Petrodollar system: Saudi Arabia, gold and the dollar

0:00Saudi Arabia just shot the main airport in its own capital because a missile fired from Yemen came down on the terminal in Riyadh and 12 people are dead. More than 300 are hurt and an American is one of the dead. And the news will give you all the war details, all the grim stuff, who fired, who's to blame and all that kind of stuff. And whether America steps in is obviously important. Donald Trump's already answered that. His exact words were "we may move very quickly."

0:28But the war is actually not the part that should worry the money in your portfolio because Saudi Arabia is the country that agreed 50 years ago to sell all the world's oil in dollars and to send the proceeds of all of that straight back into American investments. And that literally one arrangement is a big reason the dollar in your pocket, the dollar in your portfolio holds its value at all. Then right now missiles coming down on Riyadh and Washington saying we may do something about it. Well, the Saudis are asking themselves some questions and nobody on mainstream media is really joining this up, but everyone watches the smoke over the airport.

1:07The oil money is watching something very, very different. Gold just had its worst few months in about 13 years. Yet the central banks carried on buying gold anyway, which actually tells you quite a lot already. And there is one line on Saudi Arabia's books I've had my eye on for quite a long time. And it's sitting on a number that literally hasn't moved in years. And the day that it does, the dollar you're holding, the dollar that your stocks and shares are counted in will move with it. And after a week like this, I don't think it's going to stay much longer where it's been for ages.

1:48So by the end of the next few minutes, you'll know exactly what that number is, what the big money has already started doing about it and what a normal person like you, and hopefully I'm still normal, what we can actually do about it. Because by the time this turns up on the evening news, well, it's going to be too late to have a plan. So if you can guess where I'm standing, what city this is, you win a cookie.

2:12But before we go into this deeply, I'm going to ramble a little bit on about quite a lot of numbers and details and how they all kind of connected in terms of economics. So I'm going to put all that into a short report. I'm going to write up for you afterwards and that's completely free to download. So if you want to understand this really on a deeper level, go and download that. It's at felixfriends.org/riyadh. Good luck spelling that, but there's a link down below in the description so you can just click on it.

2:35If you're wondering who the heck I am standing on a balcony here, my name is Felix Nikolas Prehn. I'm an economist. I'm a former investment banker. I'm the founder of the Prehn Institute. We publish research on financial markets and provide instruction on how they actually work. I'm actually interviewing an Oxford professor on pretty much exactly this subject today which I'm very excited about, which is why I'm here, giving away the location slightly.

2:56But let's start with what actually happened because actually for once it matters. A missile fired from Yemen, which is a proxy for Iran, came down on Terminal 3 at King Khalid International, which is the main airport. And Saudis have confirmed 12 dead, 309 injured. The dead are from different countries but one of them quite importantly is from America. Why importantly? Because the US has started many a war on that kind of a footing.

3:23The New York Times has called it the deadliest attack on a Gulf Arab since the war with the Houthis began in February. And again it wasn't the first time this happened. 2 days before that a plane got blown up. 3 more people were killed. One of them was a pilot, again in Saudi. All major countries have put out travel warnings for Saudi. Most major airlines have stopped flying there. Yet in 2 weeks, Saudi is meant to host its showpiece investment summit with literally thousands of executives flying in, heads of state and so on. And it hasn't been called off yet but we have to see what happens there.

3:59So who did Riyadh ring for help? Well, they rang France, Britain, Pakistan, Egypt. It had already gone to Washington and been turned away a few weeks back. And only now after an American has died in Saudi does the president, the US president, say we may move very quickly. And as soon as he's going to help, Riyadh has also signed a defence pact with Turkey and Pakistan.

4:20And that's an important thought because it matters more than the missiles for your money because this is where it reaches you. You see, oil jumped more than 5% on the day of that attack. Brent, which is the world's benchmark oil price, is sitting at just over $100. And an oil shock does not stay in Saudi Arabia. It gets on a plane, it comes to your house.

4:42And this, by the way, is exactly why it's so important to look at your stocks and look at which one of these is sitting on what I call a danger zone. And again, there's a filter for that in the Winston app. If you want to check that out, it's down below. It's called danger zone and it tells you which companies can absorb a shock like this and which cannot. And I think that's quite an important thing to check and thousands of stocks actually can't.

5:06So what's the part that really matters to you here? Well, think about what this actually does to your household, not to Saudi Arabia. When oil moves like this, it is not just a news item. You see it at the pump first, then in your weekly shop, and then on your heating bill, and then last of all actually in your portfolio statement, in your stocks, by which point it's already happened to you. And this whole dollar reset, oil reset is all connected. And by the time it's a headline in your local paper, the quiet gap between what the official numbers say and what your money actually does is already reality.

5:46So the people who are sitting there being careful in cash, I think we've already established they're definitely the ones who lose. But it isn't just the people who are sitting in cash. It's also the people who are sitting in the wrong stocks and the wrong indices. And the hard part is this. And I say this with a great deal of respect because most of us were taught to handle money that was built for a world that has gone. Plant the oak tree, buy and hold, don't look at it for 20 years.

6:10And it worked beautifully. It worked beautifully for the previous generation because oil was cheap. Interest rates fell for 40 years straight. Now, what replaces this is a skill you were never taught, which isn't your fault at all, but it is your responsibility to learn it. And if you want to come through a shock like this with what you've built still intact, in fact possibly thriving, well, you need to know that skill.

6:37And the people who do come through in one piece are not the ones who are smarter than you. They're not the ones who are richer than you. They simply watch where the big money, the institutional money, the skilled money is actually moving and they move with it instead of marrying one position for life, whether that's an index fund or a stock. That's pretty much the whole difference. It's a skill and a skill is the one thing that can actually be handed from one person to another, which is a beautiful thing and which is why I do what I do here. And I want to do exactly that for you.

7:03So I'm going to for the first time ever teach you live for free, about 2 hours, this coming weekend, how to survive the oil shock. And it's going to be me walking you through exactly what to watch and what to do about it step by step. And if that sounds a little complicated, relax. It can literally be done with an index fund or a couple. And you can ask me questions live on that day on Saturday and it'll work if you're in the US, if you're in the UK, if you're in Europe, anywhere else really.

7:34So if you're open to actually learning that, if you're open to learning how to survive and thrive out of this oil crisis, then just put "open" in the comments and then get yourself a free seat. There's a link down below, petrodollarshock.com. Again, you can just click on that and it's completely free. And I love doing that and there'll be a couple of thousands of us there live and we can actually learn how to protect ourselves and benefit from this.

7:57But let's dive a little bit deeper into what's happening here today because if you want to understand why a missile on an airport is really a currency story, an investment story, you have to go back to 1974. The deal then was very simple and has run the world ever since. Saudi agreed to price its oil in dollars and to take the mountain of money that it earned and plough it back into American assets. That was the deal. In return, America provided the security. Oil and protection were basically getting married.

8:28So that one handshake is why even today the dollar is used in roughly 90% of all these oil transactions on the planet. And it means that if a country needs oil, and basically every country does, you first have to do what? You have to go and buy some dollars before you can buy a single barrel of oil.

8:46Casino. Before you can play at the table, you have to go to the little window and you have to buy the house chips, right? America owns the window and the whole world has to queue up at it. And that's the superpower behind the strength of the dollar, behind the strength of the stock market, behind the strength of the bond market and its ability, the US's ability to run these massive deficits.

9:08Now, the bit most people have never really thought about is this. The Saudi riyal isn't really a free currency at all. It's a Saudi currency. It's been chained to the dollar at the same fixed rate since 1986. So for 40 years it's never moved a cent. And to keep that chain from snapping, the Saudi central bank has to shadow America's central bank's move bit by bit, interest rate by interest rate.

9:35So when Washington raises interest rates, Saudi raises them too. When Washington cuts, Saudi cuts. So in a very real sense, Saudi Arabia has been taking its orders on money from America for the last 40 years. That's the thing I want you to hold on to in your head. They've backed it with an enormous amount of money, something like $450 billion in foreign currency reserves and a sovereign wealth fund almost at a $1 trillion. So this isn't some poor fragile little country. This is one of the richest pools of money on earth.

10:07And for almost 50 years it's pointed all that money in one direction, towards America. So a big slice of it is held in treasuries, which in plain English are just IOUs from the US government. You lend Washington your money, Washington promises to pay you back with a little bit of interest. Saudi is holding about $140 billion of these IOUs. And the detail that may be set up is this. Earlier this year in a single month they sold about $11 billion of that.

10:37Now one month doesn't make a trend. Countries move these things around. But I'm not going to stand here and tell you Saudi is dumping that stuff. But if you put it into context with everything that's going on here, they needed money because they're not selling enough oil. And they're probably also a little bit peeved off by the whole situation that's been caused here quite frankly by the US.

10:56So the airport's in flames, the phone calls are now to Paris and Islamabad, not to Washington. The defence pact is with Turkey and a little less money is parked in America. So the honest question is this, and this is a question, this is not a fact yet because we don't get that much data out of Saudi, but the 1974 deal was oil in exchange for security. If the security is now coming from Pakistan, Turkey, France and Britain, then what exactly is holding up the other side of the bargain? What keeps all that Saudi money pointed at America if America is no longer the one keeping Saudis safe?

11:31I'm not saying it's going to happen. I'm not telling you it's going to snap this year. A reset like this is never one single dramatic morning. It's a drift. A little less here, a quiet phone call there, one number that stops moving the way it used to. And that's what I'm actually watching here.

11:48So if Saudi Arabia ever did want to loosen that chain, where would it go? Well, there are two roads out and both of them are opening up at once. The first road is physical. It's about who controls the water the oil floats across. And you've probably heard of the Strait of Hormuz by now, right? A little bit between the Arabs and the Iranians where a quarter of the world's oil has to squeeze through. But Hormuz has a backup plan and that's the Red Sea. And the same fighters who hit that airport have been gaining ground along the coast, which means they can now watch that backup route too.

12:23So picture this scenario. If the main road and the diversion are both under threat at the same time, oil stops being priced on supply and demand. It gets priced on fear. And you can see it in shipping. The cost of hiring a tanker to take oil out of the Gulf has just gone vertically to the highest level ever recorded, like a million dollars a day or something crazy. The captains are being paid $100,000 a month, like danger money.

12:47And it isn't just the logistics, it's the actual oil machine. A refinery was hit in August. Facilities in Yanbu and Riyadh were just hit. There is a strike claimed on a Riyadh facility earlier this month. So the thing that earns the Saudis its dollars is a target.

13:07The second route out is a little bit more quiet, but it's actually more important and it's financial. For 50 years, if you wanted to buy oil, you needed dollars. Remember the casino window? But some countries have been building a side door and it's called mBridge. So let me tell you what that actually does because it is a big part of the dollar losing its importance here. It allows central banks to pay each other directly in their own currencies for real goods without the dollar in the middle. No more queues out the window.

13:34Now $55 billion have already gone through it. Now important to understand is the Saudis are not in that system. They took part in a trial and then when the pilot was wrapped up they stepped back out, presumably because they wanted to not piss off the US. But the United Arab Emirates having it, and I'm sure the Saudis are watching that as an option with everything that's going on right now. That's their hedge. It's their plan B.

14:00But there's another straw in that wind. See, Saudi has already flirted with the idea of selling some of its oil priced in renminbi. Essentially what's happening here, you see that the same with all the gold buying from central banks, is that the central banks of the world are trimming how much they're lending to the United States.

14:18So let's talk about what they're doing instead. Gold, right? So the strangest thing in markets right now is this because it's the clue hiding in plain sight. On paper, gold has just been a terrible run, right? Worst quarter since 2013. It was below 20% down or something from the high earlier this year. So it should send people running for the exit, you'd think, right?

14:43And many ordinary investors did exactly that. They sold. They panicked. They're like, "Gold's over. It doesn't go any higher." But the central banks did the opposite, right? So the worst stretch for gold in 13 years, yet the guys printing money are actually buying it, the central banks. Now the institutional money, it's done quite the opposite. And if I look out again, it's in the Winston app. There's an indicator. It shows you every week what the institutional money is doing. And they have basically run for the exits.

15:08Now there's some statistics on that and they're not a promise of future returns. I'm not a financial adviser and past isn't necessarily going to be the future. But typically when we see everybody's run for the exits, it's a little more likely that if you do get a rally, you get a nice rally. Doesn't have to happen though. That's typically the way it works. That's again something I'm watching.

15:27So to me, as long as gold sits at $4,000 and above, it's intact. I don't predict prices. It's pointless. I just look at where the money is flowing. But Saudi's got pretty significant oil reserves and we don't know if they've sold any. They don't really tell us. Officially they haven't. But if they want to not put massive, massive amounts, fresh amounts of money into dollars because they're a bit peeved off by the United States, where are they going to put it? What is the likely place they'd put it? Well, to me that would be gold.

15:55Put some money on top of that because the 1974 deal with the Saudis, the Americans, is essentially a paper deal. It's a paper dollar deal, right? It isn't a gold deal. And that was run on a promise. Now the promise seems to not be performing quite as I'd like it to. So the thing I would watch is literally that number. The day Saudi Arabia's gold reserves start to officially climb, that's the day the richest oil nation on earth is telling you the trust in the paper dollar is a little less than it used to be. There won't be a press release. There won't be anything big, but we'll tell you when we get the data. Again, it's in the Winston app. And I think after the week they're having, we've inched a lot closer to that.

16:39So let's make this really just about you and less about Riyadh. What can you actually check tonight at the kitchen table? Well, check one. Do you even know what you own? Most of you genuinely don't, right? They've got a pension here, a workplace scheme there, a few funds there, portfolio there. So the first thing is actually just to put that all together. Put all the things you own together in one place so you know what you actually own.

16:59The second thing is the 2022 test. The last time the world hurt, inflation and an oil shock was 2022. The closest rehearsal for what's actually coming. So just check when everything gets more expensive, which companies held up and which ones fell apart. Again, if you go into the Winston app, there is an inflation test. It pops up actually as you enter it, shows it right on the homepage. And it'll show you whether your stocks are exposed one way or the other. Free trial. Don't like it? Just cancel it on day 29. No one's ever going to bother you. So that's the second thing I check. And the third thing I check is then for all those stocks, are they in

17:33That what I call the danger zone. So companies that could get into trouble very easily if things go a little bit south. Now I also want to be honest with you what those checks will do for you. They'll give you awareness, which is great. They show that you're exposed. They show how much your future is riding on one country's promises.

17:54What they can't do on their own is tell you what you actually do about it, because the what to do is a skill and it's a skill that we don't get taught. So again, not your fault you haven't got it, but I think the fact that you now realise there is a skill gap here, it is your responsibility to go and learn it. And that's what Saturday is all about. I'm going to walk you through step by step, not the theory but the actual moves.

18:16So let me put the whole thing back together in just a couple of sentences here. You got an airport in Saudi that was hit. The country that's underwritten the dollar over 50 years is asking whether America still has its back or whether they should maybe put their money somewhere else. The richest oil nation on earth is talking to the French and to the Turks and keeping a hand near the financial emergency exit. They've sold a fair chunk of America's debt already, which is a very unusual thing for them to do. And the smartest money in the world is buying gold into a crash.

18:47And in 12 months there'll be two types of people watching this. The first kind who will read about the headline and after the dollar or whatever it is in your pocket has bought them less and wonder why you didn't act. And then they'll be the kind of people who were calm and gave themselves some time to prepare. Nothing dramatic, no panic, just the head start because they made a plan.

19:07So you've done literally the hard part, which is actually paying attention and watching something fairly intense and detailed. But you know the economics of the world here and the next step is just learn the skill set. It's completely free. I'll teach you for about two hours live on Saturday. It's called How to Survive the Oil Shock and it's a playbook we've seen again and again, but the world is a little bit different to what it was in the 70s. And therefore I think there are a lot of lessons there from those patterns and from what the big institutional money is doing right now.

19:39So it's not going to be complicated. No, it's actually going to be surprisingly simple, but it takes a little bit more time than we have in a short YouTube video like this. So if you're somewhere in the Americas or in Britain or in Europe, wherever you might be, come and join us at petrodollshock.com. It's live. There isn't a replay. You got to just sign up for it. It's completely free.

20:02And if you got some value out of this, if this shook you just a little, send it to somebody who might benefit from this too. And I wish you all the best. And if you hadn't realised it by now, we are of course in London. All the best.

20:12Right now, I think we're going through some weird phase transition. And normally when you get bad economic news or you get bad jobs data, people are going to fly to safety into the bond