It’s a cunning strategy.
The US Federal Reserve satisfies the global demand for dollars while maintaining the dollar’s title as the planet-wide currency king.
With one brilliant move, it has divided the world up into allies and non-allies of the US.
Today, everyone needs the stability of the USD in a world turned upside down with economic turmoil.
Granted, that stability may be only relative to other countries’ own currencies. But American allies have to deal with that reality.
They know it. And the Fed knows it.
- That’s why the Fed has created a path to access US Dollars for government-identified real allies of America.
And it has denied access to those identified as unfriendly.
It’s critical that you understand this…
And when you do, you’ll be miles ahead of almost everyone else.
The US has put a system in place where all but the most die-hard anti-American nations will want to be included among the friendlies.
In fact, many will do anything to make the list. How do they do this? Through SWAP lines.
Never heard of them? Then you’re not alone.
For the most part, when I bring up SWAP lines, I have found myself speaking into a vacuum.
I haven’t come across one person in a hundred that knows about them. And that includes business executives, politicians, or even bigshots in the financial industry itself.
Most investors are not even cognizant of the program’s existence, much less aware of its significance.
But given how important SWAP lines are to the global economy, every investor should understand them and how they work.
What Are SWAP Lines?
First things first, here’s how the Fed explains swap lines on its own website:
- If you have access to a US swap line, you are what I call a +SWAP Line Nation.
- If you don’t have access to a swap line, you are a -SWAP Line Nation.
SWAP Lines Are a Financial Lifeline
In the wake of any global panic, the most recent example being the pandemic…
Many central banks request that America provide financial assistance to at least alleviate the stress caused by a lack of US Dollars.
SWAP lines have provided that relief and will continue to do so.
They are, literally, lifelines. And they are also debts.
- All those dollars borrowed must be paid back in US Dollars, with interest, also requiring dollars.
It’s ingenious because demand for the US Dollar breeds further demand.
It will be paramount for nations grappling with deflation to enter the favored group capable of exercising swap lines.
Here’s a list of the nations that have access to US Dollar SWAP lines (as of now):
Countries outside the group—the negative swap line (-SWAP) nations—will struggle to access US dollars.
SWAP Lines are Important for Investors
The result of how this program is set up is that countries receiving swap lines will follow any stipulations they are asked to follow. They’ll have no choice.
- Suppose you want to be blessed with a swap line from the U.S…
In that case, you must be careful not to antagonize the hand that feeds you.
This means not aligning in any way with nations designated as non-friendly and agreeing to follow any restrictions, such as sanctions, that the US government puts on.
The struggling nations that require emergency access to US Dollars, and can’t get them…
- Could engage in the expropriation of foreign-owned assets as the world recession deepens.
For example:
Last year Papau New Guinea revoked Barrick Gold’s social license. Several months ago, Barrick gave the PNG government a 51% stake in the mine. Now the mine is back in production.
The PNG government is not the only nation flexing its muscles…
- Chile is amidst altering its tax code which could see miners be taxed up to 75%
- And just recently, Kyrgyzstan seized Centerra’s Kumtor gold mine.
It’s either that or face crippling depressions or revolutionary uprisings of their citizens (or both).
So, American businesses with operations in these places had better beware (and so should their investors).
SWAP Lines Will Defend American Interests
As global deflation progresses, there will be more nations that will be granted swap lines. But do not forget, swap lines will always defend American interests.
Make no mistake, this is big business…
- By April 2020, the drawdown of USD SWAPS was just under half a trillion dollars.
The last time that foreign central banks took down that amount from US SWAP lines was at the height of the 2008 global financial crisis.
The SWAP lines worked back then to prevent a complete worldwide financial meltdown. Same thing now. But this is just the tip of the iceberg.
Few want to be shut out, and around eighty-five nations have applied for US swap lines (currently, 14 central banks have been approved (EU representing 27)).
In fact, Indian Prime Minister Narendra Modi has publicly confessed to having “swap line envy.” To be approved, all those countries must solidify their positions as US allies by falling into line with our policies.
Think they will? Yep, me too.
More Nations Will be Added
Over time, I expect these critically important SWAP lines to be increased and more nations to be slowly added.
They’ll be subject to the terms set by the US government—both financially and geopolitically. But they’ll accede.
As monetary and fiscal policy are blending into one, it’s just a matter of time before the President uses SWAP lines as a big geopolitical leverage hammer.
SWAP lines are that important, and they will dictate global alliances and policy. So, pay attention to them.
Because I promise you, they will have an impact on companies, investments, and ultimately, the very fabric of our world.
- If you have a producing asset in a Negative SWAP Line (-SWAP) country, you must prepare for potential setbacks and for things to go wrong.
It’s about properly understanding and pricing in risk.
Something that has become overlooked in the resource sector.
SWAP Lines and Your Portfolio
Because I believe nations who do have existing SWAP lines won’t screw with foreign operating entities (American companies) to the extent of the –SWAP Line Nations.
I still expect higher taxes in all countries as it’s the only thing politicians across the world have executed effectively throughout time.
This means mining assets in +SWAP Line Nations won’t nationalize their gold mines, copper mines etc. Those nations won’t screw with America.
Nations with existing U.S. SWAP lines won’t put Forex (FX) restrictions on the foreign (American) companies operating there. –SWAP Line Nations may do so, and many have already.
This will cause less (and in some cases prevent) those U.S. Dollars in –SWAP lines from being sent back home as dividends to the owners of the company.
Know the plan. Read the playbook.
And most of all, be prepared. You can get my team and me to do the heavy lifting for you through my premium research service – Katusa’s Resource Opportunities.
I’ll tell you exactly what I’m doing – where I’m investing – and how you can follow.
Regards,
Marin Katusa
