For years, other countries have generally considered the United States dollar to be the currency benchmark — but that might not always be the case, says Kevin DeMeritt, founder and chairman of Los Angeles-based precious metals firm Lear Capital.
Recently, some nations have shied away from purchasing U.S. Treasury securities — which in the past had garnered interest from investors in and outside of the U.S., due in part to the notion they were fairly safe investments because the U.S. government would be able to fulfill the associated terms.
“Russia has completely eliminated all of their reserves of U.S. treasuries, and what did they replace it with?” Kevin DeMeritt says. “Gold. They’ve doubled the amount of gold that they’ve held in reserve at their central bank. Same thing with China — they’ve sold off U.S. treasuries; they’ve been replacing them with gold.”
Russia and China aren’t the only investors who have shifted their approach to precious metals.
As the stock market bounced around in 2022 — a year in which all three major indexes eventually dropped 20% from their high point and entered bear market territory — a mounting number of investors began to turn to gold.
In a June 2022 article, U.S. News & World Report referred to the asset as “a safe-harbor commodity during times of market volatility and uncertainty” — and also noted spot gold prices had reached $2,000 an ounce, their highest level in a year, during the first half of 2022.
In its new “Is the Dollar Facing a Tipping Point?” guide, Lear Capital questions if the U.S. dollar has reached an untenable phase — and might perhaps be poised to follow in the same steps as currencies such as the Spanish real, which was in use from the 1300s to the 1800s and the Dutch guilder, which jingled in pockets in the 15th century but was phased out after it was replaced by the euro in 2002.
When the U.S. stopped converting paper currency for gold in the 1970s, it opened the door for an unrestrained amount of paper money to be printed. Since 2008 alone, $22 trillion has been produced, according to Kevin DeMeritt.
The current monetary system in the U.S. is sometimes referred to as fiat currency, an approach that relies on society having a certain amount of trust that the issuing government or authority will remain credible and solvent enough to ensure the money it produces will possess worth.
It is, as Lear Capital mentions in its recently released guide, a relatively new type of structure, having only been in existence for roughly 52 years. Certain recent events, such as the sanctions levied against Russia after it invaded Ukraine, have raised some questions about the dollar’s future, according to Kevin DeMeritt — who says other countries may have concerns about the U.S. using the dollar to enforce foreign policy in the future.
In addition, the dollar may face competition from other global currencies. Brazil, Russia, India, China and South Africa collectively house 40% of the world’s population; given their size and scope, any could potentially emerge as a contender to replace the dollar at some point — potentially as a unified currency source, similar to the euro.
Recent developments such as the creation of the New Development Bank, an International Monetary Fund-type organization, which has pledged to issue 30% of its loans in the local currency of the country that’s borrowing funds from it, also could be an appealing option for some nations, according to Lear Capital.
The Road Ahead
Being perceived as the world’s reserve currency can provide some advantages. If other countries need that particular type of money to conduct transactions, the demand for it will likely remain significant, helping to insulate the issuing nation from inflationary levels that are higher than its own.
Historically, reserve currency providers have also been able to decrease their manufactured or agricultural goods production efforts because other countries have provided the items in exchange for currency.
Cryptocurrency — which is forecast to have an additional 320 million users by 2027 — could pose another potential threat to the U.S. dollar.
“People have to be aware that countries are trying to get away from the U.S. dollar and giving themselves more flexibility to be able to transact deals for oil with OPEC and so on without having to use the dollar,” Kevin DeMeritt says. “They can use some other form of an asset, like gold or crypto.”
If the U.S. dollar were to lose its status as the global reserve currency, oil prices and other expenses could increase significantly, according to DeMeritt.
“People in the United States would have a gigantic wake-up call because things would become much, much more volatile,” the Lear Capital founder says. “Because [then] it’s denominated in somebody else’s currency. [When] that currency goes up and down, we would pay higher product prices, just like Europe’s been doing. Eight, nine years ago, [the cost of gas] was already very, very high — because their currency was not the reserve currency anymore; ours was — so there’s more volatility in those markets.”
As this chart from IEA shows, gas costs were significantly lower in the U.S. in 2014 and 2015 than in Europe, where they hovered around $6.50 to 8.15 per MBtu.
After reading Lear Capital’s “Is the Dollar Facing a Tipping Point?” guide, U.S. consumers may wonder: What can they do now to prepare for the future, in case the dollar at some point loses some of its luster?
Purchasing gold assets, Kevin DeMeritt says, could possibly be one way to hedge against paper money-related challenges.
Physical precious metal assets offer you the security of having complete control over your investment. You can purchase coins and other items to add to your initial investment; sell a portion of what you own or bequeath the items to heirs, for instance.
With limited availability and considerable demand, gold has historically maintained or increased in value over time — even in the face of situations that sent the market reeling, such as wars and recessions.
During the initial year of the 2009 recession, gold prices increased nearly 13%, according to the U.S. Bureau of Labor Statistics. Premium precious metal coins have performed exceptionally well during recessionary periods, retaining value through all 15 of the recessions that have occurred in the U.S. since 1919.
“If you add an increase in demand onto that physical supply that’s fairly limited, usually what you’re going to find is prices go up; it’s economics 101,” Kevin DeMeritt says. “Paper money is probably going to continue to fall, as it has for hundreds of years now — and the price of gold is probably going to continue to increase.”