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Central Banks Opt for Gold as De-Dollarization Accelerates

Central Banks Opt for Gold as De-Dollarization Accelerates

May 17, 2024

Central Banks Opt for Gold as De-Dollarization Accelerates

JP Morgan's latest report reveals a significant shift in the global economic landscape as central banks diversify away from the US dollar. The report indicates that the dollar's share of official reserves has plummeted to a record low of 58%, or 49% when factoring in gold reserves. Gold, now the second most held reserve after the dollar, has seen its proportion increase from 11% to 15%.

The implications of these shifts are profound. Approximately $8 trillion is held in reserve by central banks worldwide, which constitutes around one-third of all US dollars in circulation. Should these reserves be liquidated, the impact could trigger a 40% inflation rate within the United States.

This de-dollarization trend is attributed to several factors, including the American government's freezing of Russian central bank assets, signaling to the world that holding dollars comes with geopolitical risk. This, coupled with the US deficits nearing $2 trillion and the potential emergence of a gold-backed BRICS currency—led by a China intent on undermining the dollar's reserve status—paints a grim picture for the future of the US currency.

Despite this, the dollar managed to appreciate 7% since COVID. However, this rise is not credited to sound financial stewardship but rather to economic turmoil in other major economies, such as Europe, Japan, and China. The dollar's relative strength is seen as a product of being the "least bad option" rather than a testament to its intrinsic value.

The report suggests that the dollar's current strength is transient, overshadowed by long-term trends that threaten its reserve status. Historically, the US currency has been a safe haven during crises; yet, the dollar's recent trajectory does not align with this role. For instance, the global financial crisis of 2008 saw the dollar surge by 20% in the two months following Lehman Brothers' collapse, underscoring its safe-haven appeal during tumultuous times.

The report concludes with a grim outlook for the dollar, which has lost a third of its value since the 2008 financial crisis and 90% since President Nixon removed the gold standard. The ongoing trillion-dollar deficits and a political system perceived as corrupt further burden the currency. While remedies such as a balanced budget amendment or a return to the gold standard could theoretically reverse the decline, the report is skeptical of such measures being adopted without an economic crisis forcing change.


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