The Dollar Is Losing Utility As World Reserves Shift - But What Of Gold's Role?

Includes: GLD, UDN, UDNT
by: Biz Bluetree

"China's call for 'a de-Americanized world' is a clear sign of growing impatience with Washington's irresponsibility. […] From China, Russia, Europe, and South America voices are rising against Washington's lawlessness and recklessness. This changed attitude toward the U.S. will break up the system of dollar imperialism."

- Dr. Paul Craig Roberts

Between optimism and pessimism lies realism. Always the optimist, today, I find myself forced to be a realist - a realist in a manure field of surreal nature. How high is it piled?

There was a time when traveling to many foreign lands did not require a passport. All anyone needed was a smile and a pile of U.S. dollars to move around. Those greenbacks were good as gold. But, those days are gone for the traveler. And those days are more than numbered for the dollar, more aptly termed the Federal Reserve note.

The purpose of this article is not to ignite a political discussion. Though misguided politics and bad policies are front and center of this problem, rather than point fingers, let's look at factual indicators painting a grim picture for the U.S. dollar's continued world dominance.

Another nail in the coffin

The first and most obvious threat to dollar dominance starts at home with the devaluation of the dollar as it is happening right now in accelerated fashion with piles of currency and debt being poofed into existence by the Federal Reserve and its fractional banking system. That, with wavering trust and faith in U.S. policy makers - exacted by the debt ceiling fiasco and government shutdown, among other reasons - puts another nail in the dollar's coffin.

And U.S. body politic has left the Fed little wiggle room. We'll soon see Bernanke, Yellen and friends having no choice but to pump up the volume as the deficit has widened and the economy has taken another hit.

The Fed is trapped

The Fed is easing itself into an even tighter corner as the rest of the world watches. And as the world monetary system continues to evolve (or devolve), gold remains the foundation asset that balances risks present in all fiat currencies the most important of which is the U.S. dollar and the risks now closely associated with it.

Doctor Paul Craig Roberts, the former U.S. Assistant Treasury Secretary who is credited with co-creating Reaganomics, today keeps a keen eye on the macroeconomic landscape. Dr. Roberts has an astute opinion on what he sees, saying in a recent interview:

"The October 2013 U.S. government partial shutdown and debt default threat resulted in the unprecedented currency swap agreements between the Chinese central bank and the European central bank and between the Chinese central bank and the Bank of England. The reason given for these currency swaps was necessary precaution against dollar disruption. In other words, U.S. instability was seen as a threat to the international payments system. The dollar's role of reserve currency is not compatible with the view that precautions must be taken against the dollar's possible failure or disruption."

There couldn't be more clear an indicator of trouble ahead than the Bank of England and European Central Bank agreeing with China to swap currencies. They're U.S. allies, right? Like Australia, right? Why has London vowed to be the western hub for yuan distribution? Could it have anything to do with the recently reported mass tonnage of gold migrating from vaults in London to Switzerland and then on to Hong Kong and Shanghai?

It may be of interest to note that 77% of the gold imported by the United Kingdom and Switzerland combined comes from the B in BRICS, Brazil - the 13th largest gold producer in the world.

Gold bars from Brazil, Photo:

The petro-dollar bypass

Already nations that are not U.S. allies are settling their own trade differences in their own currencies as faith and trust in USD is lost. Deputy Governor of the South African Reserve Bank, Daniel Mminele is already on record saying South Africa will be diversifying into new asset classes (read gold) and new currencies outside of the USD not only because they believe asset purchases by the Fed have significantly elevated prices for U.S. Treasuries, but to lessen the impact that a possible Fed tapering could have on the their economy. With more than 60% of South African foreign exchange reserves held in USDs, (consistent with U.S. holdings in many other nations) they have a lot to lose.

But what's the real scoop on a Fed taper, Dr. Roberts?

"… central banks and some investors have realized that the Federal Reserve is locked into the policy of supporting bond prices. If the Federal Reserve ceases to support bond prices, interest rates will rise, the prices of debt-related derivatives on the banks' balance sheets will fall, and the stock and bond markets would collapse. Therefore, a tapering off of quantitative easing risks a financial panic."

But, then, what if the Fed continues QE, sir?

"… continuing the policy of supporting bond prices [QE] further erodes confidence in the U.S. dollar. Vast amounts of dollars and dollar-denominated financial instruments are held all over the world. Holders of dollars are watching the Federal Reserve dilute their holdings by creating 1,000 billion new dollars per year. The natural result of this experience is to lighten up on dollar holdings and to look for different ways in which to hold reserves. The Federal Reserve can print money with which to purchase bonds, but it cannot print foreign currencies with which to purchase dollars."

South Africa is not alone in looking for different ways to hold reserves. The entire BRICS block of companions (Brazil, Russia, India and China among them) are all doing the same thing and are already settling their own bills with each other in their own currencies, completely circumventing USD, while it's reported some are using gold and infrastructure construction to barter with Iran.

Brazil is the latest emerging economy to buy gold, doubling its central bank holdings to 2.16 million ounces since August according to, as concerns about quantitative easing and competitive devaluation by the U.S. Federal Reserve drives reserve managers toward hard assets.

Central banks in Latin America have recently joined those in Asia and the Middle East in adding to their gold reserves: in addition to Brazil, others including Mexico, Colombia, Paraguay and Argentina have recently bought bullion.

In total, central banks have purchased 500 tons of gold this year, the most since 2008, according to Bullion Week.

What's the plan?

It appears China is a driving force in dethroning the dollar, which should not surprise anyone given China's insatiable appetite for stock piling gold as many suspect the People's Republic plans to one day back its yuan (renminbi) with gold.

Chinese gold consumption has doubled in the past year with the Federal Reserve's price suppression helping the nation to accumulate gold at reasonable cost, according to an article in China is buying the only money with a fixed supply, according to the article, at a time of massive money printing by global central banks.

And the People's Republic of China is taking full advantage of the new private gold vault opened in Shanghai's "free trade zone" by storing its gold unofficially among the inventories of other nations as China's gold demand alone may rise by as much as 30% this year.

Private bullion vault, Shanghai Free Trade Zone. Photo:

Down under

But do other U.S. allies figure in to the dollar snub? Yes, the Australian government just reached a direct, bilateral trade agreement with China making the Communist state Australia's newest and biggest trade partner. All commerce is to be settled in their respective national currencies. But even more interesting is the agreement's rider to openly trade each other's currencies. The Aussie dollar is now the third major world currency along with the dollar and yen to openly trade on the Chinese mainland's currency exchange.


Australian Prime minister, Jillian Gillard was happy to announce to world media on her trip to China earlier this year that:

"The important Chinese government policy objective of greater internationalization of the Chinese currency will be significantly advanced by these decisions."

But what of oil consumption and the petro-dollar?

Australia is the worlds' largest producer and exporter of uranium with China already importing 22% of its uranium supply from down under and paying with yuan. Together with another BRICS nation, India (paying with rupees) - China and India plan to bring 35 nuclear reactors online over the next two decades. Uranium will become tantamount to not only their mutual growth but, the survival of their populations.

Rising energy demand from the world's most populous countries like China and India will boost Australia's uranium industry, says Australian Resources and Energy Minister Gary Gray as he further reiterated:

"[T]wo important drivers of nuclear power remain unchanged - the rising energy demand from growing populations and the need to reduce greenhouse gas emissions."

Russia is another key uranium target for Australia the Resources and Energy Minister said.

So, with Brazil, Russia, India, China, South Africa, Japan, Australia, England, the Euro Zone among many others finding their own way without the U.S. dollar, what could this mean for the world's super power and its world reserve currency?

And Americans brace for what's to come in January and February in DC.

Dr. Roberts believes there will be serious repercussions felt if the October showdown plays out again in January/February, saying:

"there has been a change in attitudes toward the U.S. dollar and acceptance of U.S. financial hegemony. […] a repeat of the October impasse would further erode confidence in the dollar."

Eroding confidence in the dollar will not just be an international phenomenon, it will soon be as prevalent on Main Street, USA as it is in Tiananmen Square. So, why do some experts feel it important to hold physical silver and gold? Well, would you feel more secure holding USD or another country's paper currency? And why are most of those countries themselves stocking up on the metal?

With China leading the charge for a "de-Americanized" world

What could happen if the U.S. gets ruffled enough to intervene? After all the U.S. invaded Iraq because Saddam Hussein was trying to close a deal to sell Iraqi oil to Europe in exchange for Euros. And the U.S. took exception with Libya when Momar Quadafi tried moving oil to Russia in exchange for gold. What then might happen in an American/Chinese stare-down?

Dr. Roberts thinks:

"China could destabilize the U.S. dollar by converting its holdings into dollar currency and dumping the dollars into the exchange markets. The Federal Reserve would not be able to arrange currency swaps with other countries large enough to buy up the dumped dollars, and the dollar's exchange value would fall. Such an action could be a Chinese response to military encirclement by Washington.

In the absence of a confrontation, the Chinese government is more likely to gradually convert its dollars into gold..."

What's an investor to do?

How does one play what looks to be an approaching end game? Is there enough time left to make money by playing paper gold, say with options? There are those who swear volatility in itself is a trade. Do you short futures in the SPDR Gold Trust ETF (NYSEARCA:GLD) and hope to offset calls to hedge? Or do you go long?

Do you short the U.S. dollar because you believe what you've read here? Open a position in the PowerShares DB USD Bear ETF (NYSEARCA:UDN) and ride it to the end? Or do you go crazy bull and triple bear down with a position in the PowerShares DB 3x Short U.S. Dollar Index Futures ETN (NYSEARCA:UDNT) because you're that certain?

Or should you do what most central banks, especially those in the east, and some western contrarians are doing and that is buy and hold physical gold and silver?

I might add Mario Draghi, head of the European Central Bank, is on record saying, he never thought it wise to sell gold because for a central bank "it is a reserve of safety." Kudos to Mr. Draghi for his candor, there is no Fed-speak there.

None of us, in our lifetimes in the U.S., have ever seen an end game play-out. And if we do this time around, chances are good we'll never see one again. I have a strong idea for my game plan, but I might be wrong. That's why it's important for each of us think about what is going on in a geo-political, macroeconomic sense and the possible resulting ramifications that may or may not occur and not be caught off guard.

Dr. Paul Craig Roberts is pretty smart.

I get the feeling he might think the window of opportunity to fix this thing passed in 2008 when, he says, the banks should have been allowed to fail. Now he thinks in order to avoid an "immediate crisis", the Federal Reserve has no choice but to continue a policy that will produce a crisis down the road rather than now. He's convinced:

"It is either a financial crisis now or a dollar crisis later."

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.