Russia and China's Plan to Destroy the Dollar...and How to Protect Your Wealth From It

Dear Global Intelligence Letter subscriber,

Late autumn 2012. A sedan winds slowly through a forested landscape of spruce, alder, and birch trees dressed in a light dusting of morning snow. Gray clouds hang low and ominous in the early morning light. The driver slows, unsure of where to go.

A small wooden house appears on a side road in the forest. White smoke lifts from the chimney, quickly merging with the low clouds.

The car pulls to a stop.

"I think here," the driver offers in a thick, Eastern European accent.

The passenger looks around...nothing looks familiar. He steps out, snow crunching underfoot and shattering the silence. The car motors away.

In the window, a gray-haired man gazes out.

He watches intently as the passenger approaches the house and knocks on the door.

The location: a leafy suburb of Tallinn, Estonia.

The passenger: me.

The man in the window: a former member of the Congress of People's Deputies of the Soviet Union, once the most powerful state body in the former USSR.

He opens the door with a smile, welcomes me in, and is soon sharing Russia's plan to "start a new cold war." His words, not mine.

This, he tells me, will be a very different kind of cold war. It will not have the same physically destructive power as a "shoot 'em up" war, but it will harm more people—basically everyone—because the battlefield will be located everywhere money is spent.

Economic destruction will tear through countries around the globe, particularly America. It will leave in its wake poverty, rampant inflation, devaluation of the dollars in your wallet, and an entirely new global monetary order.

I know how all of that sounds...like delusional ravings or the plot of some James Bond or Jack Ryan story. Indeed, few wanted to believe me when I first wrote about this meeting in the woods of Estonia more than a decade ago. Few probably want to believe me now.

But know this: The event the man warned about... it is now beginning to unfold. And serious economists are finally starting to sit up and take notice.

There is some good news, though. There is still time to protect your wealth from this new cold war by investing in the financial savior of tomorrow. That's not marketing hype. It's a fact, rooted in a very long history.

I'll tell you about this savior in a moment. But first, let me explain this event and why it threatens to upend a century of status quo...

The Long Reign of King Dollar

This new cold war has one aim: To destroy the greatest weapon America has ever possessed—King Dollar.

For a century now, the dollar has stood atop the mountain of global currencies. It has officially served as the world's "reserve currency" since the summer of 1944, when in the waning months of World War II, Allied powers gathered in Bretton Woods, New Hampshire to fundamentally reshape the world economy by establishing our buck as the currency in which all global trade would be priced.

Today, roughly 85% of global trade occurs in dollars. No matter if that's Colombia trading raw sugar with Bulgaria, the swap takes place in dollars. Bulgarian sugar buyers must convert their lev into greenbacks that they then dispatch to Colombia, where sugar mills must then convert those dollars back into Colombian pesos to pay the costs of running their business.

Moreover, 60% of global currency reserves—the money that the world's central banks keep on hand—are in U.S. dollars for various reasons ranging from international finance obligations (trade and debt repayment costs) to portfolio diversity.

All of that creates artificially high demand for the U.S. dollar. It is the primary reason the dollar maintains such strength relative to other currencies.

Without reserve status, the dollar would be valued lower relative to other world currencies because central banks wouldn't have to hold bundles of greenbacks, and companies the world over would not have to buy dollars to facilitate trade.

This high global demand for dollars means that prices for pretty much everything in the U.S. are cheaper than they would otherwise be.

If the dollar was not the global reserve currency, we'd be paying currency-conversion costs, just like every other country. Our wallets would feel the effects at the supermarket and just about every consumer-goods retailer.

And if demand for dollars wasn't propped up, the U.S. government would never have been able to borrow as much money as it has from the world.

Today, global buyers are effectively forced to buy U.S. Treasury bonds to meet their currency-reserve needs. If that wasn't the case, the yield on Treasury bonds would have to be higher to attract global buyers. That would push up the interest rates that Americans pay on mortgages, car leases, credit cards, and other forms of debt—all of which are based on Treasury bond yields.

The dollar, then, is the most powerful financial weapon in the world. It is the key to America's wealth and power.

The benefits that the dollar bequeaths to America and Americans have long annoyed much of the world. Indeed, back in the 1960s, Valéry Giscard d'Estaing, who would later become president of France, coined the term "exorbitant privilege" to describe the economic advantage the dollar's reserve status awards to America's economy and her consumers.

America's enemies, in particular, bristle at having to use the dollar in their own economies, and have long sought a way to undermine its global dominance.

Which takes us back to the wooden house in an Estonian forest...

The Plan to Destroy the Dollar

The man in the window was Ivar Raig.

He was born in southern Estonia in 1953, when the country was a state in the former Soviet Union. Ivar grew up a member of the Communist Party. In time, he would serve in the highest levels of the Soviet government.

When the USSR collapsed in 1991 and Estonia gained its independence, Ivar transitioned into Estonian politics.

Perhaps the most important note about his resume is that he is a trained economist. He served in various economic roles in both the USSR and Estonia and—the really big deal—helped Estonia build its own currency, the kroon, after independence.

When he opened the door to greet me all those years ago at his forested home in Tallinn, the smell of apples and cinnamon emanated from the kitchen. He smiled and invited me in, shocked, he told me, that an American had heard of him and would travel all the way from the U.S. just to spend time chatting with him.

As we sat in his living room, his wife appeared with coffee and a plate of apple cake she had just finished preparing for my visit. Over the next couple of hours, Ivar shared with me all kinds of stories about the economics of modern-day Russia, as well as Estonia's emergence as one of the strongest economies in the European Union.

Then, at one point in the conversation, Ivar mentioned in passing that he was fielding at least one call a month from the Russian central bank.

I stopped him, somewhat stunned, and asked why the Russian central bank would regularly be calling an Estonian economist.

He told me it was because Russia and China were working together to build a new reserve currency, and because of his experience launching a currency, Russia wanted his input.

Ivar told me that Russia wanted to attack the dollar by releasing a new hard currency backed by gold, oil and various other commodities. He said China was onboard with the plan but was cautious and kept telling the Russians, "Not yet. Now is not the time. Be patient."

Immediately, I knew he was telling me the truth.

A hard currency is one that's backed by one or more hard assets. There was a time when the U.S. dollar was a hard currency—backed by gold for more than 100 years. Before Nixon ended the gold standard in 1971, countries could go to the U.S. government and swap $35 for an ounce of gold at any time. Now, the U.S. dollar is a fiat currency, meaning it is backed by nothing more than a promise from Uncle Sam. Basically, it's an IOU.

For years before meeting Ivar, I'd been reading all these economic stories about China gobbling up so much of the world's natural resources, like copper, iron ore, and silver. The numbers always puzzled economists because there was no possible way the country could be using such a vast quantity of resources.

I blurted out to Ivar, "So that's why China has been buying so many hard commodities! It's building a war chest to back a hard currency."

He smiled and shrugged.

After my meeting with Ivar, I wrote a story noting that China and Russia would one day launch a global reserve currency based on hard assets. My report mainly solicited laughs among mainstream economists.

But nobody's laughing now...

The Plan Is in Motion

Last July, headlines like the one below from Insider started appearing in the business sections of major publications across the world.

Russia and China are brewing up a challenge to dollar dominance by creating a new reserve currency.

A headline like this doesn't cause much angst with lots of Americans because we Americans generally don't perceive much threat from any other currency in the world, particularly from Russia or China.

After all, the Chinese yuan is tightly controlled by the Chinese government, which has a demonstrated history of manipulating the currency to further its own ends. Hardly suitable for a global reserve currency. The ruble, meanwhile, comes from what is now a pariah nation and an economy under global sanctions because of Moscow's unprovoked attack on neighboring Ukraine.

Yet, Russia and China building a new reserve currency is not an event to blithely cast aside. The pair are in cahoots with the three other members of the BRICS nations—Brazil, India, and South Africa. Countries including Egypt, Turkey, Algeria, and Saudi Arabia are also talking about joining the effort.

I realize just how easily lots of people will disregard that hodge-podge of countries. But that would be a mistake for several reasons:

1. Those nine countries combined represent 28% of the global economy, and 44% of the world's population.
2. All of them are resource-rich, which means they have the capability to build a currency backed by hard assets.
3. Many are clear adversaries of the U.S. Some are apathetic, while others merely pretend to be friends of America for national security reasons.
4. Many other nations—lots of them antagonistic to America—would gladly join that collection of countries or be more than happy to store some of their national savings in a non-dollar, non-Western reserve currency.

This effort to build a new reserve currency is a direct assault on the dollar's dominance.

"This is a move to address the perceived U.S.-hegemony of the IMF [International Monetary Fund]," Chris Turner, global head of markets at financial giant ING, recently wrote in a note to investment-banking clients. "It will allow BRICS to build their own sphere of influence and unit of currency within that sphere."

Granted, neither China nor Russia has said anything (yet) about backing this new reserve currency with hard assets, but I'm certain there's a method behind that silence.

China is a nation that plans for three generations. America is a country that plans for Friday night.

I am convinced China is biding its time while it puts into place everything it needs before it announces this new reserve currency is going to be backed by hard assets.

For years, China has been stockpiling all manner of natural resources, from iron ore to molybdenum. The country is also the world's largest miner of gold (none of which leaves its borders) and the largest importer of gold. Russia, meanwhile, is obese with resources including gold, copper, titanium, tin, oil, natural gas, and more.

And there are the other countries that may join this effort. They're rich with oil, uranium, platinum, palladium, copper, gold, silver, iron, nickel, zinc, and a veritable smorgasbord of natural resources that would fit very nicely into a reserve currency backed by hard assets.

Don't be surprised if China and Russia ultimately announce that the BRICS reserve currency is backed by a basket of commodities including gold, silver, oil, gas, palladium, and various industrial metals.

That means the currency would be convertible, at any time, into the equivalent value of that basket of hard assets, just as the U.S. dollar used to be convertible into gold.

Russia and China know that such a currency could draw in a vast amount of demand from countries which right now fear that vast and growing debts will collapse the U.S. dollar and the Western economic system.

We're already seeing evidence that countries around the world, including friendly nations, are increasingly worried about our debt levels.

Last year, global central banks snapped up gold at the fastest pace in more than half a century, according to the World Gold Council. Those central banks are rightly worried that a Western debt crisis will destroy currencies all over the world, and that the only buffer is a hard asset like gold.

Not hard to see, then, that a reserve currency backed by hard assets including gold would very likely find substantial global demand.

The Inevitable U.S.-China Conflict

The plan for a new reserve currency may have been hatched in Moscow, but it's clear that Beijing is now the one calling the shots. China is fixated on overtaking America.

Even as China works with Russia and the BRICS nations to build this reserve currency, it's also trying to convince Saudi Arabia to begin selling Gulf oil in Chinese yuan instead of Uncle Sam's greenbacks.

This goal was announced at the end of last year when Chinese President Xi Jinping embarked on a rare trip overseas to meet with Saudi leadership in Riyadh. The Saudis have not yet agreed to this plan, but there's good reason to think they ultimately will because both sides have been negotiating this for many months now at the highest levels of government.

China's plan is to expand the flow of oil trading through the Shanghai Petroleum and Natural Gas Exchange, which launched in September 2021.

Xi is calling for Gulf Cooperation Council nations (Saudi Arabia and the rest of the Arabian Peninsula, excluding Yemen) to sell their oil in yuan through the Shanghai exchange. And Xi has influence behind his words: China currently sources about 40% of its oil imports from GCC countries.

Right now, roughly 80% of global oil sales are priced in dollars, and Saudi Arabia has exclusively traded oil for dollars since 1974. Allowing China to use the yuan instead—and having increasing amounts of global oil production flow through the Shanghai exchange—would represent an existential threat to King Dollar and begin to see countries call into question its current role as the world's reserve currency.

Trading volume would increasingly find its way to the Shanghai exchange, meaning away from U.S. and European exchanges. Lots of countries would certainly buy their oil in Shanghai, either out of necessity or because of animosity toward a U.S. government that has shown a penchant for using the dollar as a weapon to bludgeon nations into accepting American dictates.

So, how does this end?

There is a thesis you might have heard of called the Thucydides Trap.

This is the idea that when a rising power bumps up against an existing power, one of two outcomes must occur: The existing power yields to the rising power...or war erupts.

This trap has emerged 16 times going back to ancient history, and in 12 instances war resulted.

Raise your hand if you think the U.S. will yield its most powerful force—the dollar—to China?

Right. No one thinks that.

This coming conflict may not involve guns—though it very well could, and it could be centered on Taiwan. More likely, though, this will be a financial war. And there, China has a stacked arsenal.

Where America has debt, China has wealth—roughly $3.5 trillion in foreign currency reserves and an amount of gold that is wildly understated.

Officially, China holds about 1,980 tons of gold, according to the World Gold Council. But that's almost certainly a lie.

In 2007, China became the world's largest miner of gold, a position it has held every year since. Since 2000, the country has mined more than 6,800 tons of gold, and there are two facts to know about that production:

1. The Chinese government owns more than half of domestic gold production through state-owned gold miners.
2. The export of domestic gold from China is illegal.

It seems pretty clear, then, that more than 6,800 tons of gold mined in the last 20-plus years is somewhere inside China, with much of it in the government's coffers.

And then there's this little tidbit: Along with being the world's largest miner of gold, China is also the world's largest importer of gold. That import data is trackable through Hong Kong and shows more than 6,700 tons of gold flowing into the country. Virtually nothing flows back out.

That right there is more than 13,000 tons of gold.

Uncle Sam theoretically owns a bit more than 8,000 tons at Fort Knox, but there are plausible reasons to believe that too could be a lie.

The gold that supposedly lives there was last partially audited in 1953 and all efforts by Congress since then to audit the gold (owned by the Federal Reserve, which is not a U.S. government agency) have been rebuffed. Moreover, just as Hong Kong tracks gold shipments, so too does America...and those documents show that over the last 20 years or so, far more gold left American shores than came in or was mined here.

No one can say where that excess gold originated.

Is Uncle Sam draining Fort Knox?

Only the Federal Reserve knows, and it's not saying a word or allowing anyone in government to audit Fort Knox.

Finally, China owns a boatload of U.S. debt—almost $1 trillion worth, as of last fall. That's a weapon of mass destruction far more powerful than any nuclear missile.

If China (with Russia) were to unleash a reserve currency backed by hard assets, have an oil exchange where petroleum is priced in yuan, and then suddenly dump U.S. debt...it would be cataclysmic for America.

Uncle Sam relies on other countries to buy his debt so that he can afford his bills. If China were to abandon U.S. debt, America would not find another country or countries with pockets deep enough to pick up the slack.

The dollar would collapse.

Interest rates would soar beyond the capacity of consumers, businesses, and the government to absorb the increased debt repayment costs.

Life and lifestyles in the U.S. would devolve.

The long-touted thesis is that China would be hurting itself by pursuing such a tactic because the value of its foreign currency reserves would plunge. And that's very true.

But that thesis also blindly (or willfully) overlooks one salient fact...

All the gold that China owns.

Gold and the dollar generally move in opposition, as though on a see-saw. Thus, even as China's foreign currency reserves declined, the value of its gold would soar.

China, in effect, has created the world's largest hedge fund, and it's positioned specifically for a dollar decline.

It also seems to be positioning its citizenry for a coming crisis.

Since 2009, China has been urging its people to buy gold and silver, which, logically, is where a lot of gold production and imports are likely being consumed. That's a huge and fundamental shift in messaging for a country that once imposed strict controls on gold purchases by its citizens.

Why, one must ask, would China suddenly make this significant change in financial policy and start urging its people to buy precious metals?

Has China been preparing its people for a global monetary reset?

Ultimately, what we have is this:

• China and Russia are actively and openly working to dethrone King Dollar by creating a new reserve currency that will encourage various central banks to dump dollars for a BRICS currency. And if it turns out the new currency is backed by hard assets, then the dollar is in deep trouble because many countries will gladly hold a hard asset currency over one backed by mountains of debt.
• China is out to undermine the dollar's supremacy by pushing to price oil in yuan.
• China has the world largest foreign currency reserves, and quite likely the world's largest stash of gold.
• China for more than a decade has been urging its people to buy gold.

To me, all these signs indicate that a monetary reset is afoot.

And we don't necessarily need to see a full monetary reset...

Even if just 20% to 30% of the global oil trade starts occurring in Chinese yuan, or if central banks convert just 10% to 20% of their reserves to this new BRICS currency, it would still be massively damaging to the value of the U.S. dollar.

And that's why I am urging you to act to protect yourself and your lifestyle by following in the footsteps of China and loading up on gold.

Gold as Lifestyle Protection Insurance

I've been buying gold in my personal life now for probably 15 years. I own rare gold coins from centuries ago, and raw bullion coins from the 19th and 20th centuries that countries once used in global trade or that consumers around the world once used as pocket change.

I own gold mining shares in my largest retirement account, and I own physical gold exchange-traded funds in a number of investment accounts.

In all, gold is easily 20% of my overall investment and savings portfolio.

Gold takes up that much space in my financial life because I have long worried that American and Western debts are assured disasters, and that the U.S. dollar is destined to lose reserve currency status. That's simply history talking, since not a single reserve currency going back to the 13th century has survived more than about 80 to 100 years.

The dollar is about 100 years into its reign.

Meanwhile, China's hoarding of gold, and its concerted effort with Russia to undermine King Dollar on the global stage, is not something I scoff at. Ivar Raig told me a decade ago what was coming. At the time, many people laughed. Now it's clear he was dead-on accurate.

For me, this is a moment to begin preparing. You have time, but I can't say how much. The gears of this plan are already in motion.

So, you absolutely want to own gold.

Gold is going to be part of the solution to the monetary challenges ahead because it cannot be manipulated like fiat currencies can. To buy more guns and butter, all a nation must do today is push a button on a computer and create new currency units—be that dollars or euros—which makes every existing dollar and euro worth a bit less.

But expanding the gold supply requires real effort.

You have to find new sources of gold, then mine them, and then fabricate the ore into metal.

No one—not even the Federal Reserve—can gin up new gold bars at the push of a button.

For that reason, gold is the anti-fiat currency...an asset that answers to no overlord.

There's a reason that gold has served as the antidote to every major monetary reset in history. And the world is not so advanced in 2022 that "this time is different." The only thing that's different today are the monetary thinkers in government and economic think tanks who claim gold is a relic.

Laughable arrogance.

While I certainly counsel people to own some physical gold in a safe at home, that's not always practical, particularly for larger quantities of gold or for those investing through a retirement account such as an IRA or a 401(k) plan.

The easiest and most convenient way to own gold—especially in brokerage and retirement accounts—is by grabbing shares of an exchange-traded fund (ETF).

There are a number of gold-centric ETFs. The biggest and most well-known is SPDR Gold Shares, more commonly known by its ticker symbol—GLD.

I am not a fan of GLD, however, and I discourage others from owning it. GLD has a history of lending and borrowing gold through third-party custodians and sub-custodians. That means GLD owns what are essentially IOUs from other investors rather than holding actual physical gold in its possession. In a global crisis that sees gold shoot higher—and I think that day of sharply higher gold prices is coming—GLD could fall apart if custodial/sub-custodial agreements break down.

Just think of the ripple effect that hit banking and financial institutions all over the world when subprime mortgages started collapsing back in 2008.

In a crisis that hits GLD, owners will find out painfully that they do not own gold. They own a paper asset and a claim on whatever dollars GLD cobbles together to make investors whole, or as whole as possible.

That is not the kind of gold exposure I want in my financial accounts. I want an ETF that gives me a claim on physical gold, rather than a claim on corporate paper.

Gold is a Higher Risk investment since it is a volatile commodity. You have to be prepared for the short-term whipsaws that can happen. But longer term, over years, gold has preserved wealth against inflation and crises.

Though Sprott Gold is based in Canada, it trades in the U.S., so you will have no trouble buying it through any U.S.-based brokerage firm. You can own these shares through a traditional brokerage account or inside an IRA. If you're operating through a company 401(k) plan, you will likely need access to a so-called brokerage window that allows you to invest beyond whatever pre-defined investment options exist inside the plan.

As its name implies, Sprott owns physical gold as its only asset.

Unlike GLD, Sprott's gold is fully allocated and unencumbered, meaning the trust owns physical gold bars held in Sprott's name and never loaned or borrowed. Basically, the gold just sits inside a vault and leaves only whenever investors sell their shares of the trust.

That vault is deep underground at the Royal Canadian Mint, Canada's federal mint. Moreover, there is no sub-custodian between the bars of gold in that vault and the unit holders—me and you. The upshot is that even if Sprott tumbled into bankruptcy, the gold in the vault goes to the investors who hold shares in the trust.

Sprott Physical Gold Trust is precisely the kind of gold asset I want in my portfolio: real gold, owned outright, stored in a globally secure location backed by one of the most respectable world governments (Canada), not subject to any custodial shenanigans, and easily traded at a moment's notice.

It's the next best thing to owning physical coins and bullion at home, but without the risk of theft or loss in a natural disaster. (Disclosure: I own PHYS in two brokerage accounts. I have owned these shares for years, and I have zero intention of parting with them anytime soon.)

The cost of owning the Sprott trust is 0.45% per year, meaning every $10,000 in PHYS costs just $45 annually.

Now, I need to note that Sprott is characterized for tax purposes in the U.S. as a "PFIC" (pronounced: pee-fick), a Passive Foreign Investment Company. These have special tax designations and, potentially, tax advantages.

In terms of tax advantages, long-term capital gains tied to precious metals are normally taxed at a 28% rate applied to collectibles. As a PFIC, however, long-term cap-gains rates are 15% to 20%, depending on a taxpayer's income level.

To qualify for the lower capital-gains rate, a U.S. taxpayer must make what's known as a "Qualifying Electing Fund" election each year when they file their taxes. That's accomplished with IRS Form 8621. It's not complicated. I point it out so that you know. But of course, you should consult your tax pro about your specific situation.

I say this regularly, but I do so because it is important to understand: The status quo is not static. It changes all the time.

What's taking place right now is a foreseeable event: The inevitable decline of the dollar's dominance. Ivar Raig foreshadowed this moment a decade ago over apple cake and coffee when he told me exactly what Russia was up to with the help of China.

Just because King Dollar has ruled the roost for five generations does not mean the status quo will continue without interruption. History would argue that a changing of the guard is likely, if not imminent.

Both China and Russia have clear reasons they want to dethrone the dollar. And numerous other countries—representing a large swath of the world economy and population when combined—have equally clear reasons why they'd want to tag-team in that effort.

We, as investors, have to be prepared for the possibility—nay, likelihood—that a monetary reset is coming. That the dollar will face competition for the throne, and that's going to cause a financial maelstrom.

In such moments, gold has always played a role in the reset that followed. Soon enough, the world will find out that gold has a very big role to play once again.