The REPO Act, Gold, and Dollar Demand

The POG (price of gold) is the inverse of the dollar’s value. The dollar’s value is 100 percent controlled by the Fed, which buys U.S. debt with dollars created out of thin air or sells its debt holdings to extinguish dollars. The equation that determines the POG is the supply of base money relative to its demand. As noted, the Fed controls supply, but dollar demand is unknown. Since the dollar is the world’s reserve currency, global demand affects the dollar POG. 

Bernanke’s 2008 QE liquidity flood introduced excess reserves, interest on reserves, and reverse repos as Fed policy tools that, in effect, withhold dollar supply. Along with Basel 3 and other regulations that force added capitalization requirements on banks, the Fed no longer has direct control over dollar supply. Therefore, one must look at the effects of global dollar demand to understand changes in the POG.

A one-year gold chart shows two inflection points. The first was a steep selloff in gold just before the October 7 Hamas attack on Israel. The selloff is similar to a massive bet shorting airline stocks just before 9/11. IOW, the rapid short-term decline in the POG indicates that some knew of the Hamas attack in advance. Immediately after the attack, the POG began to rise due to increased geopolitical tensions, i.e., increased MidEast conflict detrimental to global growth. The post-October 7 POG rise signaled increased geopolitical risk. That held with Houthis attacks on Red Sea commerce and increased Israel and Iran threats of war.

The second inflection point is on February 13. Something specific caused this rapid, near-vertical increase in the POG, indicating an increased risk of holding dollars–or a decrease in dollar demand.

Congress passed the REPO Act on April 20, 2024. The REPO Act is more mindless legislation wrapped around a fig leaf kernel of politically expedient supposed good intent that has the potential to rebound into a monetary Smoot Hawley.

The REPO Act establishes the Ukraine Support Fund with seized Russian assets—a slush fund for the Secretary of State, Blinken.

…the Ukraine Support Fund shall be available to the Secretary of State, in consultation with the Administrator of the United States Agency for International Development, for the purpose of compensating Ukraine for damages resulting from the unlawful invasion by the Russian Federation that began on February 24, 2022…

It solicits private input—a wild guess: Larry Fink and Blackrock end up administering the funds.

where appropriate, the head of the Office of Sanctions Coordination, in coordination with the Bureau of Economic and Business Affairs and the Bureau of European and Eurasian Affairs of the Department of State and the Department of the Treasury, should seek private sector input regarding sanctions policy…

The U.S. only holds a tiny slice of seized Russian assets, $4.95 billion of the projected $279.86 billion total. The bulk of assets, $226 billion, are held in the European Union, with $205.59 billion in Belgian banks.

The REPO Act specifically directs that, 

the United States should work with international allies and partners on the confiscation and repurposing of Russian sovereign assets as part of a coordinated, multilateral effort, including with G7 countries and other countries in which Russian sovereign assets are located.

Repurposing is the legalese word for stealing Russian assets against international law and funneling them through corrupt Ukraine. Passage of the REPO Act sends the clear message that any sovereign nation that holds dollar reserves is at risk of confiscation at the whim of the U.S. It is no wonder that the POG soared as the REPO Act made its way to a vote. The REPO Act cleared the Senate Foreign Relations Committee on 1/24/2024 and began to wind its way through the House and Senate for the vote on 4/19/2024. My guess is its passage became clear to the market in mid-February, which is when the POG took off.  

The REPO Act can die on the vine if the European Union (EU) rejects repurposing its confiscated Russian assets. In that case, the POG should fall back toward the level before this harmful legislation’s enactment. On the other hand, should the EU go along with the U.S. and repurpose its confiscated Russian assets for the benefit of Ukraine, the message becomes clear. There is no safety in holding dollar reserves. The POG would rise with a further decline in dollar demand. 

Smoot Hawley imposed tariffs on foreign goods, which, in turn, resulted in tariffs on U.S. exports in tit-for-tat retaliation. The result was a global tariff wall that limited international trade and caused the 1929 DOW crash. That was the start of the economic contraction that became the Great Depression.

The REPO Act has the same potential to spiral into tit-for-tat retaliation. Russia has, in turn, seized JP Morgan Chase bank account funds held in Russia. Estimates are that there are $288 billion of Western assets held in Russia that Moscow could confiscate.

The anti-China political rhetoric is only increasing. The foreign aid package passed along with the REPO Act forces the sale of TikTok and allocates funds to Taiwan. Congress could extend the REPO Act to China in the future. That would be dollar suicide, but no stupidity is out of the realm of possibility with our captured political system. The REPO Act’s message is that any country holds dollar reserves at its peril. 

1 Comment

  1. Michael Bojarski

    Hey America, you elect and pay these “Best and Brightest.”


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