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Gold Hits New Record as News Spread of a Possible Replacement of Dollars in the Global Oil Trade

By: Steve Johnson

10/6/2009 - 30 Comments

Gold hit a new all-time record high above $1,041 in morning trading, passing the previous intraday record of $1,033.90 set last year March 17, 2008.

The primary reason for the new record high was the news that the Persian Gulf states and rich oil countries including Japan, Russia and China are discussing replacing the U.S. dollar as the primary currency for oil trading.

The source of this breaking news story was the U.K.’s Independent newspaper, but Saudi Arabia’s Central Bank Governor Muhammad al-Jasser and Kuwaiti Oil Minister Sheikh Ahmed Al- Abdullah Al-Sabah denied any talks were held.

Just last month Iran, the fifth largest oil exporter in the world, replaced the dollar with the Euro for all oil trades.

Australia Raises Interest Rates

Another blow to the dollar came earlier in the morning when Australia’s central bank became the first nation of the G20 to raise interest rates since the financial crisis began. This was in direct contras to the U.S. and world bank's decision to continue to flood the world with cheap money. Australia’s dollar gained as much as 1.3 percent to 88.96 U.S. cents, the highest level since August 2008.

Reserve Currency Replacement 

The dollars reserve currency status is primarily based on an OPEC agreement to use dollars to trade oil.  Under an OPEC agreement, all oil has been traded in US dollars since 1971 which made the US dollar the de facto major international trading currency. 

All nations have to hoard dollars to buy oil. This fact has given America a huge trading advantage and helped make it the dominant economy in the world.

In 1971 the dollar was still backed by gold and because all other major currencies were linked to dollars, they were also backed by gold.  The dollar is no longer backed by gold and neither are any major currencies, which are therefore subject to the monetary policies of the U.S. Federal Reserve

As long as the U.S. Federal Reserve maintained a relatively contant supply of dollars the global financial system could have continued to operate as if it was still linked to gold. But those days are far behind us and the Federal Reserve has become a source of global inflation

In order to stabilize the global financial system, all major currencies need to be backed by gold so that inflation can be controlled and asset bubbles can be avoided.  Unless the dollar is re-linked to gold again, the world needs to find a replacement to stabilize the global financial system.

As I wrote last year,

“Bailing out the US economy from this recession will take the support of the entire world.  It will take the combined effort of all wealthy nations acting together to support the dollar through this recession.

This unilateral support for the dollar, in the midst of a global financial meltdown is unlikely to hold up and eventually the dollar will sink.

The fall of the dollar will create the largest financial crisis in the world, which will force a replacement for the dollar as the Reserve Currency of the world. 

The dollar could lose 80-90% of its value – devastating the US economy.  It is unlikely that America will recover to its prosperity of the past any time soon from the global financial crisis that is underway.”

I also wrote,

“The only chance that world government leaders have to stop the global recession turning into a global depression is the stop central banks from increasing their currency, and the only way to do that is to link the world dominant currencies to gold

This is likely to cause the demand for gold to drastically increase and perhaps bring new government controls to the ownership of gold.  The price of gold is likely to continue to increase as more and more of these meetings discuss linking gold to currency. “

Fed to Raise Interest Rates

This is really bad news for the Federal Reserve.  They will be forced to start raising interest rates even while the U.S. economy has not started recovering and is still facing staggeringly high unemployment.

The world is beginning to take a stand against the inflationary policies of the Federal Reserve, and in doing so, they are risking the U.S. military withdrawal from the entire world which will surely lead many nations to increase their own military spending.

World leaders are also risking the loss of their investments in U.S. dollar reserves, as trillions of dollars invested in U.S. treasuries will lose value as the dollar sinks. 

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