Slip Through Your Fingers
Friday was a very busy day. The action started with an early morning Bloomberg report that Iranian officials had fully opened the Strait of Hormuz. Bloomberg quoted an X post by Iran Foreign Minister Abbas Araghchi saying, “In line with the ceasefire in Lebanon, the passage for all commercial vessels through Strait of Hormuz is declared completely open for the remaining period of ceasefire.” Ships can move on the “coordinated route as already announced by Ports and Maritime Organization of the Islamic Rep. of Iran.”
In other words, once Israel had agreed to a ceasefire in Lebanon, Iran’s condition for reopening the Strait of Hormuz during the U.S./Iran ceasefire (that expires Sunday) was met. Iran would completely open the Strait, along the Iranian route, for the remaining period of the ceasefire.
Following the news, Bloomberg reported that President Trump had announced that the U.S. “naval blockade will remain in full force and effect as it pertains to Iran, only, until such time as our transaction with Iran is 100% complete.” Bloomberg added that, according to the President, the transaction “process should go very quickly in that most of the points are already negotiated.”
According to the New York Times, President Trump said the “Hormuz Strait situation is over” and “Iran has agreed to never close the Strait of Hormuz again.”
Axios then reported that, “The U.S. and Iran are negotiating over a three-page plan to end the war, with one element under discussion being that the U.S. would release $20 billion in frozen Iranian funds in return for Iran giving up its stockpile of enriched uranium, according to two U.S. officials and two additional sources briefed on the talks.”
In addition to the possible cash-for-for-Uranium consideration, Axios also said details of the three-page plan include that some of Iran’s highly enriched uranium would be shipped to a third country while some would be down-blended in Iran under international monitoring, and that Iran would be allowed to have nuclear research reactors for the production of medical isotopes, but would pledge that all of its nuclear facilities would be above ground.
Shortly after the Axios news hit the wires, however, the Financial Times reported that the President denied the cash-for-uranium report and explicitly stated “no money will exchange hands” as part of a deal that Trump said on a phone call with reporters he expects “in the next day or two.”
Meanwhile, despite the optimistic tone out of Washington, official Iranian commentary highlighted ongoing contradictions with the Western “all clear” narrative.
In response to rapid-fire White House commentary, the Iranian foreign ministry clarified on Friday that Hormuz would only be open “for the remaining period of cease-fire” for ships that adhered to a route “coordinated” by Iran, and that the strait remained under Iran’s supervision.
In addition, Mohammad Bagher Ghalibaf, Iran’s top negotiator and the speaker of its Parliament, also said, according to the New York Times, that the Strait would not remain open if the U.S. military continued its blockade of Iranian ports. A statement that represented a seeming catch-22 to earlier comments from President Trump when he stated that the U.S. blockade would only end when the United States reached a peace deal with Iran.
In short, that is all we “know” as of a Friday that was a confusing and exhausting headline news barrage amid a fog of war that remains pea-soup thick.
That said, as soon as next week we should expect to gain a better sense of the real prognosis for both a lasting ceasefire and a potentially sustainable peace deal, as well as what those terms might look like.
However, as HAI suggested last week, behind the mainstream narrative there remains ample room to speculate as to how this conflict and its potential resolution might fit within a larger global strategic context.
HAI has already pointed to headlines in recent weeks suggesting that the current conflict may have deep and long-lasting implications for the post-1971 U.S. dollar-centric global system. Two weeks ago, there was the Bloomberg article titled, “Iran War Could Be Making of the Petroyuan, Deutsche Bank Says.” Last week, there was Bloomberg macro strategist Simon White’s article, “Iran war has caused lasting damage to the USD system.” Both articles pointed to very real and growing strains on the global U.S. dollar system.
This week, Peter Alexander, CEO of Z-Ben Advisors (a Shanghai based consulting firm essentially aiming to bridge the information gap between West and East) penned a very important article on Substack titled, “China’s killer (geopolitical) app.”
In the article, Alexander adds great detail to both the threat of “damage to the USD system” and to the golden origin of the “petroyuan”:
For more than a decade now, the Beltway consensus held that the USD system operates as a geostrategic chokepoint that can be deployed to alter the behavior of other state actors. Books have literally been written on this very topic, and it may have been true for a moment in time. What has yet to be recognized is that, in present day, a USD chokepoint has, in fact, run up against hard limitations on its efficacy. Nevertheless, denial remains the default state and any assertions of the RMB [Chinese currency] displacing the USD as a medium of trade will be vehemently, if not irrationally, opposed. This represents a dangerous disconnect…”
The American move to nakedly weaponize the USD system was a message received by Beijing with immediate effect…
The risk, no matter how remote, of China being blocked access to SWIFT was existential. A solution was required and in that very same year the People’s Bank of China was tasked with finding a workable alternative. In 2015 that task was completed and the Cross-Border Interbank Payment System (CIPS) officially went live.
CIPS conducts all functions (again, via RMB) from messaging to clearing to initial fiat settlement. It also became the first system to seamlessly integrate payment and settlement of the onshore and offshore RMB (CNH and CNY). Perhaps more consequential when it comes to the Great Power competition, CIPS resides fully outside the New York correspondent banking network. The very parties that sought to apply economic coercion for the purpose of ‘altering unwanted behaviors’ are now blind.
Obviously, the introduction of CIPS was meant to directly benefit China. It is now also the case that the network is providing an attractive solution to a host of Global South countries in an era where the Trump administration has ratcheted up the deployment of coercive economic and financial tactics as points of leverage…
And that brings us to the current day, the specific topic of how Iran is processing payment for those counterparties seeking passage through Hormuz and why it is the RMB is the obvious solution.
Directing payment using RMB solves every issue arising from America’s near omnipotent reach across global finance…
All the Iranian regime needs to do is expand the current CIPS network access and have whatever payments are required to be conducted in RMB. Detractors to this line of reasoning will, undoubtedly, push back. What is Iran supposed to do with billions of surplus RMB? Well, beyond the reciprocal trade for Chinese goods, surpluses will be, ultimately, settled in gold. Ignored by far too many macro commentators, the role of gold is a fundamental feature of the entire Chinese parallel payment system. It is also yet another reason why RMB makes the obvious choice for payment, both for Iran and far beyond.
CIPS is just the payment network. With China’s capital account opened via the gold window, any trading partner holding RMB surpluses can directly convert all fiat balances into physical gold which can be held in the Shanghai vault and well beyond the reach of America’s foreign policy of sanctions and tariffs…
The entire China gold complex is also being positioned to act as yet another substitute for a critical component of the USD system. In this instance, the Chinese located gold can replace (granted, at the margins) US treasuries in the role of collateral. While not as liquid as an American sovereign fixed income instrument, the usage of gold as collateral is meant to be levered as a mechanism to support a host of cross-border trade activities. In the case of Iran, as example, the RMB that is settled into gold can then be applied as a financial tool for invoicing of any return trade of physical goods.
And here is the final point. The entire gold settlement solution described just above has been operational for the better part of a decade. Beijing has been executing plans for a multitude of outcomes all with the objective of mitigating the inherent risks of America’s leverage over the USD system. And all of this has been done very much in the open.
Now go and attempt to broach this topic, or any element included in this missive, with the foreign policy wonks in Washington. What you’ll receive in return is a condescending dress down. The fallibility of the USD global system is there for all to see, just not for the very people responsible for recognizing and addressing the real and credible threat that is the RMB, CIPS and gold system.
What Alexander is describing in great detail is what Jeff Currie has previously described as the “new paradigm” of gold recycling replacing dollar recycling. Furthermore, Alexander illustrates how the Iran conflict is, as Bloomberg and Deutsche Bank previously reported, in fact, accelerating the breakdown of the Petrodollar, and the adoption of the Petroyuan via the “RMB, CIPS, and gold system.”
What we have here, in real-time, is validation of the timeless truth Princess Leia spoke to the “Empire” in Star Wars: A new Hope when she said, “the more you tighten your grip the more star systems will slip through your fingers.”
This is the reality of the late-stage weaponized dollar system. Not that the U.S. or the dollar system is evil, or that the U.S. is the “empire,” but that the more we try to weaponize the system to our own ends, the more we ensure the dollar reserve system’s ultimate demise.
This week offered further evidence of more star systems slipping through our fingers. A Reuters article on Friday titled, “Indian refiners pay for Iran oil in CNY, via ICICI Bank, sources say,” reinforces the Deutsche Bank theory that the Iran war “could be making of the Petroyuan.”
Furthermore, in an article this week by the South China Morning Post titled, “China’s CNY settlements hit record, and the Iran conflict is looking like a catalyst,” the post reported a shocking update on cross-border yuan payments.
As the article put it, “Single-day transactions via China’s cross-border CIPS payment surge past 1 trillion CNY as Beijing’s moves to expand the CNY-payment network show signs of paying off.” Now, if the article is to be believed, that math would translate to roughly $150 billion in daily transactions, or roughly a massive $50 trillion annualized run rate.
Regardless of whether the exact South China Morning Post numbers are correct, the crucial points remain that the non-dollar “gold-based” petroyuan rails exist, those rails offer an increasingly attractive alternative to the dollar system for much of the globe, and non-dollar transactions are rapidly increasing.
Now, as stated last week, it’s been a long-held HAI view that a central tenet of Trump’s MAGA initiative is to reshore the U.S. manufacturing base as a vital national security imperative. This administration has made clear on many occasions that it absolutely understands Triffin’s Dilemma. It understands that there is a very real dark side to global dollar/Treasury reserve status under the petrodollar system that is now killing the U. S’s domestic manufacturing base—and, by extension, its global power base.
The Trump administration believes that it is the structure of the post-1971 dollar-centric petrodollar global monetary regime (with the dollar as reserve currency and U.S. Treasuries as primary global reserve asset) that is largely the cause of the perpetually dramatically overvalued dollar, which is ultimately too strong for U.S. manufacturing to be competitive.
So, in HAI’s view, it is more than possible that, despite the ingrained thinking of so many “foreign policy wonks in Washington,” this administration, with its central commitment to MAGA, may be weaponizing the dollar system with intent to ensure the dollar reserve system’s ultimate restructuring. Or, to return to Star Wars language, it’s possible this administration has strategic intent to tighten its grip so much so that reserve status does slip through its fingers—by design.
To use another analogy, global reserve currency/asset issuer status could be equated to Tolkien’s “ring of power.” After decades of carrying the burden, the U.S. may now be desperate to “share the load.” China appears ready to let gold do that, and now perhaps the U.S. is aligned.
A deal with Iran (and its de-facto backers China and Russia) that silently embraces a role for the petroyuan as a gold-based reserve/settlement system and restructures the monetary system in a way that would weaken the dollar and ultimately revitalize and restrengthen America, is, in HAI‘s view, not at all beyond the scope of plausible outcomes of this conflict.
As stated last week, HAI is just speculating here. However, this speculation is based on previously elaborated MAGA goals—goals that could well save America from Triffin’s curse.
Only time will tell. HAI suspects that even if/when a peace deal with Iran is struck, it may be many more months before we get any real idea of the actual “silent” deal that was reached.
Again, time will tell, but to HAI the present moment seems like an ideal time for the administration to orchestrate the “grand global economic reordering” Treasury Secretary Bessent previously spoke of.
At the Manhattan Institute in June of 2024, Bessent said, “We’re also at a unique moment geopolitically, and I could see in the next few years that we are going to have to have some kind of a grand global economic reordering, something on the equivalent of a new Bretton Woods or, if you want to go back, like something back to the steel agreements or the Treaty of Versailles. There’s a very good chance that we are going to have to have that over the next four years, and I’d like to be a part of it.”
In time we’ll know whether de-dollarization is a Trump administration strategic MAGA goal or a China-facilitated reality with an Iran catalyst. In HAI‘s view, gold is the clearest and cleanest beneficiary of the global reordering currently underway. By the time we “know” exactly how the “grand global economic reordering” was facilitated, HAI expects gold to be priced far higher than it is today.
Weekly performance: The S&P 500 was up 4.54%. Gold was up 1.72%, silver gained by 6.70%, platinum was up 2.38%, and palladium gained 2.04%. The HUI gold miners index was up 1.18%. The IFRA iShares US Infrastructure ETF was nearly flat, off 0.03%. Energy commodities were volatile and mixed on the week. WTI crude oil was slammed by 11.39%, while natural gas gained 1.02%. The CRB Commodity Index was off 1.77%. Copper was up 3.52%. The Dow Jones US Specialty Real Estate Investment Trust Index gained 3.47%. The Vanguard Utilities ETF was off 1.57%. The dollar index was off 0.42% to close the week at 98.24. The yield on the 10-yr U.S. Treasury was down 9 bps on the week, closing at 4.25%.
Have a wonderful weekend!
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
