In an announcement on Tuesday, Premier Wen Jiabao and his Russian counterpart Vladimir Putin said that would no longer use the US Dollar in their bilateral trade agreement.  They will be using their own currency when dealing with each other.  This stemmed from the financial crisis of 2008 when both countries began seeking alternatives to protect their economies.

In an article on
Sun Zhuangzhi, a senior researcher in Central Asian studies at the Chinese Academy of Social Sciences, said the new mode of trade settlement between China and Russia follows a global trend after the financial crisis exposed the faults of a dollar-dominated world financial system.  Pang Zhongying, who specializes in international politics at Renmin University of China, said the proposal is not challenging the dollar, but aimed at avoiding the risks the dollar represents.

The action taken by Russia and China further emphasizes the world’s view that the US Dollar is risky and weak.  These two countries have taken a small step to eliminate the US Dollar as the world’s reserve currency.  In fact they have been calling for a new world’s reserve currency since early 2009.  When the IMF didn’t include the rouble and renminbi in the new SDR weighting this month the two responded with penning their own agreement.

With the recent announcement of QE2 pumping new dollars into the world economic system, it is no wonder our foreign trading partners are longing for a way to protect their countries economies from our reckless spending.  I believe this new development between these two countries will inspire others to do the same, thus circumventing our dollar.  This will force more dollars to come home to the United States and will cause inflation here at home.

Inflation will ultimately cause gold to rise priced in dollars.  Gold is commonly used as an inflation hedge and is a great portfolio diversifier.  If Russia and China are afraid of the dollar shouldn’t we all be to a certain degree?  If the Fed is going to continue to print money shouldn’t that only emphasize our need as citizens of the dollar to diversify that risk away?  Gold coins are a great way to diversify your portfolio and give you a hedge against the dollar and inflation.