When Countries Sell Their Gold

It already sold its Treasuries. Now it's selling its gold. The first country to run out is the one that starts the cascade.

On the afternoon of August 14th, 2003, a power line in Ohio sagged in the summer heat and tangled in an overgrown tree.

Minutes later, fifty-five million people across eight US states and Canada were sitting in the dark.

Not because fifty-five million power lines failed. Because one did - and the grid did the rest.

When that first line tripped, the electricity it had been carrying didn’t vanish. It pushed over to the next line, which overloaded and tripped, which pushed its load onto the next, which tripped.

Each failure made the next one worse. The entire northeast of the continent went down in under ten minutes.

Here is the part that matters. There was no flicker. No slow dimming to warn anyone. The power was full-strength and steady - right up until it was gone. In the control rooms, operators were staring at screens that said the system was stable, minutes before it collapsed.

That is how a connected system fails. Not slowly. Not with a warning you can act on. It fails all at once - and it starts at whatever point was carrying the most load.

Let’s use this as a framework for understanding how the entire financial world is plugged into one grid - the USdollar and the Treasury bonds that carry it. Every country is a power line, and the closure of the Strait of Hormuz is causing some of them to sag.

Let’s get into it.

Let’s begin with the end - because that is easier than predicting what comes next

Every money that ever ran the world eventually lost its crown - the Roman denarius, the gold dinar of the Islamic empires, the paper money of imperial China, the Dutch guilder, the British pound. Every single one. Rome, Baghdad, Beijing, London - different centuries, different continents, same ending. The US dollar is not exempt from history.

It always ends the same way. The country at the center goes too deeply into debt, inflates its money supply, and the world slowly stops trusting its currency. One day, the United States will either default on its debt - or it will print so many dollars to avoid that default that the dollar quietly bleeds away its value instead.

Empires always chose the second option.

It is easy to forecast how the game will end. It is much harder to forecast when it will end, or what events will occur first and in what order.

Two years ago, no analysts had “Closure of the Strait of Hormuz” written on their list. It was a black swan - a thing nobody saw coming - but it has reshuffled the board and exposed some near-term vulnerabilities. If the Strait had never closed, the dollar’s endgame would still be the same - it would just arrive on a different schedule, with dominoes falling in a different order.

The destination is fixed. A handful of dominoes will fall before the big one does. What we can do is watch current global events and point to the next piece that looks most ready to go.

Here is where we are at today:

A war shut the Strait of Hormuz. A closed Strait of Hormuz chokes off 20% of the world’s oil. Choked supply sends the oil price climbing. Higher oil prices force oil-importing countries to need more dollars to buy expensive oil - so they sell the most dollar-liquid asset they own: US Treasuries, to buy the oil.

But here is what makes it a spiral and not a one-time event: every country that sells Treasuries pushes the price of those Treasuries down a little more - which makes the countries still holding Treasuries nervous enough to sell too - before the price drops further. Selling feeds fear, and fear feeds more selling - and since the US government is funded by people buying Treasuries, it needs buyers, not sellers, or it will go bankrupt. Each link is a domino.

Today, the pressure is pointing somewhere specific. But not - yet - at America.

It is pointing to the oil-importing emerging markets.

So What’s Happening

Beginning in March, oil-importing emerging markets began selling more US Treasuries on a monthly basis than we have seen in years.

These are the middle-of-the-pack countries: still growing, not rich enough to coast, and forced to buy almost all of their oil from someone else. India. Turkey. Indonesia. Thailand. The Philippines. South Africa. Egypt. Pakistan. Vietnam.

They all have two things in common:

1. They have to import their oil.

2. They keep their national savings parked in US Treasuries.

So when the oil bill explodes, this is exactly the group that gets squeezed first.

And let’s begin with Turkey, because it is the whole story in a single country.

When the Strait closed, Turkey did what every oil importer was doing - it sold its US Treasuries to raise dollars for fuel. And it did not just trim the position: in March alone, Turkey cut its Treasury holdings from $15.7 billion to $1.8 billion - dumping nearly 90% of everything it held in a single month. But that stack was never large, and once it was gone, the country reached for the one reserve it had left: its gold. In the first two weeks of the war alone, its central bank sold or swapped roughly 58 tonnes of it - about $8 billion worth - out of gold reserves worth around $130 billion. That was three months ago, and the bleeding has not stopped. A country does not start selling its gold to buy diesel unless it has run out of better options - and no one is further down that road than Turkey. Which is exactly why it is the most likely to be the next to fall.

This is not a forecast. This is reported in the books as an already-happened fact.

And here is the detail that matters: all of this data is reported on a lag - which is why we are looking at March numbers. - Which means, this Treasury and gold selling occurred when oil was priced at $70–$105 a barrel.

Hold onto that range. We are going to come back to it.

Sri Lanka, circa 2022

Running out of dollars, then running out of energy, is a situation we don’t have to guess about. In 2022, it happened in Sri Lanka.

Sri Lanka imports nearly everything it runs on - its fuel, much of its food, almost all of its medicine - and pays for all of it in dollars. Its biggest source of those dollars, by far, was tourism: foreign visitors brought in around $4 billion a year, more than 5% of the entire economy.

When tourism paused in 2020, the country drained its savings to fill the hole, and its foreign reserves collapsed from $7.6 billion at the end of 2019 to about $50 million by the spring of 2022 - exactly as these emerging markets are draining theirs now. And when the savings ran out, so did the dollars.

A country that runs out of dollars runs out of the things dollars buy. The fuel lines stretched for miles, and then the fuel ran out entirely. The power went off for hours every day. Medicine grew scarce. Food prices soared out of reach. And that July, ordinary people had finally had enough: they marched on the presidential palace in such numbers that the President fled his own country in the middle of the night.

That is what “a country running out” actually looks like. Not a number on a screen - a head of state climbing onto a plane to escape his own people.

But a tourism crisis affects a small number of countries. And energy crisis affects everyone - which is why the probability of a cascade effect is so much higher today - recall from above:

Every country that sells Treasuries pushes the price of those Treasuries down a little more - which makes the countries still holding Treasuries nervous enough to sell too - before the price drops further. Selling feeds fear, and fear feeds more selling - and since the US government is funded by people buying Treasuries, it needs buyers, not sellers, or it will go bankrupt. Each link is a domino.

Washington Understand This

Most people listen to what governments say. I would rather watch what they do - especially the strange, quiet things they would prefer you not notice.

Two of them are happening right now.

First, the United States is draining its Strategic Petroleum Reserve - the nation’s emergency oil tank, the one you are only ever supposed to crack open in a true crisis - at the fastest pace on record. But much of that oil is not going to Americans. It is being shipped overseas.

Second, the Treasury has quietly lifted its sanctions on Russian oil - twice - in the middle of a war in which Russia is helping target American forces.

Why on earth would it do these things?

Same reason for both.

If desperate countries can get oil from America’s emergency tank, or from a suddenly legal Russia, it keeps the global oil price down - and it means countries have to sell fewer US Treasuries to afford their oil - but these moves are not really about oil. They are about protecting the treasury market - keeping the most fragile countries from selling too aggressively, so that none of them falls and starts the cascade.

Read that back, because it is the tell. The US government is burning its emergency reserves and unsanctioning its enemy’s oil - to keep a distant emerging market from going under. If the system were fine, you would not need to do any of that.

So here is where we stand. The most exposed countries are already selling. Washington is already scrambling to catch them. And the longer the Strait of Hormuz stays closed, the harder that gets - because every week of constricted oil supply puts more pressure on the system.

Is Oil Going Higher?

In late May, Neil Chapman, a Senior Vice President at Exxon - one of the largest oil companies on the planet, told an investor conference: “We’re approaching unheard of inventory levels. I mean really, really low levels.”

The cushion the world has been living off of - the oil sitting in storage tanks around the globe - is almost gone.

And Chapman put a clock on it: “You can debate whether that’s going to hit in two weeks or three weeks. Once you get to that point, then you’ll see the price shoot up.”

His number for where it goes? Physical oil cargoes spiking to $150 to $160 a barrel.

Now pick up that range I asked you to hold. Everything we just watched - Turkey dumping its Treasuries, then selling its gold; emerging markets draining their reserves - all of it happened with oil sitting between $70 and $105. Exxon’s number for what comes next is $150 to $160.

So ask the only question that matters: if selling the gold is what $90 oil looks like… what happens at a hundred and fifty - when the gold is already gone?

Why a $150 Oil is Very Different from $90 Oil.

Here is where most people get it wrong. The instinct is to think this scales - $90 oil caused some Treasury selling, so $150 oil just causes more of it. A bigger version of the same thing.

It isn’t.

Ninety-dollar oil has been survivable for one reason: three cushions have been quietly soaking up the blow. The first is the oil sitting in storage tanks around the world - as the Strait choked off supply, countries drew those inventories down instead of bidding the price into the sky. The second is the US Strategic Petroleum Reserve, which Washington has been pumping into the market at a record pace to hold prices down. The third is the reserves of the exposed countries themselves: when Turkey needed dollars, it had $15 billion in Treasuries to sell before it ever had to touch its gold.

At ninety-dollar oil, those three cushions absorbed the hit. The Treasury selling was real, but orderly - countries sold what they had, the price stayed in a range, and the system held.

By the time oil hits $150, all three of those cushions will be gone - and that is the whole point. Global inventories are already at record lows and falling. The US Strategic Petroleum Reserve is already at its lowest level since 1983 and is still falling. And the exposed countries will have already sold their Treasuries.

A shock that lands on a system with no cushions left does not behave the way it did when the cushions were in place. It is not absorbed. It lands square and breaks two things at once.

First, the most exposed countries run out of things to sell and start collapsing - they go “Sri Lanka, 2022”. They cannot “sell more Treasuries” to buy oil, because the Treasuries are already gone.

Second, all that forced selling drives the US interest rate up to a level the US cannot sustain. There is a number - somewhere around 5% on the ten-year Treasury - above which America’s interest bill stops being a problem it can manage and starts to compound on itself. The cushions are what have kept yields below that line. Take the cushions away, force the selling, and yields shoot up. On the other side of that line, the United States has only two choices left: let the bond market break, or print a record amount of money to stop it.

“But the Strait might open, Jay.”

Yes. It might.

Every week, since early March, we have heard that we are “A few days away from a peace deal.”

I hope this time it is real.

And if we are, the whole system stabilizes - oil falls, the pressure drops, the emerging markets stabilize, and we all go back to arguing about something else. I genuinely hope that is what happens. That is the off-ramp. That is the good ending.

But do not mistake a reprieve for a pardon. Even if the Strait opens tomorrow, the long-term destination does not change - only the timetable. The dollar’s endgame was set long before Iran, and it will still be waiting on the other side of this war. Hormuz did not start this fire. It just poured oil on it.

The next domino

So that is what I am actually watching. Not a chart. Not a number. A country - the next one to run out of dollars the way Sri Lanka did in 2022.

Right now, the most likely candidate is Turkey. It has already sold its bonds and started selling its gold; no country is further down the road. It might not be Turkey - I cannot promise which one goes first, and a shock nobody sees coming could push a different country over the edge before it. But one of them goes first.

And the day it does - the day a real economy runs dry and collapses the way Sri Lanka did - is the day this stops being a forecast and becomes the news. Because that collapse is not the end of the story. It is the start of the cascade: the fear it sets off spreads to the next country, and the next - each one selling its Treasuries to buy oil, each sale pushing the price down, each drop frightening the next country into selling too - until it reaches the one market the entire system is built on. The United States.

What’s the point, Jay?

Where you are reading this from changes how fast this reaches you - not whether it does.

If you live in the United States or another wealthy economy, you are unlikely to wake up to empty fuel pumps. Your version is slower and quieter: inflation. The selling we have been tracking eventually forces the US to print more money, and every dollar printed makes the dollars in your account worth a little less. The number in your savings stays the same; it just buys less food, less fuel, less rent, year after year.

If you live in one of the exposed countries - and many of you do - I do not need to explain any of this. You have either lived through a currency losing its value, are watching it happen now, or had your parents tell you how it felt the last time. For you, this is not a forecast. It is a memory and a warning.

But the lesson is the same for every reader, on either side of that line: the thing that fails is paper. Dollars, lira, rupees, pesos - when a government is cornered, it protects itself by printing, and whoever is holding its paper pays the bill. The thing that survives is what cannot be printed.

So I will not tell you to buy or sell anything. I will only tell you how I think about it. The most dangerous place to keep your savings is the one that feels safest - cash, and promises to be paid in cash. The safer place is what no government can conjure with a keyboard: gold, energy, and the real, physical assets the world cannot run without. The people who have already lived through this know it in their bones.

If the Strait reopens tomorrow and I am wrong, owning some of those things early costs you almost nothing. If it stays shut, they are what hold their value while the paper loses its. One side of that bet costs a little; the other protects everything you have saved.

The countries on the edge fall first. But they were never the end of this story. They are the warning that the cascade has begun - and that it is moving, one domino at a time, toward the biggest one of all: the dollar that every other currency, and every saver on Earth, ultimately leans on.

Honest question - what am I missing? Let me know in the comments.

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That’s it for today,

Jay Martin

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