Question: which country recently announced its first sale of a gold-backed currency?
You might think it’s China, which has been consistently adding to its gold holdings for years. Or maybe Russia, one of the world’s largest gold producers, which also has been boosting its gold reserves. Or maybe it’s another gold-buying country like Turkey, Singapore, or India?
The answer: Zimbabwe.
Yes, that Zimbabwe. The country whose national currency became the butt of so many jokes 15 years ago. The country whose MONTHLY inflation rate of 79.6 billion percent was so high that the country had to eventually abandon its currency. That Zimbabwe.
Zimbabwe hasn’t had currency stability since that legendary bout of hyperinflation in 2008, first abandoning its own currency in favor of foreign currencies, then trying to adopt the US dollar, and now finally experimenting with a gold-backed digital currency. Will this attempt succeed where others have failed?
Gold has been trusted as a source of safety and stability for centuries, which is why the gold standard became the dominant monetary standard in the 19th century. Looking at money supply growth and price inflation both before and after the abolition of the gold standard, it’s pretty clear that a gold-backed currency provides superior price stability to our present monetary regime.
For a country like Zimbabwe that has ample production of gold and other precious metals from mines, backing a currency with gold also makes sense from a practical perspective. If you have access to one of the most stable commodities in the world, why not take advantage of it?
Zimbabwe has lacked currency stability ever since the end of its legendary hyperinflation. Its government and central bank have tried numerous different monetary and currency policies to try to bring about greater currency stability, with limited success.
Allowing the use of foreign currencies and the US dollar had its benefits, but no government likes to give up complete control over its monetary policy. By 2019 the Zimbabwean government had banned the use of foreign currencies and allowed only the use of the Zimbabwean dollar, a decision which it had to reverse in 2020.
Subsequent bouts of high inflation and eroding trust in the Zimdollar have forced the government into another difficult situation. That was the impetus behind the government’s creation of a gold-backed digital currency. The digital currency is backed by nearly 140 kilograms of gold, and the tokens are supposed to be able to be used through card payments or digital wallets.
The question Zimbabweans are going to have is, can they trust that the government will maintain that gold backing. With Zimbabwe’s history on currency over the past 15 years, trust is going to be essential to the functioning of this gold-backed currency. But if the government is successful, might this be a roadmap for the future?
Gold and the Dollar
Numerous countries around the world have become fed up with the US dollar for a variety of reasons. In some cases it has to do with the persistent inflation of the dollar that drives down its value against foreign currencies, benefiting US exporters and harming foreign producers.
In other cases it has to do with the US government’s weaponization of the dollar and the US banking system, using the dollar’s reserve currency status to strongarm other countries into doing the US government’s bidding. But as much as many countries would like to de-dollarize, the question is how to do it.
Replacing the dollar with another fiat currency is an imperfect solution with no guarantee of success. Therefore many potential proposals to replace the dollar have floated the idea of a gold-backed or gold-linked currency unit to supplant the dollar for use in international trade. In that way, even if the yuan or rupee or ruble remained a fiat currency, there might be a new unit of currency used for international trade that would both be backed by gold and freely convertible into national currencies.
Any such proposals are still in their infancy, and the dollar is unlikely to be dethroned anytime soon. But 10-20 years from now, who is to say how strong the dollar might remain?
Recent events could help accelerate the dollar’s downfall. The US banking crisis, for instance, has ensnared foreign depositors in US banks. While US depositors of Silicon Valley Bank were made whole by the US government, even if their deposits were uninsured, foreign depositors in SVB’s offshore operations may lose every penny. The lesson they might learn is that the US banking system isn’t a safe place to park their money.
Between those kinds of policy decisions and the decision to weaponize the US banking system as part of the sanctions placed against Russia, the US government is doing a lot to disincentivize foreigners from doing business with the US dollar and the US banking system. The more the dollar is weaponized, the more other countries want to find alternatives. And a gold-backed system might just be one of those alternatives.
Gold and the Future
A future in which the dollar isn’t the world’s reserve currency may seem far-fetched right now. But it could be coming quicker than many expect. Millennials and even some younger Gen-Xers may see the dollar’s downfall within their lifetimes.
The negative effects of that could show up in the form of bond market instability, fluctuations in stock prices, and higher interest rates. But positive effects could come for those who own gold.
If gold ever were to form the basis of a system of international trade, demand for gold could increase, boosting the gold price. And owners of gold would find themselves in a unique position, one that most people haven’t been in in years, as owners of an asset that’s simultaneously a valuable commodity and a valuable currency at the same time.
If demand for the dollar in international trade is one of the major supports for the continued value of the dollar today, just imagine how demand for gold in international trade could boost gold’s value. That’s the potential if more countries decide to adopt gold-backed currencies for domestic and international use.
Of course, no one knows exactly how this might develop. But given greater international unease with the dollar, and now the first adoption of a national gold-backed currency unit, we may be seeing the creation of the roadmap for gold’s return.
Many Americans have also seen these developments and have begun to position themselves to take advantage of that. By buying and holding gold for the long term, they hope to take advantage of gold’s reputation for safety and security as well as the potential for future price gains.
Unease about the future of the economy has already driven gold to $2,000 in recent weeks, and if the economy falls into recession many analysts expect it to climb even further. But that’s just the short term. If gold ends up playing a more prominent role in the international monetary system over the long term, the gold price could end up at permanently higher levels.
If you want to put gold to use in your portfolio, talk to the experts at Goldco today. With over $1 billion in precious metals placements and thousands of satisfied customers, Goldco’s representatives can walk you through all the options available to you. You don’t want to get left behind if the rest of the world ditches the dollar for gold. Call Goldco today to learn more about the benefits of gold.