Ever since the petrodollar system was imposed by the US on the rest of the world, the US dollar’s status as the world’s reserve currency has remained firmly entrenched; the petrodollar system has been to the sole benefit of the US.
But the world has had enough, and gold will play a crucial role as the dollar’s star wanes. The precious metal is the apolitical instrument that can replace the dollar as the world’s reserve currency. Gold is not sovereign money, it can’t be issued, and it is not tarred by politics: as such, it can be the objective disciplinarian to the global monetary system. Around the world, countries are waking up to this.
Some countries, including China and Russia, are looking to fill the role historically played by the dollar, for example to buy oil. In September 2018, Jean-Claude Juncker, the president of the European Commission, pointed out the absurdity of the EU paying for 80% of its energy import bill – worth €300bn a year – in dollars when only around 2% of its energy imports come from the US. Elsewhere, Turkish President Erdogan has stated that loans from the International Monetary Fund should be repaid in gold rather than US dollars. These aren’t mere rumblings; they are signs of material change being in the offing, and all potentially supportive of the yellow metal.
US President Richard Nixon’s 1971 announcement of a ‘temporary suspension’ of the gold standard (the dollar’s convertibility to gold) was supposed to be exactly that – temporary. But almost half a century later, the US continues to benefit from the “exorbitant privilege” of the dollar’s reserve currency status.
But no longer is the “exorbitant privilege” of the US dollar sitting at the heart of the financial system deemed acceptable and economic powers from China to the European Union (EU) are signalling either via their words or their actions that change is afoot. US Treasuries buying has slowed and the long unspoken truth of the dollar being a political tool is finally being exposed.
The dollar’s continued involvement in non-US oil and trade transactions is not a natural process; doing so through gold would be a return to the natural norm. And the yellow metal’s re-emergence as genuine apolitical money is only good news for investors in the asset class.