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Capital at risk. Forecasts are not a reliable indicator of future results.

All around the world, nations are seeking ways to escape the tyranny of the US dollar. As Russia discovered the hard way, it is no longer the global currency of exchange. It is a tool of control used by the US to further its foreign policy.

Russian assets held in US dollars were frozen and seized. Russia was frozen out of using the US dollar to trade too. And Russia’s trade partners were caught out in the cold as a result, some literally.

But plenty of countries don’t like US foreign policy. And yet, they still want to participate in global trade. Some allies of the US want to be able to trade with nations that the US might decide to freeze out of the US dollar in the future.

So, how can the world conduct international business without being at the mercy of the US dollar and the US government’s control of it?

Many commentators say it simply isn’t possible to escape for a simple reason. There is no viable alternative to the US dollar.

I’m sure that sounds odd given the many currencies around the world. But critics of the alternatives do have plenty of good points too. The US dollar simply doesn’t have a viable challenger for a global trading currency amongst its currency peers.

First of all, the US is far more politically stable than the rest of the world. Which might sound absurd given the last few years of drama, but it remains true.

The combination of rule of law and political stability means a US dollar is likely to be around in a decade and be worth something to its current owners. Other currencies are at risk of disappearing, being confiscated or having their use restricted surprisingly often.

This favours having the US dollar as the global medium of exchange.

Secondly, the US has a rather large bond market. Which is important because governments and companies don’t just keep their US dollars in cash or at the bank. They buy investments with them. Usually US government bonds. Which means a large and liquid market is needed in order to deploy all the money that is held in the international currency of trade.

The Japanese bond market is large enough to accommodate a lot of funds, and parts of the eurozone may be too. But the Japanese bond market is incredibly illiquid right now because the central bank has bought so many of those bonds. And the European government bond market went through a sovereign debt crisis recently, not to mention the future of the euro looking wobbly.

So the US’ large and liquid bond market is the only one that can sustain the vast investment demand of being a global trading currency.

Thirdly, the US runs a trade deficit, which makes lots of US dollars available internationally. When Americans buy more than they sell on global markets, the result is an export of US dollars. Those can then be used in trade. The more plentiful they are, the easier trade becomes.

The eurozone, for example, runs a trade surplus. (With the remarkable exception of 2022, but let’s not open that can of worms.) And the same applies to China’s yuan, of course.

A trade surplus restricts the amount of euros or yuan available on global markets, making the euro or yuan a poor choice for international trade.

In a way, the trade balance of the nation issuing the global trading currency is a bit like the monetary policy on global trade. A trade deficit is like having loose monetary policy for global trade because it increases the money supply, while a trade surplus is like tightening monetary policy because it removes money from the trading system.

There just aren’t any large economies with persistent trade deficits to take over from the US.

There are several other reasons why there’s no obvious challenger to the US dollar. But the point is that, in the absence of a decent alternative, no matter how bad the US abuses its power over the US dollar, it will still be used in trade.

That’s not to say the pressure against it isn’t large and growing. And it’s not to say that nations aren’t working on alternatives. But such alternatives require a lot more than just a new international medium of exchange. They require trust, liquid markets and the appropriate amount of supply.

The problem with the attempt to create alternatives for use in international trade is also that they become inherently political. The creation of a new international medium of exchange will inherently benefit some and cost others. It’ll establish new trends in financial markets too.

That makes it difficult to agree on what the alternative should be. Except, of course, in the aftermath of a world war when a new globally dominant superpower has emerged… Even when that happened, it wasn’t a forgone conclusion that we’d end up with the US dollar as the global currency.

But this isn’t the first time we have come up against all these challenges. Global reserve and trading currencies like the US dollar come and go often, if you ask a historian instead of an economist.

History also teaches us which asset is chosen as the new global reserve currency when there’s no single dominant superpower: gold.

The reasons are obvious in the context of all the above issues.

Gold is not political – nobody controls it or issues it. Nobody can define or control its price (without incurring the costs of doing so).

Another nation’s gold reserves cannot be frozen or seized (if they’re kept domestically, as many nations’ reserves increasingly are of late…).

Gold is universally accepted as having great value.

Gold is held as a reserve by governments and central banks around the world already, and so arguing it is not suitable for this purpose would be a bit odd.

Gold has a long history of being used to settle trade.

The gold supply steadily expands at a predictable and fairly stable rate, although supply shocks in the past have had an impact on trade.

Thus, in the confusion of a multipolar world, where some nations are backing the old order, some are seeking to break away from it, and some are trying to keep a foot in both camps, gold is the only viable go to. There is simply no viable alternative.

But can gold really absorb the vast amount of money that would pile into it, should it become a global reserve asset and a means for conducting trade?

The answer is simple – the gold price simply adjusts for this challenge.

If gold were to be returned to its role as a way of settling global trade, then it would be in far greater demand. This would increase the price, allowing it to absorb the higher demand.

That is why those expecting gold to make such a comeback as the global currency are so often gold investors too. They know the price would have to surge should it become an international medium of exchange again.

All this might seem a bit academic after 50 years of using the US dollar, but consider it’s already happening. Ghana, having run out of US dollars with which to buy oil for its economy, recently decided to barter oil for its gold.

BBC News’ Pidgin service explained the details:

Vice President Dr Mahmoud Bawumia announce late last year say govment dey explore wit de new gold for oil policy where dem go buy oil wit gold instead of cash.

De Gold for oil policy according to govmemt go help reduce de pressure on de already weak Ghana cedi den bring in cheaper fuel in exchange for gold.

Now I’m not sure why the same article isn’t available on BBC News’ non-Pidgin service. Well, I have my suspicions, but let’s not go there.

To translate the above, instead of printing Ghanaian currency to get more US dollars, thereby further weakening the domestic currency, the government is swapping oil for gold.

So it is perfectly plausible to do trade via gold – to use gold as a settlement mechanism. Indeed, some nations have to when their national currency breaks down.

And the ploy worked to stabilise the currency and thereby prices, as BBC News reported… on its Pidgin service:

Fuel prices start dey drop at de pump for between 3%-10% after govment introduce dia gold for oil policy.

One litre of petrol previously dey sell around national average of GH¢13.53 and GH¢13.69 for diesel.

As at de time of this report, one litre of petrol drop to Ghc12.95 across de major pumps while diesel dey sell at Ghc13.49.

Great news!

It’s not that gold solves all the world’s trading and geopolitical problems. I doubt the Chinese government particularly likes the idea of having an uncontrollable, politically neutral asset used in global trade.

But that’s the point. Nobody does like it, but it’s better than the US dollar and it’s the only system the world’s geopolitical adversaries could agree on. That’s the point our investment director John Butler made in his interview with Kitco News. Not to mention his book The Golden Revolution, Revisited, which just happens to be about precisely this topic.

If the gold price were to catch on to these developments, it would surge dramatically to adjust for the new source of demand. And here’s how to play such a surge.

Until next time,

Nick Hubble
Editor, Fortune & Freedom