GoldWhat’s your take on China changing to the Gold Standard for Reserves and how it will “destroy” the dollar and stock market. Is that causing gold to spike now? (Dylan Jovine on
Dec. 6 it will happen)
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My take? No country will ever adopt the gold standard again. That’s because governments are run by people who like to be in control, and tying your currency to gold removes your control over how much money you can create.
China has bought a lot of gold over the years, and, along with Russia and some other countries who have been pushed away from the dollar because of our increasingly aggressive use of sanctions to control how other people can access the US dollar system, they are trying to make the their own currency more universally acceptable to the folks from whom they want to buy stuff, but they’ve got a long way to go. The dollar is losing some of its hegemony in global trade, as folks like China, Iran and Russia convince counterparties to accept their currency in exchange for commodities or other goods, instead of insisting on US dollars… but it’s not losing much in terms of “reserve currency” status just yet, mostly just because there isn’t another reasonable option. Which means that when Botswana sells copper to China, just to dream up a random example, they might accept Yuan in exchange, but Botswana is probably not holding on to those Yuan as part of their official reserves — they’re either using them to buy manufactured goods from China, which is easy because almost every country has a trade deficit with China, or they’re converting them to US Dollars.
The dollar is losing some of its sheen, which means the US will eventually lose the incredible tailwind we’ve had for 50 years from being able to print as much money as we want, with no end to the demand for our bonds… the gravy train will almost certain end someday, the rest of the world will stop subsidizing US consumers. But it’s not going to happen next week, it’s a slow evolution, and it’s driven at least as much by the increasingly unstable US deficit as by the interest in geopolitical foes to develop a competing financial structure. And it’s also driven to at least some degree by the US role as the globe’s overwhelmingly dominant military force — that will probably also change someday, but not soon.
Gold is going up right now because of fears of future economic surprise, to some degree, there’s always some “flight to safety” interest in gold, and that rises when people are nervous about their own currency or about the state of the world in general… but more immediately, it’s probably mostly going up because interest rates are going down. Gold competes with other “safe” investments like T-Bills and cash, and those investments yield 5% right now while carrying gold comes without a yield, and with costs (higher transaction costs, plus the cost of storage), so when rates go down, all else being equal, gold looks a bit more appealing. That’s also likely the immediate likely cause of Bitcoin surging higher recently, if the dollar yields a bit less then investors are more willing to place their bets with “store of value” assets that don’t have a yield.