It has been many years since the US dollar has been the world’s dominant reserve currency – and now it is being challenged. It is really hard to say when the dollar’s reign will be ended -if at all- but one thing is certain: it will take a mountain of gold bars to sustain a new world reserve currency.
It was 100 years ago that the First World War devastated European economies and put an end to the gold standard. At the time the UK Pound Sterling was internationally accepted as the most reliable trading currency, with gold Sovereigns being the British trademark of credibility.
After the Second World War, as the world was emerging from the destruction to regroup and rebuild, one nation emerged a superpower and gave the world the almighty US dollar, which has been used ever since as the world’s default reserve currency. A system described as a “gold exchange standard” was established under the Bretton Woods international monetary agreement of 1944, under which most countries fixed their exchange rates relative to the U.S. dollar and central banks could exchange dollar holdings into gold; all currencies thereby had a fixed value in terms of gold and central banks held substantial gold reserves.
Until the 1980’s America was the world’s biggest creditor, produced and exported most of the world’s goods, and spent most of the world’s money. It was then that the world’s greatest economy started to show signs of fatigue: the strength of the dollar had put a harness on US exports, and America went from a nation of producers to a nation of borrowers on a national level as both household and government debt was bulging out of control.
When you are drowning in debt, your first step to recovery is to limit spending. It is a different situation though, when you are the world’s biggest economy and the owner of the world’s reserve currency. To pay off its debts, the U.S. just prints more money. It’s exactly this policy that raises the dollar value of financial assets like gold and silver, but on the other hand loading phantom dollars into the system only devalues the currency and increases the debt.
Despite the fact the US economy is becoming less dominant and stable, it is doubtful that bankers will abandon the greenback for a currency issued by a larger or more stable economy – especially when both “nominees”, the Chinese Yuan and the Euro, are not really suitable.
Return to gold standard?
The EU is not a single economy, it is a union of economies with extremely different fundamentals. In fact, the UK, which is a founding member state, still carries its own currency. China on the other hand is struggling to exchange its huge dollar reserves with thousands of tonnes of gold bars so that it can approach US gold reserves.
China’s thirst for gold is a major factor that is bound to lead to higher prices for the yellow metal. Invest in gold bullion at low prices dealing with coininvest.com, and don’t miss out on this opportunity.