Latest / Felix Nikolas Prehn's Podcast / Petrodollar System: Saudi Arabia, Gold And The Dollar

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Petrodollar System: Saudi Arabia, Gold And The Dollar · Felix Nikolas Prehn's Podcast

• 0:00
  Saudi Arabia just shot the main airport in its own capital because a missile filed that a Yemen came down on the terminal in Riyad and 12 people are dead more than 300 are hurt and an American as one of the dead and the news will give you all the war details all the grim stuff who fired who's to blame and all that kind of stuff and well whether America steps in is obviously important Donald Trump's already sort of answered that his exact words were we may we move very quickly but the war is actually not the part that should worry the money in your portfolio because Saudi Arabia is the country that agreed 50 years ago to sell all the world's oil in dollars and to send the proceeds of all of that straight back into American investments.
• 0:44
  And that literally one arrangement is a big reason the dollar in your pocket, the dollar in your portfolio holds its value at all. Then right now missiles coming down on Ray and Washington saying we may do something about it. Well, the Saudis are asking themselves some questions and nobody on mainstream media is really joining this up, but everyone watches the the smoke over the airport.
• 1:07
  The oil money is watching something very, very different. Gold just had its worst few months in about 13 years. Yet, the central banks carried on buying gold anyway, which actually tells you quite a lot already. And there is one line on Saudi Arabia's books I've had my eye on for quite a long time. And it's sitting on a number that literally hasn't moved in years. And the day that it does, the dollar you're holding, the dollar that your stocks and shares are counted in will move with it. And after a week like this, I don't think it's going to stay much longer. There's still point where it's been for ages. So, by the end of the next few minutes, you'll know exactly what that number is, what the big money has already started doing about it and what a normal person like you and hopefully hopefully I'm still normal. Um, what we can actually do about it because by the time this turns up on the evening news, um, well, it's going to be too late to have a plan. So, if you can guess where I'm standing, um, what city this is, you would a cookie.
• 2:10
  But before we go into this deeply, um I'm going to I'm going to ramble a little bit on about quite a lot of numbers in details and how they all kind of connected in terms of economics. So I'm going to put all that into a short report. I'm going to going to write up for you afterwards. And that's completely free to download. So if you want to understand this really on a deeper level, go and download that. It's at felixfriends.org/riad.
• 2:31
  Good luck spelling that, but there's a link down below in the description so you can just click on it. If you're wondering who the heck I am standing on a balcony here, my name is Felix Nicholas Breen. I'm an economist. I'm a former investment banker. I'm the founder of the PIN Institute. We publish research on financial markets and provide instruction on how they actually work. I'm actually interviewing a an Oxford professor on actually pretty much exactly this subject today which I'm very excited about which is why I'm here giving away the location slightly. Um but let's start with what actually happened because actually for once it matters a missile filed la Yemen which is a proxy for Iran came down on terminal 3 and King Khaled international which is the main airport and um Saudis have confirmed 12 dead 309 injured. Um the dead are from different countries but one of them quite importantly is from America. Why importantly because the US has started many a war on that kind of a footing. um the New York Times which is called the deadliest attack on a Gulf Arab since the war with the Iraqs began in February. Um and again it wasn't the first time this happened. Two days before that a plane got blown up.
• 3:32
  Three more people were killed. One of them was a pilot um again in Saudi. All major countries have put out travel warnings for for um Saudi. Most major airlines have stopped flying there. Yet in two weeks, Saudi is meant to host its showpiece investment summit with literally thousands of executives will be flying in heads of state and so on and it hasn't been called off yet but you know um we have to see what happens there. So who did Riad ring for help?
• 3:59
  Well, they're rank France, Britain, Pakistan, Egypt. It had already gone to Washington and turned away a few weeks back. And only now after an American has died in Saudi does the president, the US president say we may remove very quickly and you know, as soon as he's going to help. Riyad has also signed a defense pack with Turkey and Pakistan. And that's an important thought because it matters more than the missiles for your money because this is where it reaches you. You see, oils jumped more than 5% on the day of that attack. Brent, which is the world's benchmark oil price, is sitting at just over $100. And an oil shock does not stay in Saudi Arabia. It gets on a plane, it comes to your house.
• 4:40
  And this, by the way, is exactly why it's so important to look at your stocks and look at which one of these is sitting on the sort of this what I call a danger zone. And again, there's a there's a filter for that in the the Winston app. If you want to check that out, it's down below. It's called danger zone. and it tells you which companies can absorb a shock like this and which cannot. And I think that's quite an important thing to check and thousands of stocks actually can't. Um, so what's the part that really matters to you here? Well, think about what this actually does to your household, not to Saudi Arabia. When oil moves like this, it is not just a news item. You see it at the pump first, then in your weekly shop, and then on your heating bill, and then last of all, actually in your portfolio statement, in your stocks, by which point it's already happened to you. And this whole dollar reset, oil reset is all connected. And by the time it's a headline in your local paper, the quiet gap between what the officials numbers say and what your money actually does is already in it's already reality.
• 5:46
  So the people who are sitting there being careful in cash, I think we've already established they're definitely the ones who lose. But it isn't just the people who are sitting in cash. It's also the people who are sitting in the wrong stocks and the wrong indices. And the hard part is this. And I I say this with a great deal of respect because most of us were taught to handle money that was built for a world that has gone. Plant the oak tree, buy and hold, don't look at it for 20 years. And it worked beautifully. It worked beautifully for, you know, the previous generation because oil was cheap.
• 6:16
  Interest rates fell for 40 years straight. Now, what replaces this is a skill you were never taught, which isn't your fault at all, but it is your responsibility to learn it. And if you want to come through a shock like this with what you've built still intact, in fact, possibly thriving, well, you need to know that skill. And the people who do come through in one piece are not the ones who are smarter than you. They're not the ones who are richer than you.
• 6:42
  They simply watch where the big money, the institutional money, the skilled money is actually moving and they move with it instead of marrying, you know, one position for life, whether that's an index fund or a stock. That's pretty much the whole difference. It's a skill and a skill is the one thing that can actually be handed from one person to another which is a beautiful thing and which is why I I do what I do here. Um and I want to ex do exactly that for you. So I'm going to for the first time ever teach you live for free about 2 hours this coming weekend how to survive the oil shock. And it's going to be me walking you through exactly what to watch and what to do about it step by step. And if that sounds a little complicated um relax. It can literally be done with an index fund or a couple.
• 7:23
  Um, and you can ask me questions live like on that day on Saturday and it'll work if you're in the US, if you're in the UK, if you're in Europe, anywhere else really. So, if you're open to actually learning that, if you're open to learning how to survive and thrive out of this oil crisis, then um, just put open in the comments and and then get yourself a free seat. There's a link down below, petro dollarshock.com.
• 7:46
  Again, you can just click on that and it's completely free. and and and I I I love doing that and there'll be couple of thousands of us there live and we can actually learn how to protect ourselves and benefit from this. But let's dive a little bit deeper into what's happening here today because if you want to understand why a missile on airport is really a a currency story, an investment story, you have to go back to 1974.
• 8:08
  The deal then was very simple and has run the world ever since. Saudi agreed to price its oil in dollars and to take the mountain of money that it earned and plow it back into American assets. That was the deal. In return, America provided the security. Oil and protection were basically, you know, getting married. So that one handshake is why even today the dollar is used in roughly 90% of all these oil transactions on the planet. Um, and it means that if a country that needs oil, and basically every country does, you first have to do what? You have to go and buy some dollars before you can buy a single barrel of oil. It's like a casino. Before you can play at the table, you have to go to little window and you have to buy the house chips, right? America owns the window and the whole world has to queue up at it. And that's the superpower behind the strength of the dollar, behind the strength of the stock market, behind the strength of the bond market and its ability, US's ability to run these massive deficits. Now, the bit most people have never really thought about is this. The Saudi realal isn't really a free currency at all. It's a Saudi currency. It's been chained to the dollar at the same fixed rate since 1986. So, for 40 years, it's never moved a cent. And to keep that chain from snapping, the Saudi central bank has to shadow America's central banks move bit by bit, interest rate by interest rate.
• 9:35
  So when Washington raises interest rates, Saudi raises them too. When Washington cuts, Saudi cuts. So in a very real sense, Saudi Arabia has been taking its orders on money from America for the last 40 years. That's the thing I want you to hold on to in your head.
• 9:50
  They've backed it with an enormous amount of money, something like $450 billion in foreign currency reserves and a sovereign wealth fund almost at a trillion dollars. So this isn't some poor fragile little country. This is one of the richest pools of money on earth.
• 10:07
  And for almost 50 years, it's pointed all that money in one direction towards American. So a big slice of it is held in treasuries which in plain English are just IUS from the US government. You know you lend Washington your money, Washington promises to pay you back with a little bit of interest. Saudi is holding about $140 billion of these IUs and the detail that may be set up is this. Earlier this year in a single month they sold about 11 billion of that. Now one month doesn't make a trend. Countries move these things around. But I'm not going to stand here and tell you Saudi is dumping that stuff. But if you put it into context with everything that's going on here, well, they needed money because they're not selling enough oil. And they're probably also a little bit peeved off by the whole situation that's been caused here quite frankly by the US. So the airport's in flames, the phone calls are now to Paris and in Islamabad, not to Washington. The defense pact is with Turkey and a little less money is parked in America. So the honest question is this and this is a question this is not a fact yet because we don't get that much data out of Saudi but the 1974 deal was oil in exchange for security if the security is not coming from Pakistan, Turkey, France and Britain. Then what exactly is holding up the other side of the bargain? What keeps all that Saudi money pointed at America if America is no longer the one keeping Saudis safe? I'm not saying it's going to happen. I'm not telling you it's going to snap this year. A reset like this is never one single dramatic morning. It's a drift. A little less here, a quiet phone call there, one number that stops moving the way it used to. And that's what I'm actually watching here. So, if Saudi Arabia ever did want to loosen that chain, where would it go? Well, there are two roads out and both of them are opening up at once. The first road is physical. It's about who controls the water the oil floats across. And you've probably heard of the straight of bloody Hmoose by now, right? a little bit between the Arabs and the and the Iranians where a quarter of the world's oil has to squeeze through. But Homus has a backup plan and that's the Red Sea. And the same fighters who hit that airport have been gaining ground along the coast which means they can now watch that backup route too. So picture this scenario. If the main road and the diversion are both under threat at the same time, oil stops being priced on supply and demand. It gets priced on fear and you can see it in shipping. The cost of hiring a tankum to take oil out of the Gulf has just gone vertically to the highest level ever recorded like a million dollars a day or something crazy. Um the the captains are being paid $100,000 a month like danger money.
• 12:47
  And it isn't just the logistics. It's uh the actual oil machine. A refinery was hit in August. Facilities Yamu and Riyad where it just hit um there is a stri strike claimed on a Riyad facility earlier this month. So the thing that earns the Saudis its dollars are a target. The second route out is a little bit more quiet, but it's actually more important and it's financial. For 50 years, if you wanted to buy oil, you needed dollars. Remember the casino window? But some countries have been building a side door and it's called Mbridge. So let me tell you what that actually does because it is a big part of the dollar losing its importance here. It allows a central bank to pay each other directly in their own currencies for real goods without the dollar in the middle. No more cues out the window. Now, $55 billion have already gone through it. Now, important to understand is the Saudis are not in that system. They took part in a trial and then when the pilot was wrapped up, they stepped back out presumably because they wanted to not piss off the US. But the United Arab Emirates having it and I'm sure the Saudis are watching that as an option, you know, with everything that's going on right now. That's sort of their hedge. It's sort of their their plan B. But there's another straw in that in that wind. See, Saudi has already flirted with the idea of selling some of its oil priced in rem essentially what's happening here. You see that the same with all the gold buying from central banks is that the central banks of the world are trimming how much they're lending to the United States. So let's talk about what they're doing instead. Gold, right? So the strangest thing in markets right now is is this because it's kind of the clue hiding in plain sights. On paper, gold has just been a terrible run, right?
• 14:30
  Worst quarter since 2013. Um it was, you know, below 20% down or something um from from the high earlier this year. So it should send people running for the exit, you'd think, right? And many ordinary investors did exactly that.
• 14:44
  They sold. They're panicked. They're like, "Gold's over. It doesn't go any higher." But the central banks did the opposite, right? So the worst stretch for cult in 13 years. Yet the guys printing money are actually buying it, the central banks. Now the institutional money, it's done quite the opposite. And if I look out again, it's in the Winston app. There's an indicator. It shows you every week what the institutional money is doing. And they have basically run for the exits. Now there's some statistics on that and they're not a promise of future returns. I'm not a financial adviser or past isn't necessarily going to be the future. But typically when we see everybody's run for the exits, well it's a little more likely um that if you do get a rally, you get a nice rally. Doesn't have to happen though. That's typically the way it works. That's again something I'm watching. So to me, as long as gold sits at $4,000 and above, it's kind of intact. Um I don't predict prices. It's kind of pointless. I just look at where the number is flowing. But Saudi's got pretty significant oil reserves and we don't know if they've sold any. They don't really tell us. Officially they haven't. But if they want to not put massive, massive amounts fresh amounts of money into dollars because they're a bit peeved off by the United States, where they're going to put it. What is the likely place they'd put it? Well, to me that would be gold. Put some money on top of that because the 1974 one deal with the 74 deal even with the with the Saudis, the Americans, is essentially a paper deal. It's a paper dollar deal, right? isn't a gold deal. Um, and and that was run on a promise. Now, the promise seems to not be performing quite as like as as I'd like to. So, the thing I would watch is literally that number.
• 16:14
  The day Saudi Arabia's gold reserves start to officially climb, that's the day the richest oil nation on earth is telling you the trust in the paper dollar is a little less than it used to.
• 16:26
  Um, there won't be a press release.
• 16:27
  There won't be anything big, but we'll tell you when we get the data. Again, it's in the Winston app. Um, and I think after the week they're having, um, you know, we've inched a lot closer to that.
• 16:37
  So, let's make this really just about you and and less about, you know, Riad.
• 16:40
  Um, what can you actually check tonight?
• 16:42
  Uh, the sort of kitchen table. Um, well, check one. Do you even know what you own? Most of you genuinely don't, right?
• 16:49
  They've got a pension here, a workplace scheme there, a few funds there, portfolio there, that sort of thing. So, the first thing is actually just to put that all together. Put all the things you own together in one place so you know what you actually own. Um, the second thing is the 2022 test. The last time the world hurt inflation and an oil shock was 2022. The closest rehearsal for what's actually coming. So, just check when everything gets more expensive, which companies held up and which ones fell apart. Again, if you go into the Winston app, there is an inflation test. Um, it pops up actually as as you enter it. Um, shows it right on the homepage. Um, and it'll show you whether or stocks, you know, you're exposed one way or the other. Free trial. Don't like it? Just cancel it on day 29. No one's ever going to bother you. So that's the second thing I check.
• 17:29
  And the the the third thing I check is then for all those stocks, are they in that what I call the danger zone. So companies that could get into trouble very easily if things go a little bit south. Now I also want to be honest with you what those checks will do for you.
• 17:43
  Um they'll give you in in in awareness which is which is great. They show that you're exposed. Um they show how much your future is riding on, you know, one country's promises. uh what they can't do on their own is tell you what you actually do about it because the what to do is a skill and it's a skill that well we don't get taught it right so again not your fault you haven't got it but I think the fact that you now realize there is a skill gap here it is your responsibility to go and learn it and that's what Saturday is all about I'm going to walk you through step by step um not the theory but the actual moves so let me put the whole thing back together in just a couple of sentences here you got an airport in Saudi that was hit the country that's underwritten the dollar over 50 years is asking whether America still has its back or whether they should maybe put their money somewhere else. The richest oil nation on earth is uh you know talking to the French and to the Turks and um keeping an hand near the financial emergency exit. They've sold a fair chunk of America's debt already which is a very unusual thing for them to do. And the smartest money in the world is buying gold into a crash. And in 12 months there'll be two types of people watching this. the first kind who will read about the headline and you know after the dollar or whatever it is in your pocket is is sort of bought them less and wonder why you didn't act and then they'll be the kind of people who were like calm and and and and and gave themselves some time to prepare nothing dramatic no panic just the head start because they made a plan. So you've done literally the hard part which is actually paying attention and watching something fairly uh fairly intense and and and detailed. Um but you know the economics of the world here and the next step is just learn the skill set. It's completely free. I'll teach you for about a half two hours live on Saturday.
• 19:25
  It's called how to survive the oil shock and it's a playbook we've seen again and again but the world is a little bit different to what it was in the in the ' 70s. um and and therefore I think there are a lot of lessons there from those patterns and from what the big institutional money is doing right now.
• 19:39
  So it's not going to be complicated. No, it's actually going to be surprisingly simple, but it takes a little bit more time than we have in a in a short YouTube video like this. So if you're somewhere in the Americas or in Britain or in Europe, wherever you might be, uh come and join us at petrodollshock.com.
• 19:55
  It's live. There isn't a replay. You got to just sign up for it. It's completely free. And if you got some value out of this, if this sort of like, you know, shook you just a little, send it to somebody who might benefit from this, too. And I wish you all the best. And if you hadn't realized it by now, we are, of course, in uh in London. All the best.
• 20:12
  >> Right now, I think we're going through some sort of weird phase transition. And normally when you get bad economic news or you get bad jobs data that people are going to fly to safety into the bond