A dedollarization discussion between top-notch economists reveals some intriguing facts. While the dollar is still heavily used globally, it’s no longer a desirable asset. It gets interesting when an Obama-appointed economist points to gold’s price as a clear warning on the dollar’s future…
Your News to Know rounds up the most important stories about precious metals and the overall economy. This week, we’ll cover:
- A dedollarization debate reveals some intriguing facts
- Why the steady rise in gold’s price is a warning to the West
- We have all the ingredients for $50 silver
Not everyone is sold on de-dollarization, but how long can we ignore the signs?
The optimists and pessimists on the U.S. dollar aren’t necessarily who you’d expect. New York Times columnist Paul Krugman has recently been among the U.S. dollar’s defenders, claiming to “debunk” the global dedollarization trend. Oddly he includes this:
The dollar’s share of such reserves has indeed declined gradually over time, from 71 percent in 2000 to 58 percent in 2022. However, this decline mainly reflects diversification into smaller currencies such as the Canadian and Australian dollars rather than a move to serious dollar rivals…
Krugman argues that de-dollarization is in fact impossible – because “there just aren’t any good alternatives.” Well, when it comes to financial transactions, he’s right. The dollar’s share of international transactions has remained stable at 88% for the last 20 years.
When we look at central bank reserves, though, his own evidence proves him wrong. A central bank’s reserves are more or less a government’s savings account. The dollar’s share in government savings hit a 25-year low way back in 2021 (and has declined further since).
Instead of buying and holding dollars, since 2021 central banks have been loading up on gold bullion. They bought the most gold in history in 2022 and just a little bit less in 2023.
Goldman Sachs – despite their very bullish call for gold – argued that there isn’t a real alternative to the U.S. dollar right now.
On the other hand, we have a warning from American economist and finance executive Mohamed El-Erian. It’s worth noting El-Erian was once deputy director of the International Monetary Fund (IMF), and an Obama appointee to the U.S. Global Development Council. He’s a smart guy who knows international finance inside-out.
So when El-Erian takes to the pages of the Financial Times to say, “the west should be paying more attention to the gold price rise,” we should pay attention.
He explains that “an increasing number of little pipes” are under construction to bypass the dollar in international trade, and “a growing number of countries are interested and increasingly involved” in the project. What’s at stake? El-Erian tells us flat out:
…this risks materially fragmenting the global system and eroding the international influence of the dollar and the US financial system. That would have an impact on the U.S.’s ability to inform and influence outcomes, and undermine its national security.
Dismissing de-dollarization is indeed strange given the data.
Consider:
- Foreign investors owned about 1/3 of total U.S. debt in 2015
- Today, foreign investors own less than 1/4 of the total – a 30% reduction
- According to Bloomberg, the Treasury Department’s debt auctions have recently experienced “demand shortfalls”
In the background, our debt-to-GDP ratio surged to levels last seen in the aftermath of World War II. That’s simply astonishing to me – the federal government spent the last few years racking up debt as if we were fighting a two-front war. And the annual cost to simply roll over all that debt now exceeds our annual military budget. This is completely unsustainable!
Neither presidential candidate is going to suddenly reverse the downward trend. Regardless of who’s elected, the next four years will see more of the same. More central bank gold buying, more debt and a lot more hand-waving about how the dollar is irreplaceable. “The cleanest dirty shirt,” as analyst Wolf Richter calls it.
Well, there’s another shirt in the closet, one that’s perfectly clean… Which reminds me: The latest forecast from UBS puts gold at $3,000 next year. That’s amazing. Our customers from last summer who bought gold at $1,650/oz. got themselves quite a bargain, even though they didn’t know it at the time.
And even those who pay $3,000/oz will nevertheless be participating in the most significant shift in global finance in the last 50 years, if not the last 100. The center of gravity is shifting. Russia now wants to set up its own international precious metals exchange:
“The mechanism will include the creation of price indicators for metals, standards for the production and trade of bullion, and instruments for accrediting market participants, clearing, and auditing within BRICS,” Siluanov said.
The BRICS precious metals exchange would rival Western trading platforms, such as the London Metal Exchange, and would protect trade from sanctions imposed by the West on BRICS members Russia and Iran.
Earlier, BRICS leaders expressed support for efforts to increase trade in precious metals among the group’s countries…
Does anyone want to risk not owning physical gold right now? If so, they’re a lot braver than I am.
$50 silver is “days or weeks away, not months“
Predicting $50 silver when the metal is still below $34 is a bold call. A 47% price leap? Possible, certainly – stranger things have happened. And it’s certainly true that silver is historically undervalued relative to gold. But what’s the case for $50 silver, not just someday but some day soon?
On KingWorldNews, James Turk reviewed his case and made a lot of interesting points ($50 silver being just one item of interest).
Turk believes there’s a general lack of excitement in the gold market right now – and that’s a good thing. Gold’s 33% year-to-date rise hasn’t been front-page headline news (unless you’re me, in which case it’s pretty much all you talk about). The kind of publicity and hysteria we usually see during speculative asset bubbles just isn’t happening. Think about bitcoin, when everyone went crazy in 2017 when its price hit $19,000 for the first time – now a single bitcoin costs $68,000 and nobody bats an eye.
So what’s ahead? Well, virtually every bank and investment house has predicted gains until the end of 2025 as a minimum. Some are looking as far out as 2030. Turk says the current gold run only started in 2023 – and we should look to the big bull markets of 1971-1976 and 2008-2011 for an idea of just how much higher gold can go.
But what about silver? Turk points out that silver is still off both its 1980 and 2011 highs. Granted, the 1980 price was as clear-cut a case of market manipulation as you could ask for. So discount that one. 2011 though, when silver hit $48.70 per ounce? Gold was $1,900 then, so by all logic, silver should be more expensive today.
Turk believes physical demand will make this run-up a whole different ball game. Silver stackers are buying and holding, and in doing so, putting pressure on silver stockpiles. We recently discussed how the automotive industry is quite possibly already competing with investors in the middle of the sixth consecutive year of supply deficits – see the first story here.
Turk reminds us that silver’s fair value is based on a gold to silver ratio around 30, as it was in 2011. More recently this ratio has ballooned to historic heights in recent years – as high as 124 back in March 2020! – yet this massive imbalance is flying under the radar.
So what should silver’s price be? With a $3,000 gold price, Turk notes that $100 silver wouldn’t surprise him at all. Sure, it’s a big number, but he’s not alone.
For the moment, we can all agree that it doesn’t make sense for silver to be underperforming between supply deficits and booming industrial demand.
As before, we’re looking to $40 and then $50 as the next relevant prices.
What happens after that is anyone’s guess, but it’s a guess more comfortably made by those who bought around $28-$33.