The global reserve currency, USD, as a share of global wealth stored, has fallen to its lowest level in almost three decades.
USD continued to be the highest currency in demand held by central banks. But gold and the rise of nontraditional currencies are slowly chipping away at the global reserve currency, USD.
The global reserve currency is losing out to gold
The precious metal gold, since time immemorial, has been the oldest store of wealth, and when local currencies implode, reserves move into the reserve currency, the USD. But if the USD fails as a store of value to protect wealth, then reserves could indeed move into precious metals, particularly gold.
As noted previously, currencies are under stress due to rising national debts, geopolitical instabilities and rising domestic tensions.
“USD continued to be the highest currency in demand held by central banks. But gold and the rise of nontraditional currencies are slowly chipping away at the global reserve currency, USD”
WIN INVESTING
World foreign reserves have indeed been moving into gold and, in some cases, even Bitcoin, with El Salvador moving Bitcoin reserves to a cold storage Vault.
The Federal Reserve was the largest gold buyer in Q2, 2024 is buying gold as a bedrock of support for the global reserve currency.
“In the first half of 2024, central banks purchased 483 tonnes of gold, setting a new record as hedged to their monetary policy.
“In 2024, the Federal Reserve holds the largest gold reserves in the world at 8,133 tonnes, according to the World Gold Council,” written in a piece entitled, Countries With The Most Gold, dated August 2024.
The global reserve status of the USD has been under particular stress since 2015
In 2015, the share of USD-denominated foreign exchange reserves was 66%, and in 2024, that has fallen to 58.2% of total foreign exchange reserves, which is a decline of 7.8%.
So, the global reserve currency, the USD, erodes approximately 1% of its status annually.
In under a decade, the USD will hold less than half of the global wealth, thereby losing its reserve currency status if this rate of decline continues.
“In under a decade, the USD will hold less than half of the global wealth, thereby losing its reserve currency status if this rate of decline continues”
WIN INVESTING
However, some argue that this view is too USD bullish and that the loss of global reserve currency status will occur sooner than that
The decline of a currency first happens slowly, and then, as selling momentum builds, the collapse accelerates. Similar to a building collapsing. Preliminary signs are fissure cracks in the pillars and structural walls, and they argue that the dollar’s decline since 2015 could be an early warning of a pending collapse in the global reserve currency.
Famous macro investor Ray Dalio talks about big cycles entailing the rise and fall of Empires shaping currencies, markets and geopolitics.
He noted that big cycles have three cycles.
Long-term debt and capital market cycle, the internal order and disorder cycle, and the external order and disorder cycle.
“Warning signs of a global reserve currency under extreme stress are everywhere. Structural fissures in the USD are visible”
– Win Investing
US National Debt now exceeds 35 trillion dollars, which is 123% of GDP.
In the 2000 US, the national debt was 56% of GDP. But here is the worrying bit, interest payments on the current national debt approach one trillion dollars, now the third largest budget item, surpassing what the US spends on its defence budget, according to the US debt clock.
The ballooning deficit is primarily financed not through taxation but through debt monetisation, the treasury bond market supported by the central bank creating dollars to buy the bonds.
But if the USD global reserve currency status continues to fall, what demand will there be for future bond auctions to finance the ever-increasing national debt?
Is the global reserve currency in a doom loop?
So the Fed, the buyer of last resort, buys the bonds investors steer clear of. USD supply increases, debasing the global reserve currency even further and creating cost-push inflation as the purchasing power of the currency withers on the vine.
The Fed then raised base rates to tame inflation, which currency-creating monetary policy caused.
But that wreaked havoc on the bond market, creating the worst 2023 treasury bond market crash in history and collapsing at least five known banks that year.
Warning signs of a global reserve currency under extreme stress are everywhere. Structural fissures in the USD are visible.
So, is anyone surprised that global foreign reserves in USD are falling?
Blackrock, the world’s largest investor, buying record amounts of Bitcoin during the last week of September should also be no surprise.
“GBP, the world’s oldest surviving fiat currency, has become increasingly irrelevant as a global reserve currency”
– Win Investing
If the global reserve currency sinks, other fiat currencies tied to it are likely to go under first
Despite USD losing 7.8% of global foreign reserves since 2015, other G7 currencies have not fared much better.
The euro is the perennial second, with a share stuck around 20% for years. In Q2, the share was 19.8%.
GBP, the world’s oldest surviving fiat currency, has become increasingly irrelevant as a global reserve currency.
Post WW1, 60% of global foreign reserves were held in GBP.
Today, GBP continues to see its shrunken share of global reserves held in pound sterling.
Moreover, GBP, a former global foreign reserve currency, is now behaving like an emerging currency with sizable volatility swings.
The withering of the USD global reserve currency has a significant implication for US standards of living and for investors
The holy grail for figuring out where your assets could go in your portfolio is to get right the USD trajectory.
If you can accurately forecast the USD future exchange rate, then you’ll probably get right future inflation rate, bonds and stock prices and the trajectory of commodity prices.
Our concern is not so much the decline of the USD global reserve currency but the other moving parts, what we see as the Synchronizing of the clocks.
Empires rarely fall quietly, so why should we expect differently?
