Wall Street is currently experiencing a tumultuous relationship with the U.S. dollar, marked by contrasting sentiments among pundits and investors. Recently, Moody’s downgraded the U.S. credit rating from Aaa to Aa1, citing the escalating fiscal deficit and rising interest costs on government debt. This downgrade has led to a weakening of the dollar. However, the S&P 500 has shown remarkable resilience, recovering from the shock of April’s Trump tariffs and standing just 3.4% shy of its record high from February.
The Yield Curve and Investor Sentiment
Despite the stock market’s recovery, the yield on 30-year U.S. Treasuries has surpassed 5.0% per annum, signaling investor anxiety regarding U.S. deficits and the sustainability of its debt. Financial Times columnist Martin Wolf has expressed concerns about what he terms Trump’s “Assault on the Dollar.” While he and many economists acknowledge that there is currently no viable alternative to the dollar, I contend that alternatives do exist. Wolf outlines five potential substitutes: the Renminbi or Euro, a multi-currency reserve system, maintaining the dollar’s status quo, a global currency like Special Drawing Rights (SDRs), or a cryptocurrency-based world.
The Limitations of Fiat Currencies
I concur with Wolf that fiat currencies are inadequate substitutes for the dollar. The Euro, while a significant player, remains a weak second. The Japanese Yen and the Renminbi are even further from being contenders. The idea of a global currency like the SDR is more of a pipe dream, as geopolitical rivalries hinder the establishment of a global central bank. Moreover, the U.S. retains a de facto veto over any IMF reforms that could enhance the SDR’s role.
Cryptocurrencies, despite their market capitalization reaching $1.5 trillion and Bitcoin soaring above $100,000 post-tariff shock, face significant accessibility issues. In a scenario where global internet infrastructure is compromised, such as during a world war, the practicality of cryptocurrencies diminishes drastically.
Gold: The Timeless Store of Value
Given the unreliability of human governance in monetary systems, gold emerges as the only historically proven zero-counterpart asset and a safe store of value. Throughout history, gold, silver, and copper have served as money, with paper currency gaining legitimacy only after Sir Isaac Newton pegged the British pound to a fixed gold-silver price in 1717. The U.S. formally adopted the gold standard in 1900, a system that President Nixon abandoned in 1971, ushering in an era of floating exchange rates.
The dollar remains an efficient unit of account and means of payment, with over 80% of global trade invoiced in dollars. It also serves as a store of value, currently constituting 57% of official foreign exchange reserves, down from approximately 70% in 2000. The dollar’s supremacy is bolstered by America’s military, technological, and economic prowess. However, this “exorbitant privilege” comes with a cost: the U.S. faces rising external debt and consumption, leading to critical fiscal challenges.
Gold as a Hedge Against Uncertainty
As Wolf notes, gold serves as a hedge against inflation during uncertain times. The European Central Bank’s latest Financial Stability Report confirms that gold is a safe haven during financial stress or geopolitical uncertainty. Although central bankers historically dismissed gold for lacking yield, its compound annual growth rate (CAGR) since 1971 has been 8.8%, closely mirroring the 8.7% CAGR of total U.S. Federal debt over the same period.
The World Gold Council reports that in Q1 2025, 33% of gold production was allocated to jewelry, 6% to technology, 19% to central banks, and 42% to investment. Central banks have been increasing their gold holdings by approximately 1,000 tonnes annually for the past three years.
The Shift in Reserve Assets
The freezing of Russian assets following the Ukraine invasion has prompted central banks to seek ways to diversify their reserve assets away from potential sanctions and confiscation. The confluence of dollar weaponization, rising geopolitical uncertainty, and conflicts has led to a growing interest in alternative safe-haven assets. Interestingly, both Americans and Europeans, who hold the largest gold reserves, stand to benefit from rising gold prices, as does China, the largest gold producer.
As the U.S. contemplates monetizing its gold holdings of 8,133 tonnes, gold is increasingly viewed as a hedge against inflation and geopolitical risks. This new demand may drive gold prices higher, positioning it as a significant reserve asset alongside the dollar.
The Future of Monetary Systems
While a return to a pure gold standard is impractical due to the potential for liquidity constraints during economic downturns, increasing gold holdings could instill confidence in monetary systems. A larger gold reserve could safeguard national security against foreign confiscation and provide a buffer against excessive fiat currency creation.
Since 1945, the dollar has anchored the international monetary system. Just as sailors require multiple anchors to stabilize against turbulent waters, the global economy may benefit from a diversified reserve system. While gold may not replace the dollar as a means of payment, it is poised to become an increasingly important alternative store of value.
In conclusion, as we navigate the complexities of modern finance, the dollar’s supremacy is not guaranteed. The evolving landscape of currency dynamics necessitates a reevaluation of traditional assets like gold, which may play a crucial role in the future of global finance.
(The writer is a former central banker.)
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