The Consequences of Saudi Arabia De-pegging The Riyal

There has been chatter that the peg between the U.S. dollar and the riyal will soon be broken. Today, one U.S. dollar equals 3.75 riyal and this has been the case for 3 decades.

The reason why Saudi Arabia wants to de-peg against the U.S. dollar is because of its rising deficit. This deficit was ignited due to lower oil prices, which hit $29/barrel last week. The following chart from Tradingeconomics shows how the current account (and budget) went into deficit this year (budget deficit is 15% of GDP). This is the first evidence to support why the riyal needs to devalue, because there is a correlation between a country's budget deficit and its real exchange rate. The higher the budget deficit, the lower the exchange rate.

This current account/budget deficit coincided with the drop in oil prices from $100/barrel to $29/barrel in 2015. Saudi Arabia needs oil prices to be in the $100/barrel range for its economy to function properly.

Since 2015, Saudi Arabia has tried to keep the peg by selling its foreign exchange reserves (see chart below from Tradingeconomics). This trend cannot keep going indefinitely, which leads me to believe that the probability of de-pegging is pretty high.

Go here to read the analysis.

Mike Maloney explains the SNB depegging

Here's what Mike has to say about the SNB depegging.

The Effect of the SNB Depegging

There is so much to think about when we saw the depegging of the SNB this week. I don't have all the answers yet.

- What are the implications of the 80 billion loss for the SNB? Will the tax payer be hurt?
- What about the exports?
- What about the losses in the financial sector?
- What does this mean for the money printing announcement from the ECB next Thursday?
- What does this mean for the massive short positions in gold by the SNB?
- What will the euro do, continue its plunge?

First of all let's talk about gold, because that sector is most known to me.

We see that shorts kept covering this week and I believe next week the shorts will keep covering with a higher gold price. On the gold premium front, nothing special is happening. Premiums went down a bit due to an increase in gold price.





On the GLD front though, a fundamental reversal in the GLD stock level is catching my eye.

In just 2 days 23 tonnes of physical gold were bought at GLD. This tells me that hedge funds are starting to become long gold buyers. This SNB move could be a regime changer. Let's watch the GLD stock closely next week.

It is widely accepted that the ECB will initiate QE next week on Thursday at the ECB meeting. That's why the euro has been falling so rapidly. And that's also why the SNB had to depeg the Swiss franc from the euro. There was no way they could keep buying euro, the SNB balance sheet would explode. They rather just take their losses on the EUR/CHF, USD/CHF exchange rate and be done with it. Covering their gold shorts with it so they can benefit from the rise of gold after the ECB QE announcement. But this depegging decision could have consequences on the decision of the ECB next week. They might not do the QE now. We'll see what happens and act on it soon enough. But it's a no brainer to buy the gold miners at this stage. What the SNB did is a perfect catalyst for gold.

Here's Peter Schiff's take.