Zoltan Pozsar; How to position yourself in uncertain times?

The dollar's position could change dramatically in the coming years due to the geopolitical turmoil, according to credit analyst Zoltan Pozsar. According to the analyst, the Chinese renminbi plays a major role in this turnaround. The economist is also not very optimistic about the current high inflation, but sees a positive outlook for gold. IGWT interviewed the Hungarian-American economist, who discussed gold, geopolitics and inflation. How can investors guard against this uncertainty?

Expectations Gold

Zoltan Pozsar expects gold purchases from central banks to increase further in the coming years. The economist believes that the way central banks manage foreign assets is subject to change. This is mainly due to the increasing geopolitical turmoil at the moment. Pozsar doesn't see the dollar disappearing as the world's reserve currency. The dollar is also likely to be used as a reserve currency in many parts of the world in the future. However, the economist does think that some countries want to reduce the use of the dollar in the coming years. One example is Russia, the country whose foreign exchange reserves were frozen after the invasion of Ukraine. 

Central banks of countries such as Russia will look for alternatives to the US dollar. Gold seems to be an obvious option. Since the outbreak of the war in Ukraine, central banks have been buying at a record pace gold. A central bank that owns gold, according to Pozsar, has control over the monetary base. If, on the other hand, dollars or euros are held, the accessibility of those reserves is always subject to the approval of the state issuing the currency. As a result, countries have less control if they own dollars or euros than if they have gold in the vaults.

Foreign exchange reserves remain an important part of central bank balance sheets

Foreign exchange reserves will continue to be an important part of the central bank's balance sheet, but their composition may change. 'You have to import the products that you don't produce as a country and many of those products, such as energy and grain, are now paid for in dollars. There's no way around that'. However, it is possible that products such as energy will also be able to be settled in the Chinese renminbi or in another currency in the future.

Pozsar therefore sees a turnaround and imagines a future in which there is no longer one dominant currency. "I think there will be three dominant currencies; the dollar, the renminbi and the euro as the third wheel'. According to the analyst, the euro has been important for Europe. Euro countries no longer needed dollars to buy energy, Russia and OPEC also accepted euros when buying oil or gas. According to Pozsar, it is also an important observation that China is reducing the dollar's share of the currency basket, while the euro's share is growing. Of course, how the euro develops depends on several factors. For example, Wim Boonstra has been advocating for some timeEurobonds to provide a foundation in the bond market. This could strengthen the international position of the euro, but it is politically difficult to implement.

Pozsar now sees two major power blocs emerging, with the G7 on the one hand and many Asian and African countries on the other. The latter block is based on the New Silk Road, a development strategy of the Chinese government, aimed at connecting and cooperating between countries in Africa-Eurasia. We see that both blocks are also increasingly integrating their own supply lines. In the long term, this will also be reflected in the choice of certain currencies. On the one hand, the G7 will continue to embrace the dollar, while also creating a bloc that will focus more on the renminbi and gold. "Europe is still a question mark on this stage, it will be fought over," said Zoltan Pozsar.

The countries of the New Silk Road (Source;  Wikipedia)

Renminbi as a reserve currency?

There are economists who question the renminbi as a reserve currency, for example because China has a current account surplus, while America has a current account deficit every year, which means that dollars are constantly flowing abroad. Pozsar disagrees. According to the economist, the dollar also acquired its current status as the world's reserve currency in the years when there was a current account surplus. 

The period of reconstruction of Europe and Japan, during which Marshall aid was also provided, was accompanied by a large U.S. current account surplus. China can supply the world with renminbi through Currency swap agreements, in which central banks exchange foreign exchange to make it easier to obtain foreign currency. That is why the renminbi may well become a dominant currency, says Pozsar.

The confidence that the dollar built up was also the result of a large gold reserve that the U.S. had built up. Recently, Holland Gold has regularly published articles about China's gold purchases. The country has now also made offshore renminbi exchangeable for gold. That creates a lot of confidence in the currency. These are important factors, according to Pozsar. It is therefore no coincidence that more and more renminbi are being used for international transactions. BRICS countries are looking for alternatives to the dollar. In Brazil, copper is now settled in renminbi. Some countries already accept the dollar for oil purchases. According to the economist, the renminbi will play a role in more and more transactions in the future. 

The U.S. also built up large gold reserves before its currency became the world's reserve currency (Source; IGWT)

Inflation persists for a longer period of time

Pozsar is not reassured by the current inflation figures. Inflation is also a bigger problem than the recent problems in the banking sector, according to the economist; "In such cases, we gave the banks money and guaranteed that account holders would get their money. So those were actually quite simple problems', says the economist about the unrest at the Silicon Valley Bank. Inflation, on the other hand, is much harder to get back. 

According to Pozsar, this inflation will also last longer and will not go back to two percent in the short term. This period is different from previous periods of high inflation, such as when Paul Volcker was chairman of the FED. At that time, it was OPEC that caused high price increases. That was also the time when new oil fields were discovered and countries such as Norway and Canada increased supply. After that, Volcker raised interest rates and demand slumped. Finally, wages also remained low, as there was a very large supply of labour. It makes sense, then, that inflation dropped at the time; There was more supply, less demand and strong wage restraint.

Today, these factors have changed a lot. There is now less investment in oil and gas, which means that the supply is not rising as fast. Zoltan Pozsar expects OPEC to cut production further to push up the price. In addition, the labour market is now much tighter. In recent months, we have also seen wages rise sharply in the Netherlands. This leads to high inflation that is also difficult to bring down.

Opinion Pozsar 

IGWT also asks how Zoltan Pozsar thinks one can best position oneself in the current uncertain situation. According to the analyst, it is now wise to own a portfolio that consists of 20 percent cash, 20 percent commodities and 20 percent bonds. The remaining forty percent is then allocated to shares. Commodities are important as the commodity market changes due to geopolitical turmoil. 

Gold plays a special role in this because central banks are responding to the turmoil and adding gold to their reserves, but also because gold is likely to be used more for international transactions. Pozsar also notices around him that other investors still see gold as a valuable addition to a portfolio; 'When I talk to the well-known hedge funds and investors, the common response is that they have never seen such a complex environment. There is consensus around gold; That's a safe bet, while everything else is highly uncertain. This is a very unique situation. I think we need to have a very broad view and rethink how we see the world because things are changing rapidly. The dollar, the renminbi, gold, money and commodities. I think they will all be affected," Pozsar said.

*Quotes from this interview have been freely translated. There may be differences in interpretation.

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On behalf of Holland Gold, Paul Buitink and Joris Beemsterboer interview various economists and experts in the field of macroeconomics. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here  to subscribe.