Russia threw a multi-pronged shot across NATO’s financial bow soon after the invasion of Ukraine began.
First, Russia reacted to punishing sanctions and its exclusion from the global SWIFT money transfer system by hiking interest rates to 20% (later decreased to 11%) and establishing capital restrictions.
Then it required that “non-friendlies” (the West) purchase its oil with rubles or gold. Russia, which has spent the previous decade dumping dollars and accumulating gold, offered to acquire gold for 5,000 rubles per gram.
Vladimir Putin wants BRICS to create a worldwide reserve currency using their own currencies. He finally suggested a gold-backed ruble. What’s the point?
A global monetary system reset may already be happening. Change is impending. Credit Suisse predicts that commodity-based currencies will dominate the future economic order. Commodity-based currencies will undermine the Eurodollar system, which will be weaker when the Russia-Ukraine conflict concludes.
Someone will replace the U.S. dollar as the single major global reserve currency, probably sooner than expected.
I predict an “alternative trade” currency to challenge the dollar. This new currency would be used just to settle commerce between countries, not as a reserve currency to diversify. This is supposition, and the result is unknown.
Consider the evidence before dismissing my forecast. Global reserve currencies have fluctuated for 400 years. Spain, the Netherlands, and Britain’s reserve currencies generally last 100 years. The reasons reserve currencies failed are repeated.
Ray Dalio’s “Principles for Dealing with the Changing World Order” is a fantastic book on this issue, or you may watch his YouTube video, which explains it simply. When global powers lose their reserve status, conflicts erupt.
Bretton Woods gave the dollar its reserve status in 1944. The 44-nation accord tied the dollar to gold and all other currencies to the dollar.
Great concept if the U.S. keeps its gold and is economically prudent. By 1971, budgetary restraint was gone, and Richard Nixon detached the currency from gold, essentially defaulting.
Without the “Petrodollar,” this shift would have been disastrous to the U.S. Saudi Arabia sold oil to the U.S in return for reinvestment cash and security guarantees.
The desire for dollars to trade the world’s main commodity has propped up the dollar despite fiscal and monetary mismanagement.
When you combine these developments with the regular weaponization of the U.S. currency via sanctions and the SWIFT system, you can understand why some nations are exploring alternatives. The dollar feels lame-duck.
The world is jockeying for position.
China is most worried about these developments following the Ukraine conflict.
Before Russia’s invasion, the U.S. and China were in a financial-economic battle, and China has called for a “new international financial system.” The Ukraine conflict may escalate things. Xi Jinping has criticized sanctions, notably weaponizing the dollar, and warned of the west’s implications. What would replace the dollar as the reserve currency?
No matter how hard China tries, we know the yuan can’t replace it. It’s 2% of world reserves. One possibility may be a gold-backed “settlement” currency.
China’s gold reserves are growing. It’s the world’s biggest gold producer and importer. China doesn’t export gold. The government supports gold purchases.
Domestic and imported gold vanishes. China accumulates gold carefully and doesn’t expose its hand, probably to avoid a price surge. In the last 20 years, domestic output was 7,000 tons. America has 8,200 tons of gold.
China sometimes goes years without revealing its official gold holdings, then publishes exponentially greater quantities. 2019 report: 1,950 tons. Everyone disagrees. It’s easily doubleable or higher.
The truth will be revealed a lot sooner than later I’m sure of that.
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