt of $2.6 trillion.  However, the average interest rate on our interest expense was much higher at 8.2% in 1988.  Can you imagine what the interest expense would be today at an 8.2% rate?  It comes out to be a cool $1.67 trillion.  Well, that just couldn"t fly, could it?  If the U.S. Treasury had to pay $1.67 trillion to service its debt today, it would go belly up.

Now, there"s a good reason I selected 1988 interest rate and expense as an example.  It has to do with the next section and the 1987 market crash.

U.S. Stocks Setting Up For Another 1987 Market Enema All Over Again

Investors who have been around for a while, certainly remember the 1987 market crash.  In just one day, the Dow Jones Index lost 25% of its value.  I bring this up because there seem to be some striking similarities between the market today and the time leading up to "Black Monday," in 1987.

According to the Zerohedge article," The Nightmare Scenario" Revisited: Albert Edwards Lays Out The Next Black Monday:

A retrospective macro-narrative was inevitably wrapped around the "Black Monday" 19 October 1987 equity market crash. My 30-year recollection is pretty good: 1987 saw a buoyant equity market rising briskly through most of the year as the oil price recovered from the previous year"s collapse (from $30 to $8, see chart below). After a year in the doldrums the US economy started to accelerate notably through 1987 as the impact of 1986 interest rate cuts and a lower dollar worked. By the time of the Oct crash the US ISM had surged from 50 at the start of the year to over 60 - a level seldom ever reached (see chart below). Amazingly the ISM has just last month exceeded 60.0 for only the second time since 1987. Spooky!

I am clear in my mind both at the time and now, that the US equity market was priced for a continuation of rapid economic and profit growth and this was under threat. The Dow was on nose-bleed valuations, especially as it had ignored the bond sell-off for most of 1997 (was it really 30 years ago that US 10y yields briefly crawled back above 10% - the last time we would see double-digit yields). None of this would have mattered if the US equity market had been cheap. In my view the record 25% ‘Black Monday’ October 19 decline was due to a horrendously expensive equity market suddenly confronted with the fear of recession. Equity valuations matter.

To summarize Albert Edwards, he shows that the rebound in the oil price allowed the markets to recover in "86 and "87 as manufacturing (ISM) improved significantly.  Furthermore, he says the ISM manufacturing number last month has exceeded the 60.0 mark, only for the second time since 1987.

Edwards concludes by saying the 1987 "Black Monday" crash would not have taken place if equity valuations were "cheap."  Unfortunately, for the investors today, the valuation of the Dow Jones Index is most definitely in NOSE-BLEED territory (and then some), as Edwards suggests.

While mainstream investors and many frustrated precious metals holders have totally dismissed fundamental valuations, all bubbles come to an end.  However, it seems to many; this one will go on forever.  It won"t.

Again, we can"t forget about the $600 billion worth of U.S. Treasury Green Juice that was pumped into the market over the past seven weeks.  To put that $600 billion into perspective, look at the following:

What $600 billion would buy:

2.0 million new homes worth $300,000  (New home sales Sept 2017, annualized = 677,000 units)

17.9 million new vehicles worth $33,560 (Total U.S. vehicle sales 2016 = 17.5 million)

15,000 metric tons of gold or five years of global mine supply (482 million oz)

The $600 billion pumped into the market over the past seven weeks would have purchased two million new homes or three years at the annual rate of 677,000 units.  Furthermore, it would have purchased 17.9 million vehicles, more than the 17.5 million sold in 2016.  Lastly, it would have purchased 15,000 metric tons (482 million oz) of gold.

Just think about that for a minute.  The $600 billion of U.S. Treasury Green Juice would have purchased a year"s worth U.S. citizens" vehicle purchases and three years worth of new homes.  That"s one hell of a lot of propping.... AND IN LESS THAN TWO MONTHS... LOL.

When the stock market finally does a nose-dive as its nose-bleed valuations finally succumb to investor FEAR, the price of gold and silver will head in the opposite direction, and violently.  Yes, I realize it has been a bit of a long haul and a lot of frustration, but it will be worth it.

Lastly, if you haven"t checked out our new PRECIOUS METALS INVESTING section or our new LOWEST COST PRECIOUS METALS STORAGE page, I highly recommend you do.

Check back for new articles and updates at the SRSrocco Report. 

China Launches Yuan-Ruble Payment System

The monetary regimes of China and Russia, two of the world"s most resource-rich nations, are drawing closer with every passing day.

In the latest push for convergence, China has established a payment versus payment (PVP) system for Chinese yuan and Russian ruble transactions in a move to reduce risks and improve the efficiency of its foreign exchange transactions. The PVP system for yuan and ruble transactions, designed to streamline commerce and curency transactions between the two nations, was launched on Monday after receiving approval from China’s central bank, according to a statement by the country’s foreign exchange trading system.

It marks the first time a PVP system has been established for trading the yuan and foreign currencies, said the statement, which was posted on Wednesday on the website of the China Foreign Exchange Trade System (CFETS). PVP systems allow simultaneous settlement of transactions in two different currencies.

According to CFETS, the system would reduce settlement risk as well as the risk of transactions taking place in different time zones, and improve foreign exchange market efficiency. Of course, if the two countries had a blockchain-based settlement system, they would already have all this and much more.

CFETS said it plans to introduce PVP systems for yuan transactions with other currencies based on China’s Belt and Road initiative, and complying with the process of renminbi internationalization. Russia, however, is a top priority: the world"s biggest oil producer recently became the largest source of oil for China, the world’s top energy consumer.

To be sure, the monetary convergence between Beijing and Moscow is hardly new. The most notable recent development took place in April, when the Russian central bank opened its first overseas office in Beijing on March 14, marking a step forward in forging a Beijing-Moscow alliance to bypass the US dollar in the global monetary system, and to phase-in a gold-backed standard of trade. As the South China Morning Post reported at the time, the new office was part of agreements made between the two neighbours "to seek stronger economic ties" since the West brought in sanctions against Russia over the Ukraine crisis and the oil-price slump hit the Russian economy.

At the time, Vladimir Shapovalov, a senior official at the Russian central bank, said the two central banks were drafting a memorandum of understanding to solve technical issues around China’s gold imports from Russia, and that details would be released soon, to which we said that If Russia - the world"s fourth largest gold producer after China, Japan and the US - is indeed set to become a major supplier of gold to China, the probability of a scenario hinted by many over the years, namely that Beijing is preparing to eventually unroll a gold-backed currency, increases by orders of magnitude.

Furthermore, also around the same time, as the Russian central bank was getting closer to China, China was responding in kind with the establishment of a clearing bank in Moscow for handling transactions in Chinese yuan. The Industrial and Commercial Bank of China (ICBC) officially started operating as a Chinese renminbi clearing bank in Russia on Wednesday this past Wednesday

"The financial regulatory authorities of China and Russia have signed a series of major agreements, which marks a new level of financial cooperation," Dmitry Skobelkin, the abovementioned deputy head of the Russian Central Bank, said. "The launching of renminbi clearing services in Russia will further expand local settlement business and promote financial cooperation between the two countries," he added according to.

Irina Rogova, a Russian financial analyst told the Russian magazine Expert that the clearing center could become a large financial hub for countries in the Eurasian Economic Union.

* * *

The creation of the clearing center, and the launch of PVP systems enables the two countries to further increase bilateral trade and investment while decreasing their dependence on the US dollar. It will create a pool of yuan liquidity in Russia that enables transactions for trade and financial operations to run smoothly. In expanding the use of national currencies for transactions, it could also potentially reduce the volatility of yuan and ruble exchange rates. The clearing center is one of a range of measures the People"s Bank of China and the Russian Central Bank have been looking at to deepen their co-operation, Sputnik reported.

But one of the most significant measures under consideration is the previously reported push for joint organization of trade in gold.

In recent years, China and Russia have been the world"s most active buyers of the precious metal. On a visit to China last year, the deputy head of the Russian Central Bank Sergey Shvetsov said that the two countries want to facilitate more transactions in gold between the two countries.

"We discussed the question of trade in gold. BRICS countries are large economies with large reserves of gold and an impressive volume of production and consumption of this precious metal. In China, the gold trade is conducted in Shanghai, in Russia it is in Moscow. Our idea is to create a link between the two cities in order to increase trade between the two markets," First Deputy Governor of the Russian Central Bank Sergey Shvetsov told Russia"s TASS news agency.

In other words, China and Russia are continuing to shift away from dollar-based trade, to commerce which will eventually be backstopped by gold, or what is gradually emerging as an Eastern gold standard, one shared between Russia and China, and which may day backstop their respective currencies.

Meanwhile, the price of gold continues to reflect none of these potentially tectonic strategic shifts, just as China - which has been the biggest accumulator of gold in recent years - likes it.

Russia Launches $100 Million Bitcoin-Mining Operation

In what some have called a “watershed” moment for bitcoin, Bloomberg reports that a company co-owned by an aide to Russian President Vladimir Putin is seeking to expand Russia’s bitcoin-mining industry, leveraging Russia"s cheap energy to rival China as the world’s largest mining market.

The company, known as Russian Miner Coin, or RMC, is seeking to raise $100 million in an initial coin offering, promising buyers a right to 18% of the company’s mining revenue, according to a presentation cited by Bloomberg.

“Russian Miner Coin is holding a so-called initial coin offering, where investors will use units of Ethereum or bitcoin to buy new RMC tokens. These new tokens will have rights to 18 percent of the revenue earned with the company’s mining equipment, according to a presentation posted on its website.”

According to Brian Kelly, a frequent CNBC contributor, the announcement is a “watershed” development in the history of bitcoin because it suggests that Putin recognizes the value of the pioneering digital currency as a reserve asset. The Russian president has already expressed an interest in blockchain technology – particularly Ethereum. In June, he met with Ethereum founder Vitalik Buterin on the sidelines of the St. Petersburg Economic Forum and offered his support for Buterin’s plans to help local partners adopt the technology in Russia.

I guess sooner than I thought, this is effectively Russia beginning to "buy" Bitcoin as a reserve asset -->https://t.co/P5XufYR5n4

— Brian Kelly (@BKBrianKelly) August 8, 2017

If u r a nation w/ the exorbitant privilege of a reserve currency you MUST pay attention to this --> #bitcoin $dxy https://t.co/n3joAcSrF6

— Brian Kelly (@BKBrianKelly) August 8, 2017

To me this feels like a watershed event

— Brian Kelly (@BKBrianKelly) August 8, 2017

Russia offers several advantages for bitcoin miners: For example, its excess power capacity is substantial.

“Russia has 20 gigawatts of excess power capacity, with consumer electricity prices as low as 80 kopeks (1.3 cents) per kilowatt hour, which is less than in China, RMC said in the presentation."

The company plans to build its own mining hardware using computer chips designed in Russia.

“RMC plans to use semiconductor chips designed in Russia for use in satellites to minimize power consumption in computers for crypto-mining, Putin’s internet ombudsman, Dmitry Marinichev, said at a news conference in Moscow. Russia has the potential to reach up to 30 percent share in global cryptocurrency mining in the future, Marinichev said, adding that $10 million from the proceeds of the ICO may be spent developing the processors.”

Though, in the beginning, the firm will rely on Bitfury chips. Bitfury, a company that manufactures mining equipment and also operates its own mining operations, was founded by Valery Vavilov, a Russian-speaking native of Latvia.

“The company initially plans to locate mining computers based on Bitfury chips in individual Russian households to challenge Bitmain by using Russia’s lower power prices.”

Already, at least one Russian government entity is experimenting with blockchain tech. The Central Bank of Russia has already deployed an Ethereum-based blockchain as a pilot project to process online payments and verify customer data with lenders including Sberbank PJSC.

The vote of confidence from a close Putin associate has helped lift the bitcoin price to all-time highs, according to data from CryptoCompare.

 

4 Financial Components To Improved Russian Relations

Authored by James Rickards via The Daily Reckoning,

With the U.S. preparing to confront China and go to war with North Korea, Russia is an indispensable ally for the U.S.

There are huge implications on capital markets as these hegemonic powers continue to edge toward war.

Here’s an overview of some of the financial implications of improved relations with Russia…

1: The End of OPEC and the Rise of the Tripartite Alliance

On energy, a new producer alliance is being created to replace the old OPEC model. This new alliance will be far more powerful than OPEC ever was because it involves the three largest energy producers in the world — the U.S., Russia, and Saudi Arabia. This Tripartite Alliance is being engineered by former CEO of Exxon and Secretary of State Rex Tillerson, with support from Trump, Putin and the new Crown Prince of Saudi Arabia, Mohammad bin Salman.

This alliance is perfectly positioned to enforce both a price cap ($60 per barrel to discourage fracking) and a price floor ($40 per barrel to mitigate the revenue impact on producers). Supply cheating by outsiders, including Iran and Nigeria, can be discouraged by directing order flow to the alliance members, which denies the cheaters of any revenue.

As a result, energy will trade in the range described. Traders can profit by buying energy plays when prices are in the low 40s and selling when prices hit the mid-to-high 50s.

2: Improved U.S. Relations with Russia and Sanctions Relief

Following Russia’s annexation of Crimea and intervention in eastern Ukraine, President Obama imposed stringent economic sanctions on Russia, its major banks and corporations, and certain political figures and oligarchs. The EU joined these sanctions at the behest of the U.S. Russia responded by imposing its own sanctions on Europe and the U.S. in the form of banning certain imports.

The sanctions have been a failure. They have had no impact on Russian behavior at all. Russia still acts freely in Crimea, eastern Ukraine, and in other spheres of influence such as Syria.

This failure was predictable. Russian culture thrives on adversity. Russians understand that their culture is distinctly non-western and has its roots in Slavic ethnicity and the Eastern Orthodox religion.

The benefits to Europe from sanctions relief would amplify what is already solid growth and monetary policy normalization there. This paints a bullish picture for the euro and the ruble as trade and financial ties expand beginning in 2018.

A review of Russia’s place in the world and its prospects would not be complete without an analysis of its monetary policies and positions.

Russia’s hard currency and gold foreign exchange reserves have been on a roller coaster ride since mid-2008, just before the panic of 2008 hit full force. Reserves were $600 billion in mid-2008 before falling to $380 billion by early 2009 at the bottom of the global contraction.

Reserves then expanded to over $500 billion by mid-2011, and remained in a range between $500 billion and $545 billion until early 2014.

Russia’s reserves nosedived beginning in mid-2014 due to the global collapse of oil prices, which fell from $100 per barrel to $24 per barrel by 2016. The Russian reserve position fell to a low of $350 billion by mid-2015, about where they were at the depths of the 2008 crisis.

Reserves then began a second recovery in late 2015 and today stand at around $420 billion. This recovery is a tribute to the skill of the head of the Central Bank of Russia, Elvira Nabiuillina, who has twice been honored as the “Central Banker of the Year.”

When U.S.-led sanctions prohibited Russian multinationals, such as Gazprom and Rosneft, from refinancing dollar- and euro-denominated debt in western capital markets in 2015, those giant companies turned to Nabiullina. They requested access to Russia’s remaining hard currency reserves to pay off maturing corporate debt.

Nabiullina mostly refused their requests and insisted that the reserves were for the benefit of the Russian people and the Russian economy and were not a slush fund for corporations partially controlled by Russian oligarchs.

Nabiullina’s hard line forced the Russian energy companies to make alternative arrangements including equity sales, joint ventures, and yuan loans from China (which could be swapped for hard currency) to pay their bills. As a result, Russia’s credit was not impaired and its reserve position gradually recovered.

3: Watch Russia’s “Gold-to-GDP” Ratio

Another critical aspect of Russia’s reserve management under Nabiullina is that, even at the height of the oil-related drawdown in mid-2015, the Central Bank of Russia never sold its gold. In fact, it continued expanding its gold reserves. This meant that gold reserves as a percentage of total reserves continued to grow.

The Russian reserve position today consists of approximately 17% gold compared to only about 2.5% for China. (The U.S. has about 70% of its foreign exchange reserves in gold; a surprisingly high percentage to most observers who never hear any positive remarks about gold from U.S. Treasury or Federal Reserve officials).

More important as a measure of Russia’s gold power are gold reserves as a percentage of GDP. If we take GDP as a metric for the economy, and gold as a metric for real money, then the gold-to-GDP ratio tells us how much real money is supporting the real economy. It is the inverse of leverage through government debt.

For the United States, that ratio is 1.8%. For China the ratio is estimated at 1.5% (China’s ratio is an estimate because China is non-transparent about the amount of gold in its reserves. The actual ratio is likely in a range of 1% to 3%).

For Russia, the gold-to-GDP ratio is a whopping 5.6%, or three times the U.S. ratio. The only other economic power that comes close to Russia is the Eurozone. It consists of the 19 nations that use the euro and they collectively have just over 10,000 metric tonnes of gold.

The gold-to-GDP ratio for the Eurozone is 3.6%; not as high as Russia, but double the U.S. ratio. On the whole, Russia is the strongest gold power in the world.

Russia is one of the five largest gold producers in the world. Currently Russian gold mining output is sold on the open market and the Russia central bank buys gold for its reserves on the open market. This stands in contrast to the situation in China, the world’s largest gold producer, where gold exports are banned, and are partly diverted to government reserves at below market prices.

However, Russia could easily flip to the China model in a financial crisis. This would rapidly increase Russian gold reserves at low cost, while drastically reducing global physical supply.

Russia and China are well-positioned to execute the greatest gold short squeeze in history. Of course, they have no interest is doing so right now because both are still buyers who favor low prices. At some point, they will flip to hoarders who favor high prices, but not yet.

Russia’s strong gold position combined with a very low amount of external debt leaves Russia in the best position to withstand economic distress without default or a funding crisis in the future. This is one reason U.S. economic sanctions have been relatively ineffective at hurting the Russian economy despite a slowdown and recent recession.

This trend in gold as a percentage of total reserves is highly revealing. It is part of a long-term effort by Russia and China (among others) to abandon the dollar-based international monetary system. They’d prefer a system less congenial to the United States and more accommodating to rising gold powers such as Russia, and rising geopolitical powers such as China.

Gold is not the only factor in the Russian plan to abandon the dollar-based system. Russia has actively promoted the ruble (RUB) as a regional reserve currency. The ruble has no prospect of becoming an international reserve currency for decades, if ever. Yet it is in wider use in bilateral trading payments in eastern Europe and central Asia where Russia is trying to reestablish local economic hegemony along the lines of the former Soviet empire.

4: Russian Relations and Blockchain Technology Will Challenge U.S. Dollar Dominance

Russia is also exploring the use of blockchain technology and crypto-currencies as a medium of exchange and as a payments platform. Recently, Putin met with Vitalik Buterin, the inventor of crypto-currency ethereum.

Buterin was born in Kolomna, Russia and was able to converse casually with Putin in their native Russian language. Here’s how Bloomberg reported the meeting on June 6, 2017:

Ethereum, the world’s largest cryptocurrency after bitcoin, has caught the attention of Vladimir Putin as a potential tool to help Russia diversity its economy beyond oil and gas…

‘The digital economy isn’t a separate industry, it’s essentially the foundation for creating brand new business models,’ Putin said at the event, discussing means to boost growth long-term after Russia ended its worst recession in two decades…

Russia’s central bank has already deployed an Ethereum-based blockchain as a pilot project to process online payments and verify customer data with lenders including Sberbank PJSC, Deputy Governor Olga Skorobogatova said at the St. Petersburg event. She didn’t rule out using Ethereum technologies for the development of a national virtual currency for Russia down the road.

Last week, Russia’s state development bank VEB agreed to start using Ethereum for some administrative functions. Steelmaker Severstal PJSC tested Ethereum’s blockchain for secure transfer of international credit letters. (Emphasis added).

Left unsaid in this report is the fact that the blockchain technology on which ethereum is based has unbreakable encryption. Its message traffic is routed through an infinite number of internet pathways that the U.S. cannot interdict. Any blockchain-based payment system offers a way to run a global payments system independent of existing systems controlled by the U.S. such as FedWire and SWIFT.

Bitcoin and ether boosters were quick to shout about the Putin-Buterin meeting as evidence of Russian support for bitcoin or ether. That’s not exactly right.

Putin’s interest is in the blockchain technology, not any particular crypto-currency. With the right technology platform, Russia could launch its own crypto-currency. This could be a digital-RUB or a jointly issued currency with China and other members of the Shanghai Cooperation Organization.

Whichever platform or direction Russia chooses, they all point in the same direction — the displacement of the dollar as a dominant transaction and reserve currency, and the creation of payments systems that the U.S. cannot sanction.

This project will continue on a gradual basis in the years ahead and then suddenly be unleashed in the equivalent a gold and digital Pearl Harbor sneak attack on the dollar.

What Does This All Add Up To?

Absent the phony scandals that have impeded the Russian–U.S. relationship for the past eight months, a substantial improvement in that relationship would have occurred already. As it is, the relationship will improve either because the scandals abate or because Trump pushes the relationship forward despite the scandals.

This is a simple matter of balance-of-power politics. With the U.S. preparing to confront China and go to war with North Korea, Russia is an indispensable ally-of-convenience for the U.S. This emerging U.S.–Russia condominium has implications far beyond China, including common interests in Syria, energy markets, and toward sanctions relief.

Notwithstanding the prospect of improved relations, Putin remains the geopolitical chess master he has always been. His long game involves the accumulation of gold, development of alternative payments systems, and ultimate demise of the dollar as the dominant global reserve currency.

It is up to the United States to defend that monetary ground. However, the likelihood of that is low because the U.S. does not even perceive the problem it’s facing, let alone the solution.

This evolving state of affairs creates enormous opportunities in the months and years ahead.

Moscow And Beijing Join Forces To Bypass US Dollar In Global Markets, Shift To Gold Trade

The Russian central bank opened its first overseas office in Beijing on March 14, marking a step forward in forging a Beijing-Moscow alliance to bypass the US dollar in the global monetary system, and to phase-in a gold-backed standard of trade.

According to the South China Morning Post the new office was part of agreements made between the two neighbours "to seek stronger economic ties" since the West brought in sanctions against Russia over the Ukraine crisis and the oil-price slump hit the Russian economy.

According to Dmitry Skobelkin, the deputy governor of the Central Bank of Russia, the opening of a Beijing representative office by the Central Bank of Russia was a “very timely” move to aid specific cooperation, including bond issuance, anti-money laundering and anti-terrorism measures between China and Russia.

The new central bank office was opened at a time when Russia is preparing to issue its first federal loan bonds denominated in Chinese yuan. Officials from China’s central bank and financial regulatory commissions attended the ceremony at the Russian embassy in Beijing, which was set up in October 1959 in the heyday of Sino-Soviet relations. Financial regulators from the two countries agreed last May to issue home currency-denominated bonds in each other’s markets, a move that was widely viewed as intended to eventually test the global reserve status of the US dollar.

Speaking on future ties with Russia, Chinese Premier Li Keqiang said in mid-March that Sino-Russian trade ties were affected by falling oil prices, but he added that he saw great potential in cooperation. Vladimir Shapovalov, a senior official at the Russian central bank, said the two central banks were drafting a memorandum of understanding to solve technical issues around China’s gold imports from Russia, and that details would be released soon.

If Russia - the world"s fourth largest gold producer after China, Japan and the US - is indeed set to become a major supplier of gold to China, the probability of a scenario hinted by many over the years, namely that Beijing is preparing to eventually unroll a gold-backed currency, increases by orders of magnitude.

* * *

Meanwhile, as the Russian central bank was getting closer to China, China was responding in kind with the establishment of a clearing bank in Moscow for handling transactions in Chinese yuan. The Industrial and Commercial Bank of China (ICBC) officially started operating as a Chinese renminbi clearing bank in Russia on Wednesday this past Wednesday. 

"The financial regulatory authorities of China and Russia have signed a series of major agreements, which marks a new level of financial cooperation," Dmitry Skobelkin, the abovementioned deputy head of the Russian Central Bank, said.

"The launching of renminbi clearing services in Russia will further expand local settlement business and promote financial cooperation between the two countries," he added according to.

Irina Rogova, a Russian financial analyst told the Russian magazine Expert that the clearing center could become a large financial hub for countries in the Eurasian Economic Union.

* * *

Bypassing the US dollar appears to be paying off: according to the Chinese State Administration of Taxation, trade turnover between China and Russia increased by 34% in January, in annual terms. Bilateral trade in January 2017 amounted to $6.55 billion. China’s exports to Russia grew 29.5% reaching $3.41 billion, while imports from Russia increased by 39.3%, to $3.14 billion. Just as many suspected, with Russian sanctions forcing Moscow to find other trading partners, chief among which China, this is precisely what has happened.

The creation of the clearing center enables the two countries to further increase bilateral trade and investment while decreasing their dependence on the US dollar. It will create a pool of yuan liquidity in Russia that enables transactions for trade and financial operations to run smoothly.

In expanding the use of national currencies for transactions, it could also potentially reduce the volatility of yuan and ruble exchange rates. The clearing center is one of a range of measures the People"s Bank of China and the Russian Central Bank have been looking at to deepen their co-operation, Sputnik reported.

One of the most significant measures under consideration is the previously reported push for joint organization of trade in gold. In recent years, China and Russia have been the world"s most active buyers of the precious metal. On a visit to China last year, the deputy head of the Russian Central Bank Sergey Shvetsov said that the two countries want to facilitate more transactions in gold between the two countries.

"We discussed the question of trade in gold. BRICS countries are large economies with large reserves of gold and an impressive volume of production and consumption of this precious metal. In China, the gold trade is conducted in Shanghai, in Russia it is in Moscow. Our idea is to create a link between the two cities in order to increase trade between the two markets," First Deputy Governor of the Russian Central Bank Sergey Shvetsov told Russia"s TASS news agency.

In other words, China and Russia are shifting away from dollar-based trade, to commerce which will eventually be backstopped by gold, or what is gradually emerging as an Eastern gold standard, one shared between Russia and China, and which may day backstop their respective currencies.

Meanwhile, the price of gold continues to reflect none of these potentially tectonic strategic shifts, just as China - which has been the biggest accumulator of gold in recent years - likes it.

Leading French Presidential Candidate Le Pen Spotted At Trump Tower

As we detailed earlier, leading French presidential candidate Marine Le Pen, is in New York for an unexpected visit. While she has no public agenda to meet with Donald Trump, she has just been spotted there drinking coffee.

"Le Pen, who leads in the latest opinion poll for the presidency, is making a private visit to New York, her campaign chief of staff, David Rachline, said in a text-message exchange. He declined to say if she would meet publicly with President-elect Donald Trump or anyone from his entourage."

Well she is in Trump Tower, grabbing coffee...

As we noted earlier, while it was not confirmed that Le Pen, who is set to launch her official campaign on Feb. 4 in a meeting with supporters in the French city of Lyon, will meet with Trump it seems very likely give the picture above. She has repeatedly said she was supportive of Trump’s policies for the U.S. and called him “a sign of hope” for European anti-establishment politicians in a press conference this month.

Trump has met on several occasions with Nigel Farage, the former leader of the U.K. Independence Party, most recently in December.

What would the motive behind such a meeting be? Besides the usual pleasntries, it is possible that Le Pen will seek a loan from the US president-elect. Recall that as reported last month, "the National Front leader is struggling to raise the €20 million ($21 million) she needs to fund the French presidential and legislative campaigns in 2017 after the party’s Russian lender failed."

This past July, the Central Bank of Russia revoked the license of the National Front’s Moscow-based lender First Czech Russian Bank OOO and Le Pen"s party has still to find another backer, according to treasurer Wallerand de Saint Just. Saint Just said he’s seeking international financiers in countries including Russia because French banks have refused to fund his party.

In a phone interview with Bloomberg, Saint Just said that “the loss of the FCRB was a hard blow for us" adding that “the Russia loan was a stable resource. Now we are still searching for loans.”

That said, the optics of Trump funding a frontrunning for the French presidency would be even worse than Le Pen appealing to Putin for more cash. Which is precisely why Trump may end up doing it.

Le Pen Presidential Campaign Threatened By Russian Bank Failure

A problem has emerged for France"s anti-immigrant, anti-Euro presidential frontrunner, Marine Le Pen, and it has little to do with being behind in the polls ahead of the 2017 presidential elections, far from it. It has, however, everything to do with something far simpler: money, as the National Front leader is suddenly struggling to raise the €20 million ($21 million) she needs to fund the French presidential and legislative campaigns in 2017 after the party’s Russian lender failed, the party treasurer said.

This past July, the Central Bank of Russia revoked the license of the National Front’s Moscow-based lender First Czech Russian Bank OOO and Le Pen"s party has still to find another backer, according to treasurer Wallerand de Saint Just. Saint Just said he’s seeking international financiers in countries including Russia because French banks have refused to fund his party.

In a phone interview with Bloomberg, Saint Just said that “the loss of the FCRB was a hard blow for us" adding that “the Russia loan was a stable resource. Now we are still searching for loans.”

And, since a Le Pen victory threatens to be the final straw that crushes the European establishment camel, it is no surprise that no existing financial organizations are willing to provide her with the funds she may need to crush them.

Last week, the French Le Parisian reported that a U.S. investment bank was preparing to lend the party $20 million in August, but pulled the plug on the deal at the last minute.

Le Pen’s ties with Russia have come under scrutiny in recent weeks amid reports that the CIA "concluded" that Putin directed hackers to buoy the candidacy of Donald Trump in the U.S. Le Pen is running second in the race to become France’s next president and is openly supportive of Putin’s military operations in Syria. The now defunct Russian bank lent the National Front €9 million in 2014. In the same year, party founder Jean-Marie Le Pen’s political fund Cotelec received another 2 million-euro loan from a Russian-backed fund based in Cyprus, news website Mediapart reported. Saint Just said Cotelec helped fund the party’s 2015 regional campaign.

Realizing which way the "Putin conspiracy theory" winds blow, Le Pen knows she wouldn’t have any problem in getting a Russian loan but, according to Bloomberg, she has decided the risks outweigh the benefits because she’d be hounded for this by the French media, said Sergei Markov, a political consultant to the Kremlin administration.  “Le Pen doesn’t want to endanger her chances,” Markov said by phone. While Russia sees the conservative candidate Francois Fillon as a strong presidential contender, it also doesn’t rule out a far-right victory, he said.

Meanwhile, Le Pen is surviving on a modest grassroots campaign, having raised some money from followers and the party has some reserves it can draw on, Saint Just said, without giving any figures. “In these funding matters you have to remain discreet,” he said. “No figures, no names.”

Of course, should Le Pen proceed to win the French election, it would be another crushing blow for the status quo, and another huge victory for the Kremlin, which would then be accused of rigging the entire world.

As Bloomberg adds, the National Front leader and her allies have made multiple trips to Moscow or Crimea in recent years. Putin this month signed a “working agreement” with Austria’s populist Freedom Party in Moscow, after the group reached the runoff for its presidential election.

Ironically, amid concern that Russia may also seek to influence European elections, the National Front has begun to play down its ties to Moscow, something which clearly neither bothered Trump, nor adversely impacted his victory in presidential race. In February Saint Just said the party was reaching out to Russian banks for 25 million euros to bankroll its presidential campaign.

Unlike other candidates, Le Pen hasn’t disclosed her campaign’s funding or spending.

Others are more open: republicans nominee Francois Fillon, who is leading in the polls, published the spending on his primary campaign on Wednesday while centrist contender Emmanuel Macron said his newly founded party En Marche! has raised 4 million euros from donors. Both disclosures were voluntary as campaign accounts don’t have be made public in France.

The two-round presidential election is scheduled for April 23 and May 7 and the French will return to the polls on June 11 and 18 to elect delegates to the National Assembly, the lower chamber.

Should Le Pen remain financially isolated, her chance of winning the election in which she is perceived as a long shot, but all too possible in light of recent stunning political upheavals, will quickly evaporate.