Proof of Concept
William E. Simon, former Secretary of the Treasury under Presidents Nixon and Ford, famously said, “I continue to believe that the American people have a love-hate relationship with inflation. They hate inflation, but love everything that causes it.”
For the last 50 years, the structure of the post-1971 dollar-based global petrodollar system has allowed U.S. policymakers to do “everything that causes” inflation without reaping the full, massively inflationary brunt of their policy consequences. However, in HAI’s view, that post-1971 monetary system is now beginning to break down. It seems the Iran war is the latest significant accelerant of that monetary regime change trend.
HAI expects the current conflict with Iran to have deep and long-lasting implications for the post-1971 U.S. dollar-centric global system—a view now shared by many. The Iran war seems to have been a catalyst for Western media to begin to awaken to the reality of global monetary regime change and to China’s central role in facilitating it.
In late March there was a Bloomberg article titled, “Iran War Could Be Making of the Petroyuan, Deutsche Bank Says.” Then in early April, Bloomberg macro strategist Simon White penned an article titled, “Iran war has caused lasting damage to the USD system.” Both articles pointed to very real and growing strains on the post-1971 global U.S. dollar system.
The articles, citing media reports that Iran is allowing the passage of ships through the Strait of Hormuz only if oil payments are made in yuan, focused on how the Iran conflict could be the catalyst for both erosion in petrodollar dominance and the emergence of a competitive petroyuan. Furthermore, both articles warned that the erosion in the petrodollar regime could have significant downstream effects on the dollar’s use in global trade and savings, as well as the dollar’s role as the world’s reserve currency.
Also in April, 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.” As Alexander put it:
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.
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…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…
Now, Western critics of the viability of a petroyuan argue that in a global U.S. dollar-dominated system, participants in the CIPS network would be stuck with unwanted excess yuan. However, there are two important rebuttals to that argument. First, over the last two decades China has undeniably become the factory of the world, meaning there is no limit to the menu of offerings foreign nations can purchase from China with yuan. Second, the CIPS network utilizes a gold-based, or gold-linked, yuan for neutral net settlement in an emerging network often referred to as the “golden road.” As Alexander explains: “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…”
That gold can be held in the Shanghai vault, well beyond the reach of America’s foreign policy of sanctions and tariffs. It could also be held in the newly opened Hong Kong vault; vaults soon to be expanded into Saudi Arabia, Singapore, and Malaysia; and eventually additional hubs planned for Dubai and Russia.
Beijing has been executing plans for this entire gold settlement solution for the better part of a decade. Its overt objective is mitigating the inherent risks of America’s leverage over the U.S. dollar system. The system is functional, it’s now operational, and it is expanding rapidly.
Most recently, the Financial Times also picked up on the emerging petroyuan story a week ago, and elaborated upon it. In a May 21st article titled, “Iran war opens ‘golden window’ for China’s renminbi”, the FT, like Alexander, explicitly tied the rise of the petroyuan to China’s CIPS international payment system and its gold link.
According to the FT,
Gold could serve as a neutral asset for countries to recycle excess renminbi into, allowing China to maintain capital controls while competing more with the dollar in global trade. China has regulated the Shanghai Gold Exchange with a strict settlement system… Exporters to China can receive payment in yuan and immediately convert excess yuan into gold bars on the Shanghai Gold Exchange international board without using dollars, but with the security of a neutral asset.
Importantly, the FT noted that, since the Iran war, adoption of Beijing’s CIPS cross-border payment system is surging to record highs, and the Iran war has provided a ”proof of concept” for the CIPS system.
According to the FT, the average daily value of transactions settled through CIPS hit a record of $135.7bn (dollar equivalent) per day in March, as well as a new daily record in April of $150bn (dollar equivalent) per day. For perspective, that translates to roughly a massive $50 trillion (dollar equivalent) annualized run rate. In short, according to the FT, CIPS adoption is now booming.
Now, over the past few months a popular narrative to explain gold’s recent sell-off has emerged. It suggests that this war with Iran is fundamentally bearish for gold, and that the war has consequently catalyzed official sector gold sales. It is true that some nations did pare gold holdings in the first quarter. A number of central banks and sovereign wealth funds shed an estimated 115 tons in the first quarter of 2026. However, the vast majority of those sales were one-time events mostly attributed to liquidity effects stemming from the closure of the Strait of Hormuz.
Those sales combined with the negative price action raised concerns about institutions’ appetite for gold and their interest in continuing the de-dollarization trend. But a Bloomberg report in May fully dismantled that gold-negative narrative. In reality, even net of previously mentioned gold sales, Q1 net Central Bank purchases totaled 244 tons, up from 208 tons in the previous quarter, marking the fastest pace of central bank gold buying in almost two years.
Again, the 244 tons was a net purchase number. It includes the 115 tons of one-time Hormuz-related gold sales. If you omit one-time Hormuz related sales, the actual number of Q1 central bank gold purchases was 359 tons. That’s number is essentially tied for the third-largest quarter of central bank gold purchases on record. In HAI‘s view, its no mistake that such a strong quarter of central bank gold purchases occurred alongside record-breaking levels of CIPS network transactions.
In short, though the Iran war didn’t launch the CIPS gold-based petroyuan, it’s providing what the FT called “proof of concept.” It’s proving to be the catalyst for a dramatic acceleration of the global recognition and adoption of the CIPS gold-based petroyuan.
With the gold-based rails of an alternative non-dollar global system beginning to handle heavy traffic and the West beginning to figure it out, HAI is confident that we won’t have to wait long for the gold bull market to shake off the ongoing technical correction and resume its trend to new all-time highs and beyond.
Weekly performance: The S&P 500 was up 1.43%. Gold was up 0.49%, silver lost 0.10%, platinum was down 0.92%, and palladium was up 0.59%. The HUI gold miners index was up 5.02%. 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 off 9.06%, while natural gas was up 12.65%. The CRB Commodity Index was off by 3.11%. Copper was up 0.34%. The Dow Jones US Specialty Real Estate Investment Trust Index was off 1.35%. The Vanguard Utilities ETF was off 1.94%. The dollar index was down 0.38% to close the week at 98.94. The yield on the 10-yr U.S. Treasury was off 12 bps on the week, closing at 4.44%.
Have a wonderful weekend!
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
