One of the peculiarities of the gold market is that it seems that gold demand rises as the price gets higher, and falls when the price gets lower No one seems to want to buy gold when it’s “on...
The US dollar has been the world’s reserve currency for close to 80 years now. The American population has become used to the dollar being in demand around the world, as have US politicians.
Having the world’s reserve currency has afforded the US government the ability to run extraordinary budget deficits for decades. Demand for US Treasury securities means that the US government can essentially export its debt around the world.
But the days of the dollar’s dominance may be waning, as more and more countries look to free themselves from Washington’s financial yoke. As more countries look to break their reliance on the dollar, it could eventually end the dollar’s reign as the world’s dominant currency.
Is the Dollar’s Reign Coming to an End?
History is replete with currencies that have sat atop the world for some period of time. But all of them eventually get knocked off their pedestal.
Before the dollar, it was the UK pound that was the world’s dominant currency. The pound’s gold backing and the UK’s dominant role in world trade made the pound the currency to beat.
But the pound’s dominance was broken by World War I and the UK’s decision to leave the gold standard in order to fund the war. Abortive attempts to get back on the gold standard in the interwar period didn’t help, and the pound found itself struggling against the newly ascendant United States and its dollar.
In the aftermath of World War II, the US was without a doubt the strongest country in the West, and the dollar, which was still partially backed by gold, was made the backbone of the post-war Bretton Woods monetary system.
As the issuer of the world’s reserve currency, the US government took advantage of that fact to create more dollars than it had gold backing. That juiced up the US economy, made American exports cheaper, and provided a shot in the arm to an economy that was trying to pull itself out of war and depression.
Other countries got wise to what was going on, and began to redeem their dollars for gold at the Treasury’s gold window. With fears that US gold reserves would eventually be depleted, President Nixon closed the gold window in 1971, severing the last official link between the dollar and gold.
Yet despite now being completely unbacked, the dollar remained the world’s reserve currency, thanks in part to the United States’ position as the defender of the free world. It was helped too by the development of the petrodollar system, in which oil exporters accepted dollars as payment, in return for investing their dollars in the West and receiving military equipment and assistance from the US.
After five decades of this, however, the system is showing signs of fraying. The US in recent years has taken advantage of its dominant financial position to weaponize the dollar and the US financial system.
Any country that falls afoul of the US government’s foreign policy positions faces the risk of financial sanctions. These sanctions have started to become so burdensome that other countries are trying to figure out how to get around this.
But what could be particularly damaging to the dollar is the dissolution of the petrodollar system. If oil exporting countries begin to accept other currencies, it could lead to a worldwide drop in dollar demand.
What Might Replace the Dollar?
This drop in demand for the dollar could significantly impede the US government’s ability to run multi-trillion dollar deficits. After all, if other countries can use euros, yuan, or other currencies to buy oil, they wouldn’t need as many dollars.
Oil producing countries also wouldn’t need to recycle dollars, so demand for US Treasury securities could drop. This could lead to an increase in interest rates.
But while it would be damaging to the dollar, what exactly would replace it? Every other currency in the world today is an unbacked fiat currency, suffering from the same drawbacks as the dollar. And no country can yet rival the US in terms of its economic power or the strength of its banking system.
What many speculate might happen is that an alliance or bloc of countries might develop a currency to rival the dollar and try to dethrone it. The euro doesn’t appear to be able to do that, but the dollar’s next threat could come not from the West but from the global South.
The BRICS alliance, consisting of Brazil, Russia, India, China, and South Africa, is looking to expand. And one of its biggest targets is Saudi Arabia.
Earlier this year it was announced that Saudi Arabia had joined BRICS, although that was later walked back and explained that the kingdom is still exploring BRICS membership. But if Saudi Arabia joins BRICS, it could give the alliance a significant share of the world’s oil production.
From there, BRICS could develop its own currency, perhaps one tied to oil transactions. And given the fact that Russia, China, India, and South Africa are major players in the gold market, there’s growing speculation that a BRICS currency could be backed by gold.
Could Gold Become Money Again?
All of this is still speculation of course, and the details of any such currency would need to be worked out. But if gold once again becomes the basis of a currency, especially one that seeks to make an impact on international trade, it could be a monumental change.
A gold-backed currency could inspire more trust in that currency than in other currencies, and could cause other countries to adopt it, at least for international transactions. And the greater the demand for a gold-backed currency, the greater the demand for gold to back it.
Central banks are already buying gold at the fastest rate in decades, and a new gold-backed currency would only increase demand for gold on the part of governments and central banks. That could help put upward pressure on the gold price, which would be beneficial for anyone who owns gold.
How the Dollar’s Demise Might Impact You
Depending on how prepared you are for the dollar’s demise, the fall of the dollar could impact you positively or negatively. On the negative side, a dethroned dollar would no longer be in such demand around the world.
Treasury securities would no longer be as popular an investment asset, and interest yields could rise, putting pressure on the US government by further increasing interest expense that is already approaching $1 trillion per year.
Decreased demand for dollars abroad could also lead to reduced overseas demand for US equities too. And all of this could impact US taxpayers and investors.
Without domestic demand increasing to make up for reduced foreign demand, higher interest rates could require the government to cut back on borrowing and to raise taxes in order to keep funding its operations. And if US equities take a hit due to decreased foreign demand, that could reduce returns for US investors.
On the positive side, the dollar’s replacement with a gold-backed currency could be a great deal for gold owners. Gold is already close to its all-time highs at over $2,000 an ounce, and gold demand due to a gold-backed currency could drive that even higher.
Many Americans have already started protecting their assets with gold due to its ability to act as a safe haven asset and a hedge against inflation. They own gold to help protect themselves against recession, against the possibility of loss, and to help protect their tax-advantaged retirement savings. And many of those gold owners could benefit if they’re still owning gold when a gold-backed currency replaces the dollar.
The prospect of the dollar’s ultimate replacement is still up in the air. Currency crises happen very slowly, then all at once. The dollar could find itself in crisis in a year or two, or in two decades, or even further out.
Trying to predict when it will occur is impossible. All we can do is try to be prepared.
If you’re worried about what might happen when the dollar eventually loses its status as the world’s dominant currency, you’re not alone. Call Goldco today to learn more about how gold can help safeguard your savings against the dollar’s ultimate demise.
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