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THE DYING DOLLAR: IS THERE LOOMING THREAT TO COMMODITY TRADING COMPANIES?

As commodity trading companies grapple with a rapidly changing global landscape, one pressing question demands their attention: How will the decline of the US dollar affect their businesses, and what can they do to prepare? In this Rapsody, I will explore the various factors contributing to the dollar’s decline, examine some of the consequences, and offer my opinion for the commodity industry as a whole. 

The US dollar currently accounts for about 60% of the value of all currencies on the planet, with over half of US dollars residing outside the United States. This is largely because banks use it as a reserve currency and oil is priced in dollars. However, the dominance of the USD is increasingly being challenged by countries seeking to avoid its use in trade. Bilateral agreements between nations, such as the BRICS Bank (Brazil, Russia, India, China, and South Africa), facilitate settlements without using the USD. This trend is becoming more widespread and could contribute to the dollar’s decline.

Countries that have tried to avoid using the USD, like Iran and Iraq, faced swift bans from the US, but new systems are emerging as alternatives. These system allows for trade without relying on the USD. Furthermore, the accumulation of gold by countries like China, repatriation of gold by countries like Germany and Venezuela, and gold-based trade agreements signal a shift away from the dollar as the dominant reserve currency.

It is important to note that the decline of the USD has not been a sudden event. The end of the Bretton Woods agreement by President Nixon in 1971, the sale of oil in euros by Iraq, Iran ending oil sales in dollars, and the increase of quantitative easing in the United States have all contributed to the erosion of the dollar’s status.

China’s growing economic power and its accumulation of gold, along with other countries shifting away from the dollar, highlight the need for commodity trading companies to be prepared for a changing landscape. The Chinese president’s statement that the dollar as the world’s reserve currency is a “product of the past” is a stark reminder of the urgency of this issue.

So, what can commodity trading companies do in the face of the dying dollar? Here are a few recommendations:

  • Diversify currency holdings: Companies should consider holding a more diverse portfolio of currencies to minimize the risks associated with the decline of the USD. This could include local currencies of their trading partners and other major global currencies.
  • Monitor global economic trends: Keeping a close eye on global economic trends and policy changes will be crucial in understanding the direction in which the world is moving. This knowledge will help businesses adapt and make more informed decisions.
  • Consider alternative payment systems: As new systems like the supra system emerge, businesses should investigate their potential use to minimize reliance on the USD.
  • Invest in physical assets: In times of economic uncertainty, investing in physical assets like gold and other commodities can help protect a company’s wealth.
  • Build strong relationships with trading partners: Establishing solid relationships with trading partners can help ensure that businesses are well-positioned to adapt to changing circumstances and continue trading, even as the global economic landscape shifts.

In addition, as the global financial landscape continues to evolve, it is crucial for commodity trading companies to build up their knowledge of cryptocurrencies, including Central Bank Digital Currencies (CBDCs). Here are some key areas of focus for building expertise in this domain:

  • Understanding blockchain technology: At the core of most cryptocurrencies is blockchain technology, a decentralized and secure digital ledger. It is essential for companies to understand the fundamentals of blockchain, its potential applications in the commodity trading industry, and how it can streamline transactions and improve security.
  • Familiarity with major cryptocurrencies: Companies should familiarize themselves with major cryptocurrencies such as Bitcoin, Ethereum, and Ripple. They should understand the underlying technology, potential use cases, and the factors that influence their value and adoption.
  • Central Bank Digital Currencies (CBDCs): CBDCs are digital currencies issued by central banks, intended to function as a stable and widely accepted form of electronic money. Companies should keep up-to-date with the development and implementation of CBDCs in various countries and understand the potential impact on global trade and the commodity industry.
  • Stablecoins: Stablecoins are cryptocurrencies designed to maintain a stable value by pegging them to a reserve of assets, often a fiat currency like the US dollar. Understanding the role of stablecoins in mitigating volatility and their potential use in international trade can be valuable for commodity trading companies.
  • Cryptocurrency regulations and compliance: As the adoption of cryptocurrencies grows, so does the need for regulatory frameworks. Companies must stay informed about existing and upcoming regulations in the countries they operate in and ensure compliance with these rules.
  • Integration with existing systems: Commodity trading companies should explore the technical and operational aspects of integrating cryptocurrencies into their existing systems. This may include updating payment infrastructure, accounting systems, and transaction monitoring processes to accommodate digital currencies.
  • Cybersecurity: As cryptocurrencies are digital assets, they can be subject to cyberattacks and fraud. Companies should invest in building robust cybersecurity measures and ensuring the safe storage and handling of digital currencies.
  • Educate and train employees: It is important to train employees across the organization about cryptocurrencies, blockchain technology, and their potential impact on the commodity trading industry. This will help create a culture of awareness and preparedness for the emerging digital economy.

The decline of the USD and the rise of cryptocurrencies and CBDCs present both challenges and opportunities for the commodity trading industry. To thrive in this rapidly changing landscape, companies must stay informed, diversify their holdings, and build strong relationships with partners while also developing expertise in emerging digital currencies and technologies. By doing so, businesses can effectively navigate these uncertain times, mitigate potential risks, and position themselves for success in a post-dollar world that increasingly embraces digital assets

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