Gold, Silver & Crypto - An Omen for the U.S. Dollar

Before WWII, the British pound was the world’s reserve currency. On July 1, 1944, at the Bretton Woods Conference, forty-four allied nations selected the U.S. dollar as the world’s leading reserve currency. Over the past eight decades, the dollar has been the currency of choice for cross-border payments, central bank and government reserves, and global transactions.

A reserve currency is a foreign exchange instrument that central banks, governments, and monetary authorities hold in substantial quantities as foreign exchange reserves. As a crucial basis for the global financial system, the U.S. dollar has held a dominant role because the U.S. is the world’s wealthiest, most powerful, and the country with the most stable political system.

A February 2022 handshake on a “no-limits” alliance between the Chinese and Russian leaders led to Russia’s invasion of Ukraine. Relations between the U.S./Europe and their allies and Beijing/Moscow and their allies have deteriorated over the past years. The world’s nuclear powers have bifurcated.

Sanctions, trade bans, tariffs, and other trade barriers have caused the China/Russia bloc to seek other means of exchange for trade to avoid U.S. dominance and control. The geopolitical shift has caused the dollar’s role to decline.

Markets reflect the economic and geopolitical landscapes. In 2024, price rallies in the leading precious metals and cryptocurrencies have signaled a shift away from dollar dominance. Meanwhile, the euro is the second-leading reserve currency and is losing its footing.

China and Russia have moved away from the U.S. dollar

• Sanctions have led Russia to shut down trading in dollars and euros on the Moscow Exchange.
• China has purchased oil from Saudi Arabia for payment in Chinese yuan, and India has also bought petroleum from the Saudis for payment in its currency, the rupee.
• China has been a seller of U.S. government bonds over the past months.
• China and Russia have been purchasing gold over the past years. As leading gold-producing countries, they have likely absorbed domestic production, increasing their gold reserves and replacing dollars with precious metals.
• China and Russia are leading an initiative for a BRICS currency with gold backing to challenge the dollar and euro’s dominance.

Gold rallied to a new record high in Q2 2024

• Gold is the world’s oldest means of exchange. Long before there were fiat currencies, gold was the leading currency.
• Central banks worldwide have been net gold buyers over the past years, increasing their reserves and validating gold’s role in the worldwide financial system.
• COMEX gold futures reached a new record high of $2,454.20 in May 2024 and were above the $2,350 level in July.
• Gold’s rally began in 1999 at $252.50 per ounce, and every correction over the past quarter of a century has been a buying opportunity.

Silver broke above a technical resistance level

• Like gold, silver has a long history as a store of value and means of exchange.
• Central banks and governments abandoned silver as a reserve asset because of its price volatility.
• COMEX silver prices rose to $32.50 per ounce in May 2024, breaking above technical resistance and reaching their highest level since December 2012.
• Investment demand in gold and silver has increased, signifying declining confidence in the U.S. dollar and the other fiat currencies.
• Silver was trading near the $30.75 per ounce level in July 2024.

The leading cryptocurrency reached a new peak

• Bitcoin is the leading cryptocurrency, with over 53% of the market cap.
• Bitcoin prices rose from five cents in 2010 to the most recent $73,662.76 high in March 2024.
• At around $56,000 per token, Bitcoin is a valuable asset. Its supporters believe it will continue to rise. 

The dollar index is a mirage- The dollar’s diminishing role adds to U.S. inflationary pressures

• The dollar index measures the value of the U.S. currency against the euro, British pound, Japanese yen, Canadian dollar, Swedish krona, and Swiss franc.
• The index only reflects allied currencies in a bifurcated geopolitical world.
• The dollar index has been stable in 2024, which is a mirage given significant changes in the global financial system.

The ascent of gold, silver, and Bitcoin and the move towards a BRICS currency are ominous signs for the U.S. dollar’s dominant reserve currency role. The bottom line is that its value erodes as the dollar’s role declines. A diminishing U.S. currency could have a substantial inflationary impact on the U.S. currency over the coming years, making the Fed’s 2% inflation target more than challenging.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!