152 THE BiG DROP
dollar-denominated debt. In the case of Russia, those assets
consist of oil and natural gas, both of which are priced in dol-
lars on world markets.
For China, the hedge is simple. If the U.S. inflates the val-
ue of the dollar, China will lose on its debt holdings, but will
make large gains on its gold. Converting some portion of its
dollar reserves to gold is a good way for China to hedge its
exposure to dollars.
For Russia, the case is more convoluted. In the short run,
Saudi Arabia is suppressing the dollar value of oil, which hurts
Russian receipts since Russian oil is also priced in dollars at
the world price. But this deflation has also tended to keep gold
prices low in recent years.
When Russia sells oil at a low dollar price, it immediate-
ly converts the dollars to gold, also at a relatively low dollar
price. When inflation returns, the dollar price of Russia’s gold
will soar, thereby compensating it for the “lost dollars” or the
earlier sales of oil.
What China and Russia have in common is they are both
protecting themselves against dollar and oil price manipulation
by converting their export sales into gold. While investors may
have missed this development, other central banks have not.
The withdrawals from the Federal Reserve represent efforts by
central banks in Germany, Netherlands, and elsewhere to take
physical possession of their gold in advance of a systemic mon-
etary breakdown.
The correlation of dollars and gold, the divergence of gold
from commodities, the repatriation of gold from the Fed, and
continued large acquisitions of gold by China and Russia are
all visible from the data. The conclusion that gold is begin-
ning to behave like money, rather than a commodity, and that
Russia and China are using gold to hedge dollar exposures in
oil and Treasury securities respectively, are reasonable infer-
ences using our models.