April 5, 2021 by SchiffGold 0 0
Last week, we reported that the Russian National Wealth fund was dumping dollars and turning toward gold. The Russians have engaged in an intentional de-dollarization policy for several years. But it appears this could be part of a broader global move away from the greenback.
The dollar’s share of global currency reserves dropped significantly in the fourth quarter of 2020, falling to its lowest level in 25 years according to recently released IMF data. Globally, the dollar now makes up just 54% of global currency reserves. The last time the greenback’s share was this low was in 1995.
As Bloomberg reported, the drop in dollar reserves comes “amid questions about how long the dollar can maintain its status as the pre-eminent reserve currency.”
Meanwhile, the euro’s share of global reserve currencies rose to 21.2% from, 20.5% and the yuans share jumped from 2.1% to 2.3%. The yuan only represented 1.9% of global reserves through the last three months of 2019.
The Bloomberg report notes that the Chinese yuan is transforming into a “force to be reckoned with” in currency markets. A record number of yuan changed hands in London last year. London ranks as the world’s leading foreign exchange center.
Many analysts believe the world is in the process of replacing the dollar-dominated global monetary system with a “multiple reserve currency framework.” A CIBC analyst told Bloomberg that he’s seeing a “slow burn theme” away from the dollar toward this multi-currency framework.
Other analysts say this is just a statistical anomaly due to significant dollar weakness during the pandemic. Once the dollar recovers, its share of currency reserves will return to a normal level. But the dollar’s share of global reserves has been on a downward trend for over two years.
The question becomes: will the dollar strengthen significantly? Given the record number of dollars currently being created out of thin air and injected into the economy, it seems unlikely.
In a recent podcast, Peter Schiff said he thought the dollar’s share of global reserves is more like to fall even further.
I think by the end of this year, the dollar’s reserve percentage will take out that low and hit a new low as more and more banks diversify their reserves out of US dollars into other currencies such as the euro or the Japanese yen.”
But Schiff said ultimately he thinks the real move in reserves won’t be from the dollar into other fiat currencies, but from the dollar and other fiat currencies to gold.
I think gold is going to be the big winner as the dollar loses the battle to be the reserve asset or the reserve monetary unit. Because gold is not a currency. Gold is money. And money should back up currencies, not other currencies. So, I think as more and more central banks really look to shore up the value of their currencies, it’s not going to be backing them with other currencies, but by backing them with real money — and that’s gold.”
We’ve seen this trend in Russia. Before pausing gold-buying at the onset of the coronavirus pandemic, the Russian central bank has added significant amounts of gold to its reserves. Prior to the pause, the central bank added an average of 205 tons of gold to its reserves every year since 2014. In February 2018, Russia passed China to become the world’s fifth-largest gold-holding country.
Meanwhile, the Russian central bank was aggressively divesting itself of US Treasuries. Russia sold off nearly half of its US debt in April 2018 alone, dumping $47.4 billion of its $96.1 billion in US Treasuries. In January, the value of Russia’s gold holdings eclipsed its dollar holdings for the first time ever.
Other countries have also added gold to their reserves. Poland recently announced a plan to add 100 tons of gold to its reserves over the next few years, and India has also been on a gold-buying spree.
We’ve been watching this de-dollarization trend over the last several years, and have written extensively about a push to minimize dollar exposure by countries like Russia and China and their desire to undermine the ability of the US to weaponize the dollar as a foreign policy tool.
The dollar’s slowing shrinking share of reserves doesn’t yet threaten its status as the world’s reserve currency, but it could be a canary in the coal mine. It’s definitely a trend to keep a close eye on.
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