Countries that participate in the novel cross-border payments system
mBridge are each hoarding gold and are largely responsible for the bull
market of the past two years.
How and when the global dollar standard will disintegrate is hard to
predict, but setting up a non-dollar payments system (mBridge) and
aggressively accumulating gold to replace U.S. Treasuries as the prime
international reserve asset is a potent strategy to de-dollarize.
mBridge: An Instant Cross-Border Payment System
MBridge is an international payments project that was launched in 2021 by the Bank for International Settlements’ (BIS) Innovation Hub in Hong Kong. Currently, there are five full members—Thailand, China, Hong Kong, Saudi Arabia, and the U.A.E.—and over 30 observing members.
The project aims to create a multi-central bank digital currency
platform for participating central banks and commercial banks, built on
distributed ledger technology (DLT) to enable instant cross-border
payments and settlement. MBridge uses an Ethereum-compatible DLT
network, the mBridge Ledger,
developed by China’s Digital Currency Research Institute. Because China
oversees the backbone of the technology, it’s immune to Western
sanctions.
A common technical infrastructure has the potential to improve the
current system and allow cross-border payments to be more efficient,
immediate, and cheaper. On June 5, 2024, mBridge reached the Minimum
Viable Product (MVP) stage.
A Surge in Gold Hoarding by mBridge Members
Readers who are familiar with my writings understand that the gold
price is determined by global flows. Based on cross-border trade
statistics, it’s clear that the East assumed dominance in the gold
market starting in 2022, overtaking the West.
As stated in a previous article,
formal gold import and export statistics represent private flows, but
they can also reflect central bank activity. Aside from elevated peaks
in private demand from China and Thailand, the Chinese and Saudi
central banks (PBoC and SAMA) are largely responsible for the rally
that commenced in 2022, both having vigorously stepped up gold purchases
after the West froze part of Russia’s foreign exchange reserves.
Strikingly, according to available trade data, the countries in the
driver’s seat of the gold market are all full members of mBridge: China,
Saudi Arabia, Thailand, and Hong Kong (see chart below). Statistics by
the U.A.E. lag several years and are misleading due to smuggling to
India.
Chart 1. Net gold import data through May 2024 reveals gold stockpiling amid higher prices.
Chart 2. The Treasury Inflation Protected Security (TIPS) yield
is the expected real interest rate on U.S. government bonds. Strong gold
buying by the East has broken the correlation and rendered TIPS
impotent.
Between China, Thailand, Saudi Arabia, and Hong Kong, it’s clear
their gold stance has changed since early 2022: they’ve jettisoned their
sensitivity to the price. Instead of selling into rallies, they are
themselves causing those rallies as a result of strong demand.
Aside from visible global gold flows, we know the official gold
reserves of Thailand, the U.A.E., China, and Saudia Arabia are rising in
recent years—even when excluding covert purchases by the latter two.
Only Hong Kong’s monetary gold has been flat; however, it can be lumped
in with Beijing since it’s a special province of China.
Chart 3. The Central Bank of Thailand has increased its reserves
to 235 tonnes from 84 tonnes in 2008. In the U.A.E., official gold
assets went up from zero to 75 tonnes over this time span. PBoC and SAMA
gold reserves are much higher than disclosed.
mBridge Helps Facilitate a Ditching of the Dollar
The dollar is said to be the world reserve currency, which means it’s
the most used currency in global trade. The lion’s share of global
international reserves (owned by central banks) are held in
dollar-denominated assets such as U.S. government bonds (USTs). Nations
wanting to break free from the dollar need an alternative for trade and
reserves.
As described above, the members of the mBridge fellowship—all running
a current account surplus—have been increasing their gold reserves in
recent years. This is referred to as Gold Recycling: storing trade surpluses in gold rather than USTs.
Chart 4. A visualization of the Gold Recycling trend. World
official gold reserves are estimated based on reported and unreported
purchases by central banks.
Getting rid of the dollar in trade is more challenging. Liquidity in
local currencies can be poor; volatility can be risky with limited
hedging opportunities, transactions slow and expensive, and payment
infrastructures incompatible.
MBridge is about connecting central banks to provide a settlement
layer for their digital currencies while supporting interoperability
between participants’ existing financial infrastructures. Utilizing mBridge is a stepping stone for more use of local currencies and, eventually, an improvement of liquidity.
Courtesy of BIS Innovation Hub (2022). Saudi Arabia was the last member to join in June 2024.
Cross-border payments often rely on an inefficient network of correspondent banking.
Through mBridge, though, its participants seek to do away with
correspondent banking and let banks link up efficiently through the new
settlement rails. According to the BIS, mBridge payments are faster, safer, cheaper, and more accessible, and settlement is final.
Courtesy of the Hong Kong Digital Currency Academy.
mBridge Facilitates New Non-Dollar Trade Deals
Energy is the lifeblood of any economy, and Saudi Arabia and China
are the largest exporters and importers of oil, respectively. For a long
time, the House of Saud preferred to receive dollars in return for oil,
based on an agreement with the United States
to invest its trade surplusses in USTs*. Despite their long-standing
ties with the U.S., the Saudis are becoming eager to trade oil in other
currencies.
In November 2023,
the PBoC and SAMA signed a currency swap agreement worth ¥50 billion
yuan ($7 billion dollars) to “expand the use of local currencies between
China and Saudi Arabia and facilitate trade and investment between the
two sides.”
This September, the Saudi Minister of Mineral Resources, Bandar Alkhorayef, said in an interview with SCMP that he’s open to new ideas, including the use of renminbi in crude oil settlements. No wonder the Saudis joined mBridge in June.
The PBoC also renewed a currency swap line with with the U.A.E.’s central bank (CBUAE) in November 2023 and, at the same time, solidified a digital currency cooperation agreement as part of ongoing teamwork for mBridge.
As it has reached the MVP stage, mBridge is slowly becoming fully operational. A few weeks ago, as an example, RAKBANK in the U.A.E. executed its first instant cross-border payment—digital dirham against digital yuan—using mBridge.
In May 2024, representatives of the Thai central bank and the PBoC signed a Memorandum of Understanding
“on strengthening banking and financial cooperation, including the
promotion of local currency usage as well as cross-border payment and
settlement,” an apparent reference to mBridge.
The Combination of Gold & mBridge Could Tank the Dollar
What are the odds that the countries that have taken over the gold
market in the past two years are also in a non-dollar trade alliance?
Surely, these countries have a thought-out plan to de-dollarize.
Noteworthy, China, Hong Kong, and the U.A.E. have sophisticated
precious metals markets where gold is traded in local currency, allowing
mBridge associates to convert any surpluses from bilateral trade
directly into gold while bypassing the dollar.
Saudi Arabia doesn’t have a developed gold market, but not long ago, a new refinery was opened in Riyadh under the patronage of the Saudi Minister of Mineral Resources, Bandar Alkhorayef. On the refinery’s website,
it reads gold bars will “comply with globally approved standards and
should be accepted globally by all customers, including all national
banks.” That should tell us enough.
One requirement for mBridge to come to fruition is the completion of
the digital local currencies, most of which are currently still in a
pilot phase. It should be clear, though, that mBridge constituents are
being finalized and coming together.
MBridge is likely to become a success because there is a political
motive to escape from the clutches of the weaponized dollar if the
mBridge group is able to take over the gold market, who knows what they
can do on the cross-border payments front?
As we keep track of developments in cross-border payments through
local currencies, the rise of gold to the detriment of the dollar in
global reserves is inescapable.
Global Gold Reserves Flipping from Dollars into Gold
My personal calculations suggest gold is currently making up 19% of
international reserves, up from 10% in 2014. Meanwhile, the dollar’s
share has fallen from 62% in 2001 to 48% in March of this year as a
result of the Gold Recycling trend (see charts 4 and 5).
Chart 5. Gold is taking over market share from the dollar in global international reserves.
Since geopolitical tensions aren’t subsiding and the mBridge group
has a motive to de-dollarize, we can assume this trend will continue.
And we shouldn’t rule out Western investors will join in driving up the price of gold.
The dollar won’t die overnight, yet its slow demise is worth
evaluating relentlessly**. I will keep readers posted on the composition
of international reserves and developments in the cross-border payments
arena.
*A “petrodollar” deal in which the Saudis exclusively accept dollars for oil has never existed between the U.S. and Saudi Arabia.
**Not mentioned in this article is that there is also a lot of dollar debt internationally due to the Eurodollar market.
mBridge
