De-Dollarization: Inevitable or Fantasy?

In the year 1023, the Song Dynasty introduced paper money, marking a significant shift from precious metals like gold and silver to a government-backed currency. This transition revolutionized the history of money and paved the way for global trade and commerce. Now, a millennium later, China is poised to once again reshape the monetary landscape. China is leading the way in transitioning from paper money to digital currency through initiatives like the digital renminbi, and it is spearheading efforts to reduce reliance on the US dollar as the global reserve currency.

Major reserve currencies since 1250 via EEAGLI

The US dollar has long enjoyed a special status as a global reserve currency, alongside the United States' military power and alliance system. Despite the US accounting for only a fraction of global trade, around half of global trade is denominated in dollars. However, there is a growing chorus of voices advocating for "de-dollarization." What was once a fringe idea is now gaining mainstream traction. French President Emmanuel Macron recently called for Europe to reduce its dependence on the US dollar to avoid being overly reliant on the US. Brazilian President Luiz Inacio Lula da Silva similarly urged developing countries to replace the dollar with their own currencies in international trade.

There are two driving factors behind the calls for de-dollarization. The first is increasing discomfort with the US' international behavior, particularly its aggressive use of economic coercion and long-arm jurisdiction. Many countries find themselves under US sanctions, and countless individuals and corporations have been excluded from the global banking system due to their alleged violations of US rules. The Russia-Ukraine conflict has set alarming precedents, such as freezing and seizing assets without due process and disconnecting certain countries' banks from global financial networks. These actions have led many countries at odds with the US to question the wisdom of the dollar's dominance in global trade.

The second factor contributing to de-dollarization is a growing sense among countries that the US dollar is no longer a safe store of value. The US' economic practices, such as its uncontrollable spending and skyrocketing national debt, have eroded confidence in the dollar. The US national debt is rapidly approaching $32 trillion and is projected to reach $44 trillion by 2027. The federal debt-to-GDP ratio has also surged from 60 percent to 130 percent in the past 20 years and is expected to hit 150 percent by 2027. Many foreign countries, which hold a quarter of US debt, are becoming increasingly reluctant to lend money to the US. Japan and China, the largest holders of US Treasuries, have already reduced their holdings by $400 billion. This trend signals a growing concern about the potential use of borrowed funds for purposes that may run counter to the lenders' interests.

China, as the world's top trading partner for numerous countries and the leading commodity importer, holds significant leverage in challenging the dollar's reserve currency status. China can shift a portion of its trade away from the dollar and encourage its commodity suppliers to accept non-dollar payments and price goods in alternative currencies. China's role in global organizations like BRICS and the Shanghai Cooperation Organization, as well as initiatives like the Belt and Road Initiative, positions it to drive a shift in the global monetary system. Rather than being replaced by a single national currency, the dollar could be supplanted by "currency multipolarity," where multiple major currencies and economic groupings compete for shares in global trade transactions.

Former Brazilian President Lula has openly discussed his intention to join China and other BRICS members in developing alternatives to the dollar, utilizing a basket of currencies known as the Five Rs (real, ruble, rupee, renminbi, and rand). This underscores the global momentum toward diversifying away from the dollar and establishing a more balanced and inclusive monetary order.

The impact of de-dollarization on precious metals, particularly gold and silver, is significant. Historically, during times of economic uncertainty and geopolitical tensions, investors have turned to precious metals as safe-haven assets. Gold, in particular, has been regarded as a store of value and a hedge against inflation and currency fluctuations.

As the world moves towards de-dollarization, the demand for alternative currencies and assets will likely increase. Countries seeking to reduce their reliance on the US dollar may diversify their reserves by acquiring gold and silver, bolstering the demand for these metals. Moreover, as the dollar's status as the primary reserve currency diminishes, confidence in fiat currencies in general may decline, leading to increased interest in tangible assets like precious metals.

Furthermore, the growing sense that the US dollar is no longer a safe store of value could prompt investors and central banks to seek alternative assets. Gold and silver, with their long-standing reputation as reliable stores of wealth, may benefit from this shift in sentiment. Increased demand for these metals could drive their prices higher.

China's prominent role in the de-dollarization movement adds another dimension to the impact on precious metals. As China encourages non-dollar payments for commodities, it may facilitate the development of new trading mechanisms that involve gold and silver. China has already been accumulating gold reserves over the years, and its efforts to establish alternative trading systems could further bolster its appetite for these metals.

However, it is important to note that the impact on precious metals may not be immediate or uniform. The process of de-dollarization will likely unfold gradually over time, and its success will depend on various geopolitical and economic factors. Additionally, the global financial system is complex, and the US dollar will likely remain a significant currency for the foreseeable future, albeit with a reduced share.

In conclusion, the shift towards de-dollarization has the potential to impact the demand and prices of precious metals like gold and silver. As countries diversify their reserves and seek alternatives to the US dollar, the demand for tangible assets and reliable stores of value may increase. While the precise implications will depend on various factors, including the success of de-dollarization efforts and evolving geopolitical dynamics, the long-standing appeal of precious metals as safe-haven assets positions them well in a changing monetary landscape.

Dissenting View:

In his book "Disunited Nations: The Scramble for Power in an Ungoverned World," Peter Zeihan presents a dissenting opinion regarding the inevitability of de-dollarization. Zeihan argues that the US dollar's dominance as the global reserve currency is deeply rooted in the United States' unique geopolitical position and its military power. He emphasizes that the US has been the primary provider of global security since the end of World War II, which has allowed the dollar to become the preferred currency for trade and investment.

Zeihan argues that while countries may express their desire to reduce reliance on the US dollar, the reality is that there is no viable alternative to replace it. He highlights the challenges faced by other major currencies like the euro and the Chinese renminbi, which lack the necessary depth, liquidity, and stability to assume the role of a global reserve currency.

Moreover, Zeihan contends that the US economy remains highly dynamic and resilient, despite concerns over its national debt and fiscal policies. He argues that the US continues to attract foreign investments due to its strong rule of law, robust financial markets, and technological innovation, reinforcing the demand for the US dollar.

Therefore, Zeihan challenges the notion that de-dollarization is inevitable, asserting that the United States' geopolitical advantages and the lack of suitable alternatives will allow the US dollar to maintain its dominant position in the global monetary system.

Affirming View:

Ray Dalio, in his book "The Changing World Order: Why Nations Succeed and Fail," provides an affirming perspective on the potential for de-dollarization and the impact on precious metals. Dalio acknowledges that the US dollar's position as the global reserve currency is not guaranteed forever and highlights the historical cycles of reserve currencies.

Dalio argues that the excessive issuance of US dollars, driven by the country's need to fund its budget deficits, raises concerns about the dollar's long-term stability and value. He points out that the accumulation of debt can lead to a loss of confidence in the currency, prompting countries to seek alternatives and diversify their reserves.

Dalio highlights the role of gold as a traditional hedge against currency devaluations and the erosion of trust in fiat currencies. He suggests that as de-dollarization gains traction, investors and central banks may turn to gold as a store of value, potentially driving up its demand and price. Furthermore, Dalio believes that silver, as both a precious metal and an industrial commodity, could benefit from increased economic activities and infrastructure development associated with de-dollarization efforts.

Based on his analysis of historical patterns and geopolitical dynamics, Dalio supports the idea that de-dollarization is a possible outcome. He asserts that as countries seek to protect their interests and reduce their vulnerability to the US dollar's dominance, the demand for precious metals like gold and silver may experience significant growth.

It's important to note that these perspectives are derived from the authors' previous works and may not fully represent their current views on the specific topic of de-dollarization and its impact on precious metals.