I’ve written for years about different nations’ persistent efforts to dethrone the U.S. dollar as the leading global reserve currency and the main medium of exchange.
At the same time, I’ve said that such processes don’t happen overnight; instead, they happen slowly and incrementally over decades.
The dollar displaced sterling as the leading reserve currency in the twentieth century, but it took thirty years, from 1914 to 1944, to happen. The decline started with the outbreak of World War I and the UK’s liquidation of assets and money printing to finance the war.
It ended with the Bretton Woods agreement in 1944 that cemented the dollar’s link to gold as the new global standard.
Even after the gold link was broken in 1971, the dollar standard remained because there was no good alternative. Then the 1974 deal with Saudi Arabia (along with other OPEC cartel members) to price oil in dollars created increased global demand for the dollar.
Because of the deal, dollars would be deposited with U.S. banks, so they could be loaned to developing economies, who could then buy U.S. manufactured goods and agricultural products.
This would help the global economy and allow the U.S. to maintain price stability. The Saudis would get more customers and a stable dollar, and the U.S. would force the world to accept dollars because everyone would need dollars to buy oil.
By the way, behind this “deal” was a not so subtle threat to invade Saudi Arabia and take the oil by force.
I personally discussed these invasion plans in the White House with Henry Kissinger’s deputy, Helmut Sonnenfeldt, at the time. But the Petro-Dollar plan worked brilliantly, and the invasion never happened.
Despite all this, nearly 50 years later, the erosion of the dollar’s role has begun and is visible in many metrics.
The dollar’s share of global reserves has fallen from 70% to 60% in the past 22-years. The dollar price of gold (an inverse measure of dollar strength) has gone from $250 per ounce to over $2,000 per ounce between August 1999 and August 2020 (it’s about $1,880 per ounce as of today).
The IMF’s special drawing right (SDR), Bitcoin, and gold (again) are waiting in the wings to step up as the dollar falters further.
The Russians, in particular, are moving quickly to protect themselves from this inevitable decline.
Russia has already increased gold as a percentage of its reserves to 20% (only the U.S., Germany, Italy, France and the Netherlands have higher percentages of gold among the twenty largest developed economies).
Now, Russia will completely eliminate dollar holdings from its $119 billion National Wellbeing Fund, a sovereign wealth fund that holds oil wealth for the future benefit of the Russian people.
Russia will be able to execute this plan without severe disruption to either the gold market or the dollar market.
By itself, this move does not mean the end of the dollar as the leading reserve currency. But, it is one more step on the slow path toward the dollar’s inevitable decline as a trusted medium of exchange.
Even though the process is gradual, it can gain a lot of momentum in the final phases. It reminds me of a line from a Hemingway novel:
“How did you go bankrupt?” asked one character. “Two ways,” responded the other. “Gradually, then suddenly.”
When the rush for the exits begins in earnest, you don’t want to be the last one out the door. It’s a good idea to diversify into gold for about 10% of your investable assets if you haven’t already.
That way you’ll be keeping up with the Russians and be one step ahead of the dollar’s decline.
I believe that the world will have to return to some version of the gold standard, not because it wants to, but because it will have to in order to restore confidence in the global monetary system.
The real question is, will it be an orderly process or a chaotic one?