Nick Giambruno's Note: I recently spoke with my friend and colleague Chris Lowe about China's new alternative financial system—and how it could mortally wound the US dollar. It was such an important discussion that I had to pass it along.

Chris is the editor of Bonner & Partners' Inner Circle. His publication shares insights from Bill Bonner's personal global network of analysts and investment experts.

Using force to compel people to accept money without real value can only work in the short run. It ultimately leads to economic dislocation, both domestic and international, and always ends with a price to be paid.

– Former U.S. Congressman Ron Paul

He who holds the gold makes the rules.

– Old saying

Chris Lowe: Why did you start researching the petrodollar system and its potential unraveling?

Nick Giambruno: This has been on my radar since 2006. That's when Ron Paul, then a Republican congressman, spoke to Congress about the collapse of the dollar-based global monetary system.

As I recently told my Crisis Investing readers, I think it's his most important speech ever. It's called "The End of Dollar Hegemony."

During the speech, Dr. Paul lays out why a global monetary order built around a fiat currency is doomed to fail.

Crucially, he pointed out the one thing that would precipitate the US dollar's collapse—the end of the petrodollar system.

I recommend reading the speech in full. But this is the most important part:

The economic law that honest exchange demands only things of real value as currency cannot be repealed. The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or Euros.

I discussed this with Dr. Paul at a past Casey Research conference. He told me he stood by his assessment.

In a nutshell, he's saying we'll know the dollar-centric monetary system is on its way out when countries start trading oil for gold instead of dollars.

That's already starting to happen.

Chris Lowe: To catch up real quick, why is the petrodollar at risk?

Nick Giambruno: Under the current petrodollar system, all global oil sales are made in dollars. However, the Chinese government recently announced a new mechanism that will allow oil producers anywhere in the world to trade oil for gold.

China's new mechanism will totally bypass the US dollar and the US financial system… along with any restrictions, regulations, or sanctions from Washington. So for many oil producers, it will be much more attractive than the petrodollar system.