The China-Arab Summit took place on Friday, December 9th, and saw President Xi of China and all the Arab states gather in Riyadh to discuss the future of their relations. While many topics were covered, one seemed to stand out in relation to what we do as Swiss asset managers in helping Americans with asset preservation against a sinking USD; it was the invitation for Arab nations to sell their oil and gas in Shanghai and yuan. If put into practice, it could end the decades-long monopolization of oil and gas being sold in USD. Those effects could put pressure on the USD value in the long term. To understand this, there is some context needed on what effects this could have on the USD and the United States economy.
Bretton Woods Agreement and the USD
We saw many currencies pinned to the USD in terms of value after the traditional gold standard was abandoned. The Bretton Woods Agreement was reached in a 1944 summit held in New Hampshire, USA, on a site by the same name. The agreement was reached by 730 delegates, who were the representatives of the 44 allied nations that attended the summit. The delegates, within the contract, used the gold standard to create a fixed currency exchange rate and created the International Monetary Fund (IMF) and the World Bank. While the fixed currency exchange rate system eventually failed, it provided much-needed stability at the time of its creation.1 After the system's fall, the world went through a time of figuring out how the world would function with floating currencies. Learn more on the podcast we did about the Bretton Woods Agreement here: The Bretton Woods System
The USD seemed to find its value and stability in part by the agreement they made with many of the OPEC nations in 1974 to sell oil exclusively for U.S. dollars and buy U.S. Treasuries with the proceeds. 2 Some would go as far as to say that this agreement was the Bretton Woods II, because of the near monopolization of the sale of oil in the U.S. and the stability it brought to the USD while oil taking the place of gold. While some countries have not been a part of the deal to sell their oil in USD, the majority have since the agreement was reached in the 1970s.
The meeting of China and the Arab League of Nations held in Saudi Arabia does not mean that the OPEC nations will accept President Xi's offer to sell their oil in yuan; it does raise legitimate questions as to how it would affect the USD should they start to do so.
China's growing influence in the Gulf has unnerved the United States because, in the past, Saudia Arabia has previously threatened to stop selling oil exclusively in USD when possible U.S. legislation exposing OPEC members to antitrust lawsuits was being suggested. For some time now, Beijing has been lobbying for the use of its yuan currency in trade instead of the U.S. dollar. A move that would threaten the use of the USD globally and one that would weaken the value of the USD should it come about.
In terms of selling oil as an independent country, the move for Saudi Arabia could make sense as it would allow them to pay Chinese imports directly. However, this may not be the right time for the move because many of Saudi Arabia's assets and reserves are in dollars, including more than $120 billion of U.S. Treasuries that Riyadh holds, plus the Saudi riyal, like other Gulf currencies, is pegged to the dollar. 3 While the sale of oil remains consistent in USD, the future seems to be a bit more uncertain after the China-Arab Summit this last week.
What Can Be Done
The majority of us look on as politicians and princes shake hands and make deals that will affect us, leaving us to deal with and adapt to their whims and wills. But the good news is there are options for Americans looking to preserve the value of their currency from the political turmoil of the U.S. and its competitors. One way to do this is to ensure your wealth is not overly exposed to one currency. Through international diversification, American investors can help to offset some of the risks of the loss in USD value over time by finding currencies that have stable track records in maintaining their value and are less exposed to the political rivalries that work against one another.
An example of how this can be done is by working with a Swiss asset manager to help them move a portion of their wealth offshore to be invested for the purposes of diversification and capital preservation (the preservation of value). The reason for working and moving assets offshore to Switzerland are many. Firstly the private banking industry in Switzerland is the best in the world and offers professionals who not only have expertise in finance and investing but also in working with Americans to protect their hard-earned wealth. The second is the Swiss franc and its historical development as a safe haven currency. The economic environment is well tended by its government and central bank due to the effect of fiscal and monetary policy allowing the Swiss franc to thrive in both good and poor economic cycles.
Further, Switzerland was never a part of the Bretton Woods Agreement. This is significant because it points to the independent nature of the Swiss and their ability to navigate the global financial challenges both historically and today. The long track record of Switzerland remaining independence and maintaining the value of its currency makes it a premier environment for Americans to move assets offshore in an effort to protect against the loss of value to the USD.
The current example of the ability of the Swiss franc to avoid the loss of value is the inflation numbers over the financial crisis when the U.S. saw inflation as high as 9.1%, and the highest Switzerland saw was 3.6%. The loss in value was significantly less due to how the Swiss have been able to react quickly with efficient and effective solutions for their economy in challenging times. If you are interested in learning more about how you can move assets offshore to Switzerland you can contact us by following the link here: Connect with us.
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