Guest Post: “The Death of The Petrodollar and What Comes After”, by Grant Williams

Our friend Grant Williams is a Singapore-based hedge fund manager who writes the always-insightful newsletter, “Things That Make You Go Hmmm”. His latest effort is excerpted from his recent presentation at the Mines and Metal Conference in London and it is simply a MUST READ for everyone.
“The Death Of The Petrodollar and What Comes After”
by, Grant Williams
The story begins in the 1970s when Henry Kissinger and Richard Nixon struck a deal with the House of Saud – a deal which gave birth to the petrodollar system.
The terms were simple The Saudis agreed to ONLY accept U. S. Dollars in return for their oil and that they would reinvest their surplus dollars into U. S. treasuries.
In return, the U. S. would provide arms and a security guarantee to the Saudis who, it has to be said, were living in a pretty rough neighbourhood. As you can see, things went swimmingly (chart below)

Saudi purchases of treasuries grew along with the oil price and everyone was happy. (We’ll come back to that blue box on the right shortly)
The inverse correlation between the dollar and crude is just about as perfect as one could expect (until recently that is… but again, we’ll be back to that).
And, as you can see here, beginning when Nixon slammed the gold window shut on French fingers and picking up speed once the petrodollar system was ensconced, foreign buyers of U. S. debt grew exponentially.
Having the world’s most vital commodity exclusively priced in U. S. dollars meant everybody needed to hold large dollar reserves to pay for it and that meant a yuuuge bid for treasuries. It’s good to be the king.

This post was published at TF Metals Report on December 29, 2016.