David Kotok: China, the Dollar and Bretton Woods 2.0
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September 7, 2026 | In this issue of The Institutional Risk Analyst, we feature the second part of our conversation with our friend and fishing partner David Kotok. He is an American financial expert, economist, and author best known as the co-founder of Cumberland Advisors. You can read the first part of the interview here (“David Kotok: Gold & US Credit Default Swaps in Euro”). A note for our Premium Service subscribers, we’ve updated our WGA Precious Metals Top 25 list as of the market close on Friday.
Toma Stream, Indian Township, Maine
The IRA: David, we ended the first part of our discussion in July talking about euro denominated credit default swaps on the US as a benchmark for gold. Since then, long-term interest rates have backed up and the Trump Administration looks increasingly at risk of being irrelevant. The case for holding gold in investment portfolios is getting stronger by the day, yet Wall Street is still not entirely on board. How do you explain Wall Street’s reluctance to embrace gold as a hedge against the manic swings in American politics?
Kotok: The conclusion I have reached on gold is that it is not short-term trading vehicle. Gold tells you that. What gold tells you is that reactive changes in gold prices are driven by forces quite different than other types of asset classes. And we already have a sense of that. But the differences are there. And they are intertemporal with quite a different time span than traders are accustomed to managing. Traders are impatient. They want to know when the gold price is going to go up tomorrow so they can buy it today and then they want to sell it. Gold doesn’t work that way.
The IRA: Americans are short-term in their thinking when it comes to gold and most other assets. The rest of the world is not. For example, the rest of the world cares about the growing risk of a US debt default. Some agents are long-term holders of gold because they’re worried about US default. I think that’s what you’ve hit on here.
Kotok: Yes, I think so. Why else would a market agent pay 45 basis points in euro for a 10-year Credit Default Swap on the United States Treasury debt? Why is the 30-year federal agency bond yielding 40 basis points more than the 30-year US T-bond? Only 15 years ago, that CDS was priced in single digit basis points. Just 15 years ago, the Treasury-agency spread was single digits. This is the market speaking with real money. Chris, there is a market-based pricing mechanism. We can make assessments of what those folks think, not by what they say, but by how they price the buy and the sale and come together with a price. And the CDS for the US in euro gives us a pricing reference. And what do we know about it? We know as you go out in time, the price of gold goes up.
The IRA: Correct. It’s quite odd to compare the heavily manipulated world of securities to a global market like gold. The Financial Times reports that China imported 100 tons of gold from Russia in the first seven months of this year.
Kotok: We know we have a directional curve. We know we have a unit-based price per year because we have one, five, and ten-year CDS contracts on US default priced in euro. So, we can interpolate three points and make an entire term structure. And we know that the CDS-gold relationship has mathematical efficacy because the Granger is not zero, it’s a positive number with statistical significance from 3 months to almost 2 years horizon.
The IRA: Your work on the correlation between gold and US CDS is quite compelling.
Kotok: Thank you. I don’t make up the numbers. I got them from the Bloomberg database. If there are any investors in the entire country who will buy CDS denominated in euro, both are on this Zoom call right now. Americans don’t look at this. Maybe that’s why it helps.
The IRA: Americans are still too desensitized to the risk of a US debt default to start buying CDS contracts in euro. They think that it’s not going to happen. When you start to tell Americans that the great game has a finite endpoint, they tune you out.
Kotok: Agreed, however, there’s a new player in town and I sent you those charts too. And that player is Shanghai. What did Shanghai do? Shanghai has run a payments system starting in 2015. And the Cross Border International Payments System or CIPS is different. CIPS is something I call a 2.0 version of Bretton Woods. And what is it? CIPS says, hey, you don’t have to clear payments in dollars or other western currencies. You don’t have to use SWIFT for the messaging and you don't have to use one of the major correspondent banks in the Western Alliance payment system. China is still small but growing. CIPSis clearing in domestic Chinese yuan. The dollar is still huge. It still settles about 90% of the world’s payments on at least one side of the trade. China is up to about 3% on CIPS.
The IRA: The self-defeating US sanctions regime and other stupidities have given the Chinese and the Russians an opportunity to create an alternative to dollars. But most payments still flow through the dollar and western alliance monopoly.
Kotok: Yes. We may be 55% of world reserves, but when it comes to settling payments, we’re 90% of at least one side of every payment trade. And we do that through the correspondent system known as SWIFT. And what do we do? We go to one of the G-SIB banks, depending on where we are in the world, we communicate the trade through SWIFT, and then we go to the correspondent to settle the trade. Counterparty A settles the trade with B. If Siemens is selling an MRI machine to Sarasota Memorial Hospital for a hundred million dollars, that’s how the payment structure would go. Siemens gets euro, SMH pays dollars. G-SIB banks net out the difference. SWIFT communicates. That’s how the dollar mechanism works.
The IRA: How does the Chinese system CIPS differ?
Kotok: What China is trying to do is fascinating. Number one, it introduced in 2015 a competing payment system currency. It says settle in Shanghai through a domestic Chinese agent and use yuan. So, if a hospital in Malaysia buys the MRI machine from Siemens, they can clear the currency exchange in Shanghai through yuan. The Indonesian hospital pays in ringgit, Siemens gets euro. No correspondent banks in the middle and the payment never touches dollars. The Shanghai Exchange handles the currencies. And CIPS will clear that payment. And CIPS now does that every day. So, the Malaysian hospital has choices, western or eastern payments. Two currency choices dollar to euro from ringgit or clear ringgit to euro through yuan via CIPS.
The IRA: CIPS is an alternative system specifically designed to evade the US sanctions network.
Kotok: Shanghai doesn’t care who the actors are. So about 20% of the transactions go through the Chinese communication system which is not visible to western eyes. That’s how Iran clears payments for oil it sells to China. Or for missile parts from North Korea or Russia. Suppose I’m one of the bad guys and I don’t want the West to see a payment. I don’t want to use SWIFT to communicate. I use the Chinese system CIPS. The supervisor is the Peoples Bank of China (PBOC). They are the only folks who see the trades unless someone has hacked into their security system. And remember the PBOC are the same folks who manage the dollar-yuan exchange rate.
The IRA: Right. Works nicely for Iran and Russia as well.
Kotok: So, you get the money, you clear, and the whole mechanism is in Shanghai in the domestic Chinese currency, and nobody sees it. The Chinese have created an option to the dollar and it is growing. What they have also done, what China has done, is brilliant. They have created a gold option. So, if you don’t trust the Chinese yuan, you can use the Shanghai Gold Exchange and take some physical gold into delivery. All this through agents for CIPS.
The IRA: Why do you call this Bretton Woods 2.0?
Kotok: China has figured out the flaw in Bretton Woods. The flaw was not allowing the market to reset the gold price. So, fixing $35 for the dollar was destined to fail over time. I don’t want to point a finger of fault at Keynes and the others…
The IRA: Oh, go ahead David. As my father Richard Whalen used to say, you cannot libel the dead. We adopted a non-gold system because the rest of the world including the British were broke. FDR and the socialists in the New Deal wanted to brainwash Americans into forgetting about gold. A century later, the effort has failed miserably in large part because of America's debt addiction and China.
Kotok: The flaw in Bretton Woods was to fix the $35 gold price instead of allowing it to change. What China has done is said, we will have a physical gold hoard and we will have a tradable gold warrant. And that warrant trades in Shanghai in the room next door to the currency payment structure. So I can take my yuan and buy the gold warrant at whatever the price is denominated in Chinese currency. I buy a yuan denominated claim on physical gold. There’s liquid market and the PBOC supervises it.
The IRA: China has reversed the idiocy of Franklin Roosevelt a century ago and made gold an advantage instead of a threat to the progressive agenda. We let our physical gold hoard sit inside Ft Knox at a fraction of the market price and pretend that we can pile endless leverage atop a fiat currency. And China encourages its citizens to own gold. Is this system superior to the dollar, David?
Kotok: the superiority is that the market agent has the option. You want yuan? You can have it. You want gold? You can have it. You want to do a global transaction with transparency? You can do it. You want to hide it from prying eyes in Washington? You can hide it. The physical gold is in a vault. And if I want to sell the warrant you get paid in Chinese currency. If you want to buy gold from me, you pay in Chinese currency. If we use agents, they must be acceptable to the PBOC. The Chinese are slowly expanding CIPS agents. Deutsche Bank (DB) just became the first official one in Europe. Today almost 100% of the gold warrants are settled with physical delivery in Shanghai. Western markets are much larger. This warrant is only 2 years old. If you go to Chicago or London, what do we do? We have futures contracts that settle in dollars. Most of the west rolls the trade so physical gold delivery is small.
The IRA: The difference between the Western markets that settle predominantly in cash and Asian markets where physical delivery is the norm is fundamental. A growing number of global central banks are moving their physical gold out of the US because of the erratic behavior of Donald Trump. They fear expropriation of their gold by a future government in Washington.
Kotok: Chris, we are burning up the value of trust. We put Smoot Section 338 tariffs on Canada, our ally and friend with a 3,000-mile peaceful border to our north. We insult everybody. We renege on what we say. And we have craziness on social media at 2 o’clock in the morning. The foreigners who wonder about America have good reason.
The IRA: You wrote that in a trade war, the guns are pointed inward. Does that encourage more use of gold?
Kotok: I think so. Gold is agnostic. Gold doesn’t fight culture wars. It just sits there as a store of value. Gold ignores the social media posts at 2 o'clock in the morning. In the West, we have various claims on physical gold. We physically don’t move much physical gold, we just roll the contracts. So, I have people say to me, eh, Shanghai is a small market. It’s one tenth the size of London and or Chicago or New York. I say, yeah, but let me ask you a question. If the larger market is replacing a claim with a claim in a security transaction. And only a tiny fraction of the gold is physically settled. And the other, smaller market settles 90% of the trades with physical gold. Where are you better off?
The IRA: Good point. What the Chinese have done is create an alternative payment system to the dollar. Brilliant.
Kotok: I think so. They have taken a payments mechanism and they have taken the $35 gold price of Bretton Woods. They said, wait a minute, we’re going to let the markets set the price. Buyers and sellers will set the price of the gold. And we will give them a tradable security, the gold warrant priced in yuan. And anybody in the world who wants to go see how much it is, how big it is, how it’s growing, can get the information. They are very transparent about the Shanghai Gold Exchange.
The IRA: How long has the Shanghai Gold Exchange warrant market been trading?
Kotok: It’s just two years old.
The IRA: And it started at zero?
Kotok: Correct. Now it is growing weekly. The last report was almost 115 metric tons as of September 1. That is a new record high.
The IRA: Fixed prices are an idiotic affectation of the Western democracies. Where is the gold deposited?
Kotok: They have physical hoards and the Shanghai Gold Exchange operation has vault locations. Each warrant represents a 3,000-gram serialized gold bar. The supervision is the Chinese Securities Regulatory Commission and the PBOC. There is an elaborate process of random and scheduled audits and designated inspections. China is trying to build trust in the system. They are slowly achieving that. This is what is competing against SWIFT and the dollar correspondent system. And by the way, the Chinese system now has agents around the world so that about 30 countries can use this system
The IRA: Well, President Trump or Treasury Secretary Scott Bessent can give the 30 counties an ultimatum to choose between SWIFT and CIPS. I doubt they would like the response.
Kotok: Indeed. Look at where we are. You can arbitrage with SWIFT versus CIPS. You can arbitrage any currency and the gold price and do it in two markets. And the big market, which is the Western alliance, ignores this. Which is why China has such enormous possibilities. Now, not everybody ignores it, but if you write up something on US CDS, most people are going to roll their eyes. But a few astute observers of the global political economy are gonna say, Gee, they’re on to something. And I never knew that.
The IRA: Any closing thoughts?
Kotok: One last point. The US could act differently and not ignore the fledgling competitor. In fact, we could replicate it with a credible dollar if we wanted to. Instead, we keep shooting ourselves in the foot. Now Vice President J.D. Vance is out talking about lower interest rates and preaching to Fed Chairman Kevin Warsh. And Chairman Warsh knows he must keep the real interest rate positive to get inflation down. Chris, we need mature adults in the room. Your father worked for one. You and your Dad knew Paul Volcker and saw him in action. It wasn’t always like this.
The IRA: No, it was not. But a majority of Americans voted for President Trump in 2024. We got what we asked for. As Peter Dinklage as Tyrion Lannister told King Joffrey Baratheon in The Game of Thrones: “We've had vicious kings, and we've had idiot kings, but I don't think we've ever been cursed with a vicious idiot for a king!” Thank you, David.
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