Dollar’s domination diminishing


US Dollar’s world domination is diminishing. Not only are central banks, the world’s rich also hoarding the yellow metal – gold.

A Bloomberg opinion piece “World Is Stuck With the Dollar as the Reserve Currency” (December 11, 2019) said:

“The U.S. dollar’s position as the world’s reserve currency might be weakening. In the last few years, the fraction of global reserves denominated in dollars has been inching down:

“This follows a longer-term slide; at the turn of the century more than 70% of reserves were in dollars. Meanwhile, central banks are buying more gold, which could signal a lack of confidence in the dollar or the global monetary system more generally.”

The opinion piece by Noah Smith, a Bloomberg Opinion columnist, said:

“If the dollar loses its status as the reserve currency, it would be a major shift in the global economy the likes of which only happens once or twice a century. What happens then is anybody’s guess. The result could be chaos if it’s mismanaged; but if it’s handled well, the loss of the reserve currency could be healthy for the U.S. and the world. Indeed, given the U.S.’s waning economic dominance, the consequences of keeping the dollar as the sole reserve currency could be worse.

“Because the dollar is the reserve currency, central banks around the world hold large amounts of dollar-denominated assets, mostly U.S. government bonds. They hold these reserves for a number of reasons: to maintain exchange-rate pegs, to insure against capital outflows and to facilitate international trade.”

Noah Smith was an assistant professor of finance at Stony Brook University.

Referring to history the Bloomberg opinion piece said:

“In the 19th century, countries held their reserves in gold or in British pounds (which were backed by gold). But after World War I the U.S. accumulated a large share of the world’s gold, meaning that holding dollars became the next best thing to holding the yellow metal itself. This arrangement was formalized in the Bretton Woods Agreement of 1944, when the dollar became the world’s official reserve currency and the U.S. promised to hold large amounts of gold. In the early 1970s, all connection between the dollar and gold was severed, but the U.S. remained the reserve currency of choice.”

It raised the question: “So why is dollar dominance slipping now?”

It answered the question:

“One long-term reason is the rise of the euro as an alternative reserve currency. A more recent factor is China’s increasing desire to diversify its foreign-exchange holdings to reduce its vulnerability to shifts in U.S. policy amid the trade war. But in the long term, the shrinking U.S. share of world economic output is the biggest threat to the dollar’s status. In 1960, the U.S. represented about 40% of the world economy but that has shrunk to less than a quarter:

“As poorer nations catch up to rich ones, they face pressure to diversify and hold less of their growing reserve stockpiles in the currency of one decreasingly important country. It’s no coincidence that the 1980s, when the dollar dipped below half of global reserves, were a time when it looked as if the U.S. might be economically eclipsed by a rising Europe and Japan. That didn’t happen, but this time it might.

“Economists have a hard time predicting the effects of a shift away from the dollar, because this is to some extent uncharted territory. One theory says that American borrowers would be forced to pay higher interest rates, causing the U.S. economy to suffer. Now, in order to acquire dollar reserves, foreigners essentially are forced to lend money to either the U.S. government or to U.S. companies. That demand for U.S. assets can bid down the price of loans within the U.S. But former Federal Reserve Chair Ben Bernanke argues that the U.S. no longer enjoys this so-called exorbitant privilege, noting that other countries’ real interest rates are almost as low. Bernanke could be wrong — those other countries’ rates might be held down by their slow population growth, while the faster-growing U.S. benefits from reserve status instead. But in a world already awash in capital, the extra effect of reserve status is probably not that much.

“Another theory says that the U.S. would benefit. Less demand for the dollar would cause the currency to depreciate; that would cut the price of U.S. exports and make imports more costly, reducing the trade deficit. That could ultimately lead to a more balanced global economy. It could even potentially help the U.S. become more competitive in manufacturing and other high-value export industries. But as Paul Krugman has noted, reserve-currency status might not be that big a factor because a number of other countries have run big trade deficits in recent decades as well.

“In the end, a shift to a basket of world currencies might be the healthiest outcome. If the euro, yen and Yuan were to join the dollar as international reserve currencies, it would mean a safer and more stable global economy. And it would enable the world’s major economies to compete on a more-or-less level playing field.

“The problem is, the other major economies may be either unwilling or unable to help bring about that outcome. The euro-zone crisis cast doubt on that currency’s long-term dominance, while China shows no inclination to abandon capital controls and make the yuan fully convertible.”

The opinion piece that does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners said:

“Reserve-holding countries may thus be stuck with the dollar. And the U.S. and its central bank may be stuck with the unenviable task of stabilizing a global economy that increasingly dwarfs it in size.”

According to Goldman Sachs Group Inc., central banks worldwide are consuming 20 percent global supply of gold as a part of a de-dollarization strategy – reducing the dollar’s dominance of global markets.

“De-dollarization in central banks – demand from central banks for gold is biggest since the Nixon era, eating up 20% of global supply,” the Head of Global Commodities Research at Goldman Jeff Currie told Bloomberg Monday. “I am going to like gold better than bonds because the bonds won’t reflect that de-dollarization.”

Gold climbed to a six-year high in September as the U.S. Federal Reserve cut borrowing costs and the total pile of debt yielding less than zero climbed to a record US$17 trillion, boosting the appeal of non-interest bearing gold.

The uncertain economic scenario, caused by a deceleration in economic growth, a political crisis such as Brexit, and mainly the U.S.-China trade war has influenced this “fear-driven demand,” ditching the U.S. dollar in the process.

“Going long-term depends on what is going to happen to global growth. The further out you go, the higher the probability that the U.S. is going to hit a recession. We have US$1,600 holding out through 2021,” Goldman Sachs analyst Mikhail Sprogis told Kitco News.

Gold was traded at US$1463.30 per ounce on Tuesday. On Monday, gold was trading near $1,460.

In March, Bank of America Merrill Lynch analysts warned that although the U.S. dollar remains the dominant reserve currency, it is slowing using its status in the world. The bullion’s high demand comes primarily from large world economic players such as Russia, Turkey, China, among others.

“Even though USD still accounts for 39.9 percent of international payments according to SWIFT, its market share has declined, as the global economy has become less U.S. and USD-centric,” the analysts said. “We believe that de-dollarization is an important factor behind the addition of gold to central bank gold reserves.”

Hedge funds and other large speculators boosted their bets on gold by 8.9 percent last week, government data showed Friday.

“Gold cannot fully replace government bonds in a portfolio, but the case to reallocate a portion of normal bond exposure to gold is as strong as ever,” Goldman commented, adding that they “still see upside in gold as late-cycle concerns and heightened political uncertainty will likely support investment demand” for bullion as a defensive asset.

Other reports said:

Over the last year, gold prices are up nearly 20%. The yellow metal is on pace for its best year since 2010.

In a note to clients published over the weekend, analysts at Goldman Sachs outlined why the strategic case for owning gold remains strong. The firm cites political uncertainty and recession fears that are unlikely to abate as primary catalysts, among other worries among the global elite like wealth taxes and increasing talk about MMT and central bank effectiveness.

By 2020, the firm thinks the price of gold will reach $1,600 an ounce.

“Since the end of 2016 the implied build in non-transparent gold investment has been much larger than the build in visible gold ETFs,” the firm writes, citing the chart below.

Trade data implies that gold in storage has increased far more rapidly than is reflected by financial market instruments, indicating a widespread preference for physical gold instead of gold-linked financial assets. (Source: Goldman Sachs)

This means that for those including gold in their end-of-the-world trade, owning gold bullion is a must.

“This [data] is consistent with reports that vault demand globally is surging,” the firm writes.

“Political risks, in our view, help explain this because if an individual is trying to minimize the risks of sanctions or wealth taxes, then buying physical gold bars and storing them in a vault, where it is more difficult for governments to reach them, makes sense.”

“Finally, this build can also reflect hedges by global high net worth individuals against tail economic and political risk scenarios in which they do not want to have any financial entity intermediating their gold positions due to the counter-party credit risk involved.”

Evan Osnos’ 2017 New Yorker story that chronicled efforts from the super rich to prepare luxurious hideaways that will see them through the apocalypse.

The head of an investment firm told Osnos that, “A lot of my friends do the guns and the motorcycles and the gold coins. That’s not too rare anymore.”

As Osnos chronicled, underground bunkers with air-filtration systems and helicopters that are gassed up and ready to go are now the real differentiators in the prepper community.

On October 4, 2019, a Geneva datelined Reuters report was headlined “Super-rich investors buy gold by ton”. The report said: “The world’s wealthiest people have responded to economic worries by buying gold by the bar — and sometimes by the ton — and by moving assets out of the financial system, bankers catering to the very rich said on Monday.”

The report said:

“Fears of a double-dip downturn have boosted the appetite for physical bullion as well as for mining company shares and exchange-traded funds, UBS executive Josef Stadler told the Reuters Global Private Banking Summit.

“They don’t only buy ETFs or futures; they buy physical gold,” said Stadler, who runs the Swiss bank’s services for clients with assets of at least $50 million to invest.

“UBS is recommending top-tier clients hold 7-10 percent of their assets in precious metals like gold, which is on course for its tenth consecutive yearly gain and traded at around $1,314.50 an ounce on Monday, near the record level reached last week.”

On September 3, 2019, Alice Ross, editor of FT Wealth Magazine and Financial Times wealth correspondent, wrote an opinion piece in Financial Times, which was headlined: “Rich people are hoarding cash, and wealth managers are getting frustrated”.

The opinion piece informed that persons with at least $1 million in investable assets, known as High-net worth individuals (HNWIs) were increasingly shunning equities. It cited Capgemini World Wealth Report, which said that HNWIs held nearly 28 percent of their portfolios on average in cash. A year ago, it was 27.2.




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