Exploring Gold’s Potential To Replace the U.S. Dollar as the Reserve Currency

The fall of the U.S. dollar is a long-awaited concept in the bullion investment market; however, with geopolitical tensions worsening overseas, this concept may become a reality in the near future. We’re currently seeing the most significant gold-buying spree since 1971, when the gold standard first ended in the U.S. With Russia freezing their denominated assets, the U.S. dollar is becoming a political tool that many nations want to veer away from, leaving space for something more secure to come in as the asset of choice.

According to the World Gold Council, central banks purchased more gold in the fourth quarter of 2022 than any other quarter on record. 2022 ended as a record-breaking gold-buying year, though the pace didn’t slow as we entered the new year. The first quarter of 2023 broke the record for the most central bank gold-buying for any first quarter of any year on record.

As gold purchases picked up in 2022, a shift occurred in the global economy. Emerging economies moved away from the U.S. dollar, selecting a safe-haven asset of choice instead: gold.

With this shift, some top oil-producing nations stopped accepting the U.S. dollar in oil trades in an attempt to devalue the currency further while strengthening local currencies. As more time goes on, the U.S. dollar continues losing its place in Eastern trades, only giving more power to gold and local currencies.

Retailer purchases and investor demand for gold peaked as well after noticing the central bank gold-buying spree and de-dollarization trend. The more organizations that hop on the gold bandwagon, the more investors will want to follow suit. With this trend, premiums for physical gold in Great Britain particularly shot up.

“The market for low-premium gold bullion coins really took off last winter with a shortage of fractional gold coins such as gold sovereigns in the market. In late summer 2023, we are only just noticing sellers coming back to the market to allow us to refill our depleted gold stocks,” an insider from Auronum explained.

A fully agreed-upon, universal reserve currency is essential for global trade. Reserve currencies ensure importing nations can purchase goods from exporters without worrying about carrying enough of the nation’s local currency for the purchase. A universal currency prevents liquidity issues.

For decades, the U.S. dollar has dominated global trade. The U.S. dollar accounts for 59% of total foreign exchange reserves. A shift to a new asset would be monumental.

If a new currency were to take the U.S. dollar’s place, most do not believe it would be an existing currency, as it would give that nation a large advantage in trade. If such were to take place, the same issues with the U.S. dollar would essentially repeat, though with a different nation.

Instead, analysts foresee a neutral asset taking over that nations can use for trade without one country maintaining advantages or disadvantages, which brings us to bullion. A gold-backed currency would allow nations to trade with one another using an even, disciplined asset that maintains value over time due to its supply. With this limited supply, though, central banks cannot simply issue their own currency to devalue or prolong deficits, which often occurs during problematic periods.

A gold-backed currency could essentially prevent inflation as it would tighten the total level of assets circulating in the economy. In reality, getting numerous nations to agree on such a policy is out of reach. Instead, Eastern nations have begun taking the concept into their own hands, forcing importers to trade with non-dollar-based assets to begin the process of de-dollarization.

If bullion truly does take over, BRICS (Brazil, Russia, India, China, and South Africa) nations will likely rule the movement, as they’ve been stockpiling the most gold in recent months. Over time, though, no single nation would have the power to profit over others, as the current model allows for. In the beginning stages, many nations may scramble to purchase gold, leaving them more vulnerable to powerful nations with hefty reserves, though this would eventually balance out.

While some analysts foresee this shift as a possible reality in the next decade, others see it as a pipedream. Whether or not the switch from the U.S. dollar to gold will actually occur is still unclear, but we’re certainly seeing evidence of it today. If gold continues taking over with central bank buying increasing at its current pace, we can expect to see excellent price support in the bullion market.

As always, investors should consult their financial advisors before making any portfolio decisions.

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