Gold, Bitcoin...and Oil Tankers?

De-dollarisation and inflation hedging strategies can include ships

Russia relies on Indian and Chinese buyers of its oil to fund its war in Ukraine. The shadow fleet of oil tankers allows Russia to bypass sanctions and the dollar banking system. In a recent development, Indian Oil Corp, the state owned refiner, is reported to have paid for Russian oil in Chinese currency, the renminbi. The move is thought to signify the increasing détente between the world’s two most populous nations. The Indian government had previously halted RMB payments by Indian buyers. It also hints at the increased involvement of Chinese traders in Russian oil exports.

The move may not feel very significant but consider it in the context of Premier Modi’s recent trip to the SCO meeting in Tianjin (covered in our 8 September Macro Macchiato) and the resumption of direct flights between India and China after a multi-year hiatus. India is quietly backing out of the relationship with the US that previous American administrations worked hard to build as part of the US pivot to the Indo-Pacific. It is not being over-dramatic to say that the US has indefinitely lost India to the new bloc emerging in Asia. From the perspective of New Delhi, the choice is between the rising authoritarian power on its doorstep, or the declining and newly authoritarian power across the ocean.

Bitcoin, gold, and the USD rebased so that January 2025 average prices = 1.00

Meanwhile, Bitcoin and gold prices are surging this year. Bitcoin has surpassed $125,000 for the first time this month. Gold’s rocket-like rise to over $4,000 has been well-documented. Gold ETFs are enjoying substantial inflows of capital this year, reversing years of reductions. Meanwhile the US dollar index is down nearly 10% this year. Investors are reacting to several intertwined themes, all of which point to further de-dollarisation. Two examples follow:

First: political risk. The US government shut-down is into its second week. Many of the furloughed workers, especially those identifying as Democrat voters, will not be returning to their jobs if the administration gets its way. The economic effects are yet to be seen but, on the basis of US Treasury data showing that government spending was 23% of GDP in 2024, there will surely be a dip in output even if government spending is in due course replaced by private sector spending. The last Trump shutdown lasted 35 days in 2018-19 and was the longest in US history. The Congressional Budget Office calculated that it caused an $11 Bn reduction in GDP. That’s a small percentage in a $20 Tn economy but still relevant if this shutdown lasts longer.

Second: central bank policy risk. There is a sense abroad that investors are avoiding government debt whether it be issued by the US, Japan, Germany, France or the UK. Investors suspect that governments will have to issue more debt as they cannot tax their way out of their commitments. That will increase their debt service costs, leading to higher interest rates and more taxation, leading to lower economic growth – the kind of “doom loop” some describe as the UK’s current trajectory. Mr Trump wants the Fed to cut interest rates, while other governments would certainly benefit if central banks prioritised debt servicing over inflation by cutting rates.

Some economists are calling this the “debasement trade” as fiat currencies are debased by fiscal imbalances and monetary expansion. In other words, governments are encouraging central banks to print too much money to fund their lavish expenditures. Investors are not selling US treasury bills to buy gold, but they are leaning more toward the metal and away from the fiat currency. Bitcoin is strongly correlated to gold with a lag, which suggests a further rally may not be far away (please don’t take this or anything on these pages as an investment recommendation).

The US treasury market is vast and deeply liquid. There is no suggestion that its dominance is under threat today. But each little drop of liquidity adds up over time.

Similarly, there is increasing anxiety that there is a bubble in AI related equity prices which could burst, damaging investor appetite for US equities in general. Add in some macro economic risk from an increasingly authoritarian federal US government and some investors may prefer to limit their exposure to USD denominated assets.

In the worst-case scenario, something like the debt crisis that Portugal, Ireland, Greece and Spain went through a decade ago could be coming for larger economies. Data suggest that non-US central banks now hold more of their reserves in gold than in US dollars, for the first time since 1996, implying a structural preference for gold’s natural hedge against inflation.

The implication is that we can expect higher inflation in the near future, perhaps at 1970s levels when gold returned around 30% a year while bonds and equities delivered negative real returns until the market reforms of the early 1980s.

This means investors should seek investments which are natural hedges against inflation. These include assets with slow growth in supply, such as gold and some other metals, some commodities (perhaps not oil due to its growing oversupply and the complications of the energy transition) and physical capital assets including ships.

So what are ship prices doing this year? As examples, let’s use Baltic Exchange assessments of five year old prices for major commodity ship types – oil tankers and dry bulk carriers. Rebasing the prices so that the January 2025 average = 1.00 gives us these two charts:

You can see that VLCC and Capesize prices have risen the most this year, while MR tanker and Handysize Bulk Carrier prices have risen the least. If I was spending my own money, I’d aim for the sizes above these – for Aframax crude oil tankers and Supramax or Ultramax large geared bulk carriers. On a dollar per dwt basis these types have outperformed larger and smaller ships over the last 15 years. They are numerous, enjoy relatively liquid second-hand markets, allowing investors both entrances and exits. They can carry a variety of cargoes and can operate globally. There is a plentiful variety of cargo interests ready and willing to hire such types for both period and spot employment.

So, anyone anxious about de-dollarisation who also think gold and bitcoin are over-bought might consider a way into shipping such as an ETF or even vessel ownership. Perhaps the days of KS and KG type investor participation might even return?