Gold is making new highs, or to put it differently, the dollar is making new lows. The dominance of the dollar has been the unchanging backdrop of the global monetary system. But could there be an alternative?

Currency Shifts Happen

It's not far-fetched. The world doesn’t change its monetary preferences often, but when it does, the shift is significant. This video tells the story of all global reserve currencies.

Video: History of Global Reserve Currencies

If monetary standards never changed, the British pound would still dominate. The idea that the dollar would surpass sterling was evident to some as early as 1776. The paper dollar replacing gold seemed improbable, but it happened. Economists call it progress, but each generation defines that term in its own way.

What do 1971 and 2024 Have in Common?

Concerned countries in 1971 thought the temptation to cheat and monetize the ballooning US debt was too big a risk. In 1971 Great Britain and France wanted their Gold back to hedge against fears of debasement. 

Today, the dollar faces new competition from an unexpected source. Central banks in Asia and emerging markets are buying gold, an asset that seemed outdated in the 21st century.

European central banks—like those in Switzerland, the Netherlands, and Germany—are relieved by the gold they bought and retained; the rising gold price is offsetting their bond losses.  Gold now offers diversification not only from the dollar but also from the overactive digital printing of central banks. 

Countries are once again worried about our ability to maintain the buying power of the USD in light of an increasingly unmanageable debt burden.

Germany began repatriating its gold as far back as 2016. Most recently nations like India are repatriating their own Gold as well. Most countries are buying more gold outright. 

It is therefore quite possible this year’s BRICS summit in October will be a reversal of sorts to what Nixon did in ending the Bretton Woods agreement in 1971.

From: Why Brics 2024 and Nixon 1971 are the Same Thing

As it turns out, what the BRICS are doing right now has strong precedent with what France and the UK did in 1971 which forced us to sever the deliver-ability of Gold against the dollar.

This time, there is no “monetary” Gold to sever deliver-ability of. Thus Gold is again being “freely” moved from the West to reside in Eastern vaults. 

Historical Perspective

Markets shape opinions, and central-bank gold buying today might not mean much given Central banking’s past track record with it.

A generation ago, the same central banks were selling gold, causing a historic low in gold prices in 1999. Have they learned anything about market timing since then?

Maybe they’ve just rediscovered that gold is the best currency. It’s scarce, has no national allegiance, and will never trade at zero. 

Gold is universally accepted, visually appealing, and isn’t anyone’s liability. Its physical properties are almost magical, as evidenced by a medieval Florentine goldsmith who could hammer an ounce into a surface area of over 140 square feet.

We're not holding our breath for a return to the classical gold standard. Its principles—simplicity, monetary freedom, and price stability—seem ill-suited for the 21st century. The gold standard thrived from 1815 to 1914, with central bankers focused mainly on maintaining the exchange rate.

Inflation was a wartime issue, neutralized by peacetime deflation, keeping average prices stable over time. The gold standard may be gone, but gold is back in the monetary spotlight.

New Central Bank Trends

According to the 2024 Central Bank Gold Reserves Survey, 29% of the World Gold Council’s respondents plan to increase their gold holdings within the next 12 months, the highest since the survey began in 2018.

Furthermore, 62% of respondents believe the dollar’s share of total reserve assets will decrease within five years, up from 55% in 2023.

Dollar Hegemony Death

Understanding the dollar’s global dominance requires knowing how it gained that position, which can’t be understood without explaining the collapse of the Bretton Woods system from 1944 to 1971.

Post-World War II American economic and military supremacy crowned the dollar as the world’s leading currency. The U.S. consumes more than it produces, paying its external deficit with IOUs. This circular system has kept the world running for the last half-century. But will it continue? The answer is likely not in its current form

The End of Bretton Woods

John Maynard Keynes called gold a barbarous relic, and others dismiss it as irrelevant1. However, the case for a fixed standard of value, like gold, remains compelling. Currencies without a fixed standard have circulated for decades, and while banks lurch from crisis to crisis, they continue to operate, often with government assistance.

The modern dollar standard began at the Bretton Woods conference in 1944, creating a system where the dollar was partially convertible into gold. As U.S. deficits grew, the dollar's overvaluation became evident.

The U.S. had options to address this, such as reducing the outflow of dollars or devaluing the dollar’s gold weight, but neither was politically appealing during the Cold War. Instead, the U.S. formed the London Gold Pool in 1961 to cap gold prices, but it failed by 1968. 

Other measures included discouraging investments abroad and applying diplomatic pressure on allies to avoid exchanging dollars for gold. However, the system collapsed in 1971 when President Nixon ended the gold standard, ushering in the era of fiat currency.

Gold a Barbarous Relic No More

Despite the shift to a nonconvertible dollar standard back then, America’s seigniorage privilege allowed it to print money, and attempts were made to demonetize gold. Since then, intermittent gold sales by the Treasury and the IMF failed to suppress rising gold prices. Most recently, the IMF has joined in extolling the virtues of Gold in lieu of Dollar dominance. The battle has turned in Gold’s favor

MF Paper- Gold as International Reserves: A Barbarous Relic No More?

Today, gold is regaining prominence in world reserves, with analysts noting that it holds a greater share of world reserves than the euro.

The dollar’s future as the world’s reserve currency is uncertain, and history might judge that holding this privilege was not as advantageous as it once seemed.