From Peter Reagan at Birch Gold Group
We are living in chaotic times. Record inflation, historic U.S. debt, and rising geopolitical tensions only represent the tip of the iceberg. Right now, as a consequence of those three forces, there’s a tectonic shift underway in the global economy.
Since the end of World War II, the U.S. dollar has served as the world’s global reserve currency. (I described exactly what that means here.) No matter how much debt the Treasury Department issued, central banks around the world snapped it up – because dollars were a requirement to participate in global trade.
That is no longer the case.
The world’s reliance on the dollar is in steep decline – which leads me to believe its role as the global reserve currency could be coming to an end even sooner than expected.
Take a look at how the dollar’s share of global reserves has been slowly diminishing over the last few years:
Data via International Monetary Fund
To be sure, the dollar still enjoys the lion’s share of global currency reserves. But that number, 59.7% of total, represents a 25-year low.
As any basic economic textbook will tell you, declining demand is bad news for any product – and the U.S. dollar, in the form of IOUs issued by the Treasury Department to finance the nation’s $31.5 trillion debt, are by far the U.S.’s #1 export.
So what’s going on?
World central banks are reducing their dependence on the dollar.
Why?
I outlined the three main reasons above. Now let’s look at these concerns from an international perspective…
This decision “sent a chill down the spine” of world leaders
When Russia invaded Ukraine back in February 2022, the Biden administration and NATO allies took historic economic measures against Russia.
Two of them are relevant to the dollar’s diminishing dominance:
First, we commit to ensuring that selected Russian banks are removed from the SWIFT messaging system. This will ensure that these banks are disconnected from the international financial system and harm their ability to operate globally.
Second, we commit to imposing restrictive measures that will prevent the Russian Central Bank from deploying its international reserves in ways that undermine the impact of our sanctions.
This economic attack, “sent a chill down the spine of leaders in — well, pretty much everywhere other than the Anglosphere countries, the European Union and Japan. If it can happen to Russia, it can happen to us.”
We covered a few of the potential ripple effects of these sanctions previously. We also covered how those sanctions backfired in terms of energy prices, thanks to Russia’s control of natural gas.
But these sanctions have also added to a long list of “weaponizing the financial system” at the hands of U.S. officials to maintain the dollar’s hegemony.
The rest of the world has decided, Enough is enough.
Singapore’s former foreign minister George Yeo recently said:
The U.S. dollar is a hex on all of us… If you weaponize the international financial system, alternatives will grow to replace it.
How can anyone rely on a currency that could be, at any moment, turned against them?
That’s one big reason the intensity of the “de-dollarization” movement has accelerated.
No matter who wins the currency war, we lose
Since February 2022 the dollar’s grip on global economic activity has been slipping:
- 17% of Russia’s foreign exchange reserve is now in Chinese yuan
- The United Arab Emirates issued bonds in their own currency, the dirham
- Egypt issued $2 billion in yuan-denominated bonds
- Israel’s central bank added yuan (and other currencies) to its central reserves
- Saudi Arabia is open to selling its oil in yuan or other currencies, ending the fifty-year agreement to only accept dollars for oil
My colleague Phillip Patrick addressed this issue recently on Bannon’s War Room:
The stories about the UAE and Egypt are important because, historically, emerging-markets nations take out loans in dollars rather than their own currency. That was considered a sign of trust in the past. Today, it’s a sign that lenders might prefer payment in dirhams or yuan instead of dollars!
Let me be clear here: any time a nation like Israel or Russia diversifies their central bank reserves by swapping dollars for another asset, that’s a vote against the dollar.
Any time an emerging-markets nation takes out loans in yuan or another currency, that’s a vote against the dollar.
These major geopolitical shifts have only just begun. I described them as “tectonic” above, but a better description might be glacial. There are over $7 trillion in the hands of foreign central banks around the world. These changes happen slowly, but with an absolutely unstoppable momentum.
As the dollar’s reign fades, other nations are eagerly vying to replace it. China has been the most aggressive contender, though Russia’s plan for a BRICS currency may ultimately become dominant.
The point is, we can’t know in advance which country, or what currency, will win in the end. We do know that the global de-dollarization process is accelerating.
And no matter the victor, the U.S. will end up losing. As global demand for dollars declines, so will the dollar’s purchasing power. Prices on imported goods will surge. The government will face higher borrowing costs to finance its trillions of deficit spending.
Ultimately, it doesn’t matter to me who wins the battle to replace the dollar.
What matters is that, no matter who wins, we lose.
“De-dollarization” is a form of diversification
In case you haven’t made this connection, world central banks are, like prudent savers, diversifying their national savings in light of these changes we discussed above. And they aren’t just swapping their dollars for yuan or euros!
Remember: we can’t know in advance who will win the struggle to become the new global reserve currency. No one can. So what are they buying instead?
According to the World Gold Council’s recent report:
A second consecutive quarter of huge central bank demand (417t) took annual buying in the sector to a 55-year high of 1,136t, the majority of which was unreported.
The Economist recently reported that, in the fourth quarter of 2022 alone, global central bank gold buying hit the highest levels on record all the way back to 1967, when the records began.
When you don’t know in advance who’s going to be the winner, it’s smart to diversify with an asset you’re confident won’t be the loser. For global central banks, that’s obviously physical gold.
This logic makes perfect sense to me! Physical precious metals have a historic track record as not just a store of value, but as a safe haven. An “insurance policy” against an uncertain future. That’s how I interpret this massive surge of central bank gold buying.
Let’s remember, too, that diversification is beneficial to individuals as well as central banks. Physical gold can serve exactly the same purpose for your financial stability and security as it does for central banks around the world.
Does that sort of diversification sound wise to you? Then why not take a few minutes and learn how you can add physical precious metals to your savings?