Ditching greenbacks for gold.
Central banks bought 651.5 tonnes of gold in 2018.
That’s the highest level since 1967.
In a world run by fiat currencies and where gold is demonised, that’s an awful lot of countries moving into hard money.
Russia led the way.
The Russians were behind almost a third of the total gold purchased last year, topping up their reserves with some 274.3 tonnes.
The goal? To move away from the US dollar and into gold.
The Russians aren’t the only ones doing this, either.
China is believed to be increasing its gold reserves, although it doesn’t report this.
An increasing number of central banks are bumping up their gold stores. Not as a way to profit from a gold bull market…but as a way of moving out of the US dollar.
In fact, the US dollar as part of global reserves has dropped 10% in nearly two decades.
However, this is just the beginning.
More challenges to the US dollar are coming, says Jim below. According to him, the popularity of the US dollar is declining at a faster rate than expected.
Read on for his full analysis.
Until next time,
US Dollar Dominance Under Multiple, Converging Threats
Jim Rickards, Strategist
For years, currency analysts have looked for signs of an international monetary ‘reset’ that would diminish the US dollar’s role as the leading reserve currency and replace it with a substitute agreed upon at some Bretton Woods-style monetary conference.
That push has been accelerated by Washington’s use of the US dollar as a weapon of financial warfare, including the application of sanctions.
The US uses the US dollar strategically to reward friends and punish enemies.
The use of the US dollar as a weapon is not limited to trade wars and currency wars, although the US dollar is used tactically in those disputes.
The US dollar is much more powerful than that.
The US dollar can be used for regime change by creating hyperinflation, bank runs and domestic dissent in countries targeted by the US.
The US can depose the governments of its adversaries, or at least blunt their policies without firing a shot.
But for every action, there is an equal and opposite reaction…
Russia leads the way
As the US wields the US dollar weapon more frequently, the rest of the world works harder to shun the dollar completely.
I’ve been warning for years about efforts of nations like Russia and China to escape what they call ‘dollar hegemony’ and create a new financial system that does not depend on the dollar and helps them get out from under dollar-based economic sanctions.
These efforts are only increasing.
Russia has sold off almost all of its US dollar-denominated US Treasury securities and has reduced its dollar asset position to almost zero.
It has been amassing massive quantities of gold and has increased the gold portion of its official reserves to over 20%.
Russia has almost 2,000 tonnes of gold, having more than tripled its gold reserves in the past 10 years.
It has actually acquired enough gold to surpass China on the list of major holders of gold as official reserves.
This combination of fewer US Treasuries and more gold puts Russia on a path to full insulation from US financial sanctions.
Russia can settle its balance of payments obligations with gold shipments or gold sales and avoid US asset freezes by not holding assets the US can reach.
And Russia is providing other nations a model to achieve similar distance from US efforts to use the dollar to enforce its foreign policy priorities.
Escaping the US dollar
Certainly, any talk of a monetary reset must involve China.
Despite its present weakness, China is still the second-largest economy in the world and the fastest-growing major emerging market.
Like Russia, China is amassing gold, and likely has far more gold than it officially lists.
It has also been helping to suppress gold prices so that it can buy gold cheaply without driving up the price.
Europe has also shown signs that it wants to escape US dollar hegemony.
For example, German Foreign Minister Heiko Maas has called for a new EU-based payments system independent of the US and SWIFT (Society for Worldwide Interbank Financial Telecommunication) that would not involve US dollar payments.
SWIFT is the nerve centre of the global financial network.
All major banks transfer all major currencies using the SWIFT message system. Cutting a nation off from SWIFT is like taking away its oxygen.
In the longer run, these are just more developments pushing the world at large away from US dollars and towards alternatives of all kinds, including new payment systems and cryptocurrencies.
The signs of a reset are everywhere, but at least for now the US dollar is still king of the hill.
SDRs to replace the US dollar?
The US dollar represents about 60% of global reserve assets, 80% of global payments and almost 100% of global oil sales.
With such a dominant position, the US dollar will not be easy to replace.
Still, the trends are not good for the US dollar.
The international reserve position may be 60%, but as recently as 2000 it was over 70% and just a few years ago it was still at 63%.
That trend is not your friend.
Another challenger to the US dollar is the IMF’s special drawing rights or SDRs.
The SDR is a form of world money printed by the IMF.
It was created in 1969 as the realisation of an earlier idea for world money called the ‘bancor’, proposed by John Maynard Keynes at the Bretton Woods conference in 1944.
The bancor was never adopted, but the SDR has been going strong for 50 years.
The IMF could function more like a central bank through more frequent issuance of SDRs and by encouraging the use of ‘private SDRs’ by banks and borrowers.
At the current rate of progress, it may take decades for the SDR to pose a serious challenge to the US dollar.
But that process could be rapidly accelerated in a financial crisis where the world needed liquidity and the central banks were unable to provide it because they still have not normalised their balance sheets from the last crisis.
In that case, the replacement of the US dollar could happen almost overnight.
Individuals will not be allowed to own SDRs, but you can still protect your wealth by buying gold.
That’s what Russia and China are doing.
Both countries have more than tripled their gold reserves since 2009.
But attacks on the US dollar are not limited to gold or SDRs themselves.
The most imminent threat to the US dollar actually comes from a combination of gold and digital currency.
Cryptos and gold take on greenbacks
The fact that Russia and China have been acquiring gold is old news.
Still, there are practical problems with using gold as a form of currency, including storage and transportation costs.
But Russia is solving these transactional hurdles by combining its gold position with distributed ledger, or blockchain, technology.
Russia and China could develop a new cryptocurrency that would be transferred on a proprietary encrypted ledger with message traffic moving through an internet-type system not connected to the existing internet.
Other countries could be allowed into this new system with permission from Russia or China.
The new cryptocurrency would be a so-called ‘stable coin’, where the value was fixed with reference either to a weight of gold or another standard unit such as the SDR.
Goods and services would be priced in this new unit of account.
Periodically, surpluses and deficits would be settled up in physical gold.
Such net settlements would require far less gold than gross settlements (where every transaction had to be paid for in real-time).
This type of system (also called a ‘permissioned blockchain’) is not pie-in-the-sky, but is already under development and will be deployed soon.
But you can count on the US government being the last to know.
The development of a gold-backed digital currency is just one more sign that US dollar dominance in global finance may end sooner than most expect.
And we may be getting dangerously close to that point right now.
All the best,