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Bet your bottom dollar on gold
THIS may be the year that we finally see the end of the international monetary system which we’ve come to know and live by. It was established at the end of World War Two, ending Britain’s imperial supremacy once and for all (our ‘victory’), and ushering in a period of unrivalled dominance for the United States with a system that funnelled trade and foreign exchange through the US dollar and the American bond market.
Three years ago, I wrote for TCW about the beginning of the end for the US dollar. Now we are much further along this transition, with the Ukraine invasion and sanctioning of Russia accelerating the end of the current monetary order, the dominance of global reserve asset – the US Treasury (UST) – under threat, and an alternative system embedding itself in the East.
Now, I’m not saying this is the very end for the American monetary order, but more the end of its supremacy.It is no secret that since the middle of the last decade, China, Russia and other BRICS nations have accelerated their reductions in UST holdings, while increasing their holdings of gold, which played an integral role in international currency exchange until President Nixon decoupled the US dollar from this peg and created the ‘petrodollar’ with new friends in the Arabian peninsula.
Initially, the moves away from the UST by countries in the East appeared to be in the interest of diversifying bank reserves. However, since 2022 it appears that gold has begun replacing USTs as the neutral reserve asset for a steadily increasing portion of trade between these countries. The sanctioning of Russia and confiscation of their foreign exchange reserve after the Ukraine invasion meant that they were compelled to seek alternative trading arrangements with China and other BRICS nations using local currency such as yuan or rupees.
This new system bypasses the need for American financial instruments, with local currency being used for transactions between nations such as Russia and China. Gold is used as the neutral reserve asset, to settle trade surpluses. This new arrangement ensures confidence in trade between the two nations without needing to use the US dollar or buy American debt (USTs). If as a consequence of this arrangement the gold price goes up, both sides benefit – the recipient gets an asset with increasing value and the sender gets more goods for the same weight of yellow metal. In China’s case, it will get more Russian oil for the same amount of gold, whilst the Russians will see their substantive gold reserves increase in value.
This is a serious problem for America, especially if this arrangement begins to be replicated elsewhere, which is why Trump has already threatened countries with tariffs or more if they choose to move away from the US dollar. But it also poses a threat to the financial sustainability of America: who will fund American deficit spending if countries around the world reduce the amount of US debt they are willing to purchase? This is where some influential figures in the US regime believe cryptocurrencies can play a role. The crypto stablecoin Tether is becoming a significantly large purchaser of USTs, albeit with a long way to go before it can reach spending parity with a sovereign superpower nation such as China.
It should be no surprise therefore that the new American administration has been vocally supportive of cryptocurrency, as increasing flows of institutional and retail money into cryptocurrency will, by default, boost the reserves available to be recycled into USTs and therefore support the US debt market. However, this solution reeks of desperation and is unlikely to work in the long term without other international interventions and a flexing of American military power.
In any case, it may already be too late. There is evidence that even institutional banks and sovereign nations in the West are pre-empting a major change in the international monetary system, based on the arrangements being enacted by BRICS nations. Eastern European countries such as Poland and the Czech Republic are increasing their gold reserves, with Poland being the largest (official) sovereign buyer of gold in Q2 2024.
The most interesting development has been the activity of a major Wall Street bank, JP Morgan, which conventionally acts in alignment with the American establishment. Since the Russian invasion of Ukraine in 2022, it has taken joint custodianship of the world’s largest gold Exchange Traded Fund and begun the process of transferring the physical bullion to its own vaults in London and New York. Official reporting from the fund shows that after a sustained process of transfer month by month (and moving large quantities of physical gold is an expensive process) more than 90 per cent of the gold bars stored in the fund have been transferred to vaults owned by JP Morgan – giving the bank a greater total of gold reserves than many of the G20 countries.
Why would a huge institution such as JPM go to the trouble and cost of securing so much physical gold for no obvious gain? Is it acting at the behest of a sovereign nation? Perhaps it is pre-empting the inevitable: a new monetary system where physical metal will play an integral role as a guarantor of value and confidence, and where derivatives and paper claims on certain assets will become worthless. A new system where the US Treasury will no longer be the global reserve asset and where endless borrowing through the bond markets and financial engineering will become unsustainable for all Western nations, with all the consequences that would entail. As the bank’s founder JP Morgan said: ‘Gold is money, everything else is credit.’
Source: https://www.conservativewoman.co.uk
