The Gulf Cooperation Council: The Dog That Didn’t Bark

Inspector Gregory (Scotland Yard detective): Is there any other point to which you would wish to draw my attention?

Sherlock Holmes: To the curious incident of the dog in the night-time.

Gregory: The dog did nothing in the night-time’.

Holmes: That was the curious incident.

This bit of dialogue is from one of the most famous detective stories of all time, The Adventure of Silver Blaze by Sir Arthur Conan Doyle. Silver Blaze is one of the classic Sherlock Holmes stories written by Sir Arthur, and was among his favourites.

The plot involves the disappearance of a champion racing horse, Silver Blaze, and the apparent murder of the horse’s trainer. Those in the house adjacent to the stables heard no sounds on the night of the crime.

Holmes correctly deduces that the perpetrator must be someone who lives in the house — otherwise, the owner’s dog would have barked at the approach of a stranger. The ‘dog that didn’t bark’ is an important clue in helping Holmes to solve the mystery.

This story is a perfect example of the analytic methods we use at Currency Wars Trader. Holmes had very few clues, but was able to make strong inferences from those he did have. As Holmes states elsewhere in Silver Blaze, ‘One true inference invariably suggests others’.

That’s exactly how intelligence analysis is conducted by me and the CIA. We try to get one important piece of information right and then draw inferences from it.

Those inferences, if strong enough, then lead to other inferences, and so on, until a rough mosaic of the solution comes into view. It’s how we solve problems when there is insufficient information to solve them using more conventional techniques.

As The Adventure of Silver Blaze illustrates, sometimes important clues involve events that did happen, and sometimes they involve events that did not happen.

An intelligence analyst — or market analyst — has to be alert to both types of information.

Is there an important clue to the future direction of global capital markets that involves an event that has not happened?

The answer is yes.

This clue points to one of the most powerful groups of economic actors in the world. The monetary ‘dog that didn’t bark’ is the Gulf Cooperation Council, GCC.

The GCC consists of six member states: Oman, Bahrain, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates (UAE). The GCC was formed in 1981 as a platform for closer integration of the member states. They dealt with matters such as trade, defence, regulation, and a banking and monetary union.

It was intended to proceed down the same path as the European Union (EU).

The EU began in the 1950s as a modest coal and steel agreement and over the decades enlarged its membership and its agenda until it evolved into the full European Union, with its own central bank and common currency, the euro.



This map shows the six member states of the Gulf Cooperation Council: Oman, Bahrain, Kuwait, Qatar, Saudi Arabia and UAE. Your strategist has visited five of the six (all except Oman) numerous times over the past 30 years. He recently returned from a visit to Kuwait and Qatar. The GCC states are located in one of the most unstable and dangerous regions of the world, immediately across the Persian Gulf from Iran and surrounded by wars and instability in Egypt, Yemen, Iraq, Syria and Israel.

Progress on economic integration so far has been slow. However, a common market has been achieved. Also, efforts toward a single currency and central bank are ongoing.

The hurdles confronting the GCC members are even greater than those confronting the architects of the EU. The GCC members are surrounded by wars in Sudan, Yemen, Iraq and Syria, and unrest in Egypt, Israel and Jordan.

More importantly, the GCC members are confronted by the rising power of Iran. Iran is located directly across the Persian Gulf, only 29 miles away at the nearest point.

Iran has recently been empowered by detente with the United States. Iran will soon receive access to hundreds of billions of dollars in unfrozen bank deposits and sanctions relief courtesy of the US.

Iran is the principal sponsor of state terrorism in the world and has an active nuclear weapons program. The US-Iran nuclear deal is viewed as a stab in the back by most GCC members.

The combination of Iran’s nuclear ambitions, detente with the US and access to funds to finance terror is highly intimidating to the GCC members. These geopolitical developments underscore the urgency for economic and military integration in the GCC.



Your strategist during a recent visit to the observation deck atop the Burj Khalifa, the world’s tallest building. The Burj Khalifa is located in Dubai, UAE, a member state of the GCC. The building is over 2,717 feet tall — more than half a mile. The Burj Khalifa is emblematic of the ambitious development and financial plans of the GCC.

Even without the formation of a GCC central bank, a kind of monetary union of the GCC member states already exists. The six GCC currencies are not formally pegged to each other, but they are all pegged to the US dollar at a more or less fixed exchange rate. If a group of currencies are all pegged to the US dollar, they are also pegged to each other by a simple transitive law. (If A = B, and A = C, then B = C).

In the past four years, practically every important currency in the world has devalued against the US dollar. These include major economies and US trading partners. Canada, Australia, the eurozone, Russia and China have all devalued against the US dollar in efforts to export deflation, boost exports and create jobs.

The one exception to this currency war litany is the GCC; they have not devalued against the US dollar. In the currency wars, the GCC is the dog that didn’t bark.

What important inference should you (or Sherlock Holmes) draw from this nonevent? What indications and warnings can we see about the shape of the international monetary system to come?

The first conclusion is that monetary policy is too tight in the GCC. That’s how currency pegs work; when you peg to another currency, you have to follow the monetary policy of that country. Since the Federal Reserve has been tight for over two years (due to tapering and tough talk on rate hikes), the GCC countries have been tight too.

This makes GCC nondollar exports and tourism slow down. (Oil exports are unaffected by the exchange rate because oil is priced in US dollars, not the GCC currencies.)

When this local slowdown is combined with the global slowdown and the collapse in the US dollar price of oil, GCC members come under economic attack from two directions. Their budgets are in deficit, and they are drawing down foreign exchange reserves to make up the difference.

The second conclusion is that the peg is unsustainable. If the current exchange rate were market driven and sustainable, you wouldn’t need a peg to begin with.

Most pegs break in a spectacular fashion (think of George Soros’ attack on sterling, which brought the Bank of England to its knees in 1992). Just this January, we’ve seen the Swiss franc break their peg to the euro. We also saw China break their peg to the dollar in August.

In both cases, massive trading losses resulted. (Of course, these widespread losses produced massive gains for the few who were on the right side of the trade.)

The GCC countries are looking for a way out of their peg with the US dollar.

Their biggest customer for oil is now China. China is offering yuan lines of credit for the purchase of Chinese exports. The GCC feels betrayed by the United States because of the detente with Iran. They are looking to Russia for nuclear plants and weapons systems to keep up with the Iranians.

The US does not seem to care. US diplomacy has turned its back on the Middle East and curtailed most military operations there. Vladimir Putin has rushed in with Russian troops, fighter jets and his navy to fill the power vacuum.

These geopolitical considerations (Iran, Russia, China) are just as important as economic ones in analysing GCC behaviour.

The next step for the GCC is to devalue their local currencies against the dollar to boost their economies. The second step is to begin pricing oil in yuan or perhaps SDRs to break away from the dollar-based system entirely.

Step two will take time to evolve, but step one could happen any day and will shock the world, just as the Swiss and Chinese actions shocked the world earlier this year. When this happens, GCC stocks will plunge in dollar terms. Those who position for this trade stand to make enormous profits.

The GCC dog has not barked so far.

That’s our indication and warning.

Now it’s getting ready not only to bark, but to bite investors who are on the wrong side of the GCC trade.

All the best,

Jim Richards
Strategist, Currency Wars Trader

Ed note: This article was originally published in the US Intelligence Triggers.


James G. Rickards is the editor of Strategic Intelligence, the newest newsletter from Port Phillip Publishing. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. Jim also serves as Chief Economist for West Shore Group.


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