This week, in an article titled “Foreign central banks sell U.S. Treasuries in wake of Iran war,” the Financial Times reported that since the Iran war started, international official holdings of U.S. Treasuries held at New York Federal Reserve have fallen to the lowest levels since 2012.
According to the FT:
“Foreign central banks have slashed their holdings of Treasuries at the New York Federal Reserve to the lowest level since 2012, as countries sell the US government bonds to prop up their economies and currencies in the wake of the Iran war.
“The value of Treasuries held in custody at the New York Fed by official institutions — a group that is largely made up of central banks but also includes governments and international institutions — has dropped by $82bn since February 25 to $2.7tn, according to Fed data.
“The decline in these holdings since the war began a month ago highlights how the surge in energy prices triggered by Iran’s closure of the Strait of Hormuz, a vital waterway, has upended the finances of countries that rely on oil imports… The foreign official sector is selling Treasuries,’ said Meghan Swiber, a US rates strategist at Bank of America.”
In other words, oil importers are scrambling to sell U.S. Treasuries to raise the dollars needed to secure desperately needed oil supplies at the new higher price (oil has nearly doubled in a month), because oil is absolutely vital, in suddenly short supply, and because, under the prevailing petrodollar system, oil is denominated in U.S. dollars.
Now, these foreign central banks desperate to secure oil are selling U.S. bonds at a time when the Treasury market is already under immense pressure from both concerns over inflation and a serious U.S. fiscal problem that’s accelerating in the wrong direction.
These multiple pressure points on the bond market have all resulted in 10-year Treasury yields rising in March by the most in over a year. In turn, the increasing yield is raising borrowing costs for the government as well as businesses and households. If the factors driving higher yields don’t reverse soon, let alone if they intensify, the dynamics are likely to result in a stagflationary crisis ultimately triggering a U.S. and Western sovereign debt doom loop.
In short, if the Strait of Hormuz stays closed for even a couple more weeks, global oil flows will be down 7-11% year-over-year. The resulting increase in the oil price under that scenario will ensure that central banks continue to sell U.S. Treasuries to raise dollars to secure oil and that will, by extension, ensure that the dynamics described above driving a stagflationary crisis and debt doom loop – are almost a certainty.
Importantly, this week, we received more troubling indications that Iran may be able to keep the Strait closed long enough to land that crippling economic blow to the West. In contrast to reports from the beginning of the war that Iran would soon run out of missiles because Iranian missile stocks had mostly been destroyed, new reports suggested that Iran still has significant missile and drone launching capabilities. A Reuters article titled “US can only confirm about a third of Iran’s missile arsenal destroyed, sources say” indicates that Iran still has plenty of missiles to fire. At the same time, an AP headline titled “Iran is getting upgraded drones from Moscow amid Middle East tensions” suggests that upgraded drone resupplies are ongoing.
Meanwhile, in an article titled “Iran Missile Strikes Deplete Gulf Interceptors, Raising US Defense Pressure,” Bloomberg reported that after a week of some of the heaviest Iranian ballistic missile attacks on Gulf targets since the war began, increasingly effective strikes “have consumed at least 2,400 interceptors, out of 2,800 in Gulf countries pre-war.”
Far greater remaining Iranian missile stocks than initially reported, ongoing drone resupplies, and dwindling interceptor stocks in the Gulf are made all the more concerning given that, at this point, Iran’s backers (China and Russia) have a far greater industrial base than the U.S. Meaning, if they want to, China and Russia can resupply Iran with missiles and drones faster than the U.S. can resupply interceptors to the Gulf.
So, unless the U.S. manages to open the Strait very soon, it seems, the U.S. may be forced to “declare” victory and exit Iran without having gained control of the Strait of Hormuz. Regardless of what the U.S. administration calls it, that will likely be widely interpreted as a U.S. strategic loss to Iran (and its Chinese and Russian backers). And that will very likely dramatically accelerate a global transition to a multipolar system and a multipolar monetary system that increasingly uses gold as the neutral reserve asset.
Interestingly, this week, according to CBS, President Trump stated that he expects U.S. military operations in Iran to conclude within “two weeks, maybe three” and he explicitly indicated that the U.S. could withdraw regardless of whether the Strait of Hormuz is reopened.
However, in HAI‘s view, if the Strait is not opened, the continued foreign selling of trillions of U.S. Treasuries will trigger a debilitating financial/sovereign debt crisis that will ultimately force policymakers to sacrifice the dollar to temporarily stabilize the system. That outcome would also very likely dramatically accelerate a global transition to a multipolar system and a multipolar global monetary system that increasingly uses gold as the neutral reserve asset.
Crucially, this week offered fresh confirmation that a high priority outcome sought by Iran (and its backers, China & Russia), is to accelerate a global transition to a multipolar system and a multipolar global monetary system that increasingly uses gold as the neutral reserve asset.
New reports this week confirmed that Iran is allowing friendly ships to transit the Strait of Hormuz through their newly established “toll both” as long as they pay the equivalent of millions of dollars—in Chinese currency.
This week, a Bloomberg article titled, “Secret Codes and Yuan Fees Get Ships Through Iran’s Hormuz Toll booth,” explains that an increase in Hormuz traffic is the result of a new Iranian implemented toll booth system denominated in Chinese yuan. As Lloyd’s List put it, “Tehran’s ‘toll booth’ system is now controlling Hormuz traffic.” And according to Lloyd’s List, “the payment is settled in yuan.”
As discouraging, disconcerting, and shocking as it may be, HAI encourages readers to at least consider the possibility that this week’s Bloomberg article “Iran’s Hormuz Grip Is Tighter Than Ever After a Month of War” might be accurate. That possibility suggests that Hormuz remains closed because Iran wants it closed, the U.S. cannot yet re-open it without unacceptable levels of casualties, and that the yuan toll booth in the Strait supports a greater strategic aim of Iran and its backers, China and Russia.
Before dismissing such a possibility, note this week’s Bloomberg article titled, “Iran War Could Be Making of the Petroyuan, Deutsche Bank Says.” According to Bloomberg:
“The conflict could be the catalyst for erosion in petrodollar dominance and the beginnings of the petroyuan,’ Mallika Sachdeva, a strategist at the German lender, wrote in a note on Tuesday, citing media reports that Iran is allowing the passage of ships through the Strait of Hormuz if oil payments are made in yuan. China, a long-time partner of Iran, is also the nation’s biggest oil customer.
“Further fault lines in the petrodollar regime could have ‘significant downstream effects’ to the dollar’s use in global trade and savings, as well as its role as the world’s reserve currency, according to the research report. China meanwhile has accelerated its efforts to boost the yuan’s global profile, challenging the dominance of the dollar in global trade and finance.”
Crucially, recall that this oil-for-yuan plan sounds an awful lot like policy statements out of the PBOC since as far back as 2015. In June of 2015, at an LBMA event in Singapore, a PBOC representative explicitly noted that the Shanghai Gold Exchange International and gold were both vital to China being able to invoice oil and gas in yuan.
In the presentation, called “World Needs New Reserve Currency,” Dr. Yao Yudong, said:
“The gold market and Shanghai Gold Exchange International are vital to the internationalization of yuan… The key function of an international currency is trade invoicing for commodities like oil and gas… We would like to increase usage of yuan in trade invoicing by using gold.”
Importantly, however, the only way to get yuan at scale is by running surpluses versus China, which almost no country does. So, necessarily, this implies that nations would have to buy gold and then sell that gold to China for yuan (in order to then buy oil and get Iran’s permission for its transit through Hormuz). In other words, Iran is essentially demanding gold for oil (thru the yuan that China has made easily convertible to gold through the Shanghai Gold Exchange International).
So, in HAI’s view, Iran’s yuan-for-oil tolling system is essentially a China-sanctioned gold-for-oil system. China gets gold in exchange for internationalizing the yuan that the world will need to buy oil. This translates to a burgeoning petroyuan system where the oil market is structurally and necessarily bidding for physical gold to obtain oil. And when considering that, it’s vital to remember that the global oil market is multiples larger than the global gold market. That means that in order to fulfill a new gold-for-oil role, the gold market will need to grow by multiples, and that means (given gold supply growth constraint) the gold price will need to increase by multiples.
Now, the fog of war is admittedly pea soup-thick at present. That said, in HAI‘s view, unless the U.S. opens the Strait of Hormuz immediately while breaking the yuan toll booth, gold appears set to be the biggest ultimate beneficiary of the conflict.
If the Strait is not open, the portion of the world operating within the petrodollar system will continue to sell U.S. Treasuries—in bulk—to raise dollars to buy increasingly scarce and expensive oil. That path, via a debt spiral, leads to policymakers massively printing money and killing the purchasing power of the dollar while simultaneously sending the gold price to the moon.
At the same time, if the Strait is not open and the yuan toll booth remains, a rapidly growing global petroyuan block will ignite a gold-for-oil trade structurally certain to catalyze a much higher gold price.
In short, if the Strait is not opened, it either leads to crushing the dollar via money printing or vastly accelerates a global transition to a multipolar system and a multipolar global monetary system that increasingly uses gold as the neutral reserve asset.
Conversely, even if the Strait is opened and the yuan toll both is decimated, the U.S. is right back to where it was before this conflict started. Meaning, the U.S. still has an acute fiscal crisis that absolutely implies the need to ultimately inflate the debt away and crush the purchasing power of the dollar.
Even amid the fog of war, in HAI‘s view, it seems clear enough that all roads lead to much higher gold prices.
In HAI‘s view, now is an excellent time to reflect on just how far gold has traveled back toward the relevant center of the global monetary system. In 2024, Jeff Currie, former Goldman Sachs Head of Commodity Research, observed the initial signs of the breakdown of the Petrodollar system. As he put it at the time, “For the first time ever, that dollar recycling is not occurring… The way I like to label what we have seen, is gold recycling, replacing dollar recycling… This is a new paradigm.”
This week, with Deutsche Bank declaring that the “Iran War Could Be Making of the Petroyuan,” Currie’s prescient observation reached the mainstream at last. But the move toward the Petroyuan actually started over a decade ago with the Shanghai Gold Exchange International Board facilitating the eventual rails for a gold-based yuan-for-oil trade.
The Iran war didn’t launch the petroyuan, but it may be the catalyst for a dramatic acceleration of its global recognition and prevalence. That said, by the time the mainstream figures out that the Petroyuan is actually a gold-based system, HAI expects the gold price will already be miles above present levels. And HAI expects those significantly higher gold prices to arrive much sooner rather than later.
Weekly performance: The S&P 500 was up 3.36%. Gold was up 4.05%, silver gained by 4.93%, platinum was up 5.99%, and palladium gained 7.22%. The HUI gold miners index was up 10.47%. The IFRA iShares US Infrastructure ETF was up 1.93%. Energy commodities were volatile and mixed on the week. WTI crude oil surged by 11.94%, while natural gas lost 7.44%. The CRB Commodity Index was up 3.28%. Copper was up 1.73%. The Dow Jones U.S. Specialty Real Estate Investment Trust Index gained 3.88%. The Vanguard Utilities ETF was up 1.66%. The dollar index was nearly flat, up 0.03% to close the week at 100.19. The yield on the 10-yr U.S. Treasury was down 13 bps on the week, closing at 4.31%.
Have a wonderful weekend!
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
