Gold’s Role in Transitioning to a Reserve Currency

The real role and importance of gold is now taking centerstage.

Gold’s primary role has NEVER been a great hedge against inflation. It has NEVER been a great replacement against monetary debasement (especially when every nation is doing it). It has NEVER been a successful bet against moving from a fiat, fractional banking system to a 100% gold-backed standard. It has NEVER been a good currency for everyday transactions in a sophisticated economy. Nonetheless, Gold has ALWAYS served as the primary role in transitioning to a new financial system.

Gold will now take its rightful monetary role in helping transition from the USD to the next reserve currency. It is independent. It doesn’t have borders or loyalties. It doesn’t sanction anyone. It simply doesn’t care. It is NEUTRAL. It is universally agreed by almost all central banks and financial institutions as a type of money or an asset without dispute. The USD has maintained reserve currency status (and the enormous benefits that come with that recognition) as it is universally accepted as a neutral and safe means of transacting. Weaponizing the financial system by the US and its allies will be viewed as the single biggest reason for the loss of the USD hegemony throughout the world. As we move to this new system away from the USD, the world will move into a safe and widely accepted means of holding “money” until this new system is developed and becomes universally accepted. It is very difficult to predict the new composition of a new world monetary system beyond the USD. Unfortunately, it is now a fait accompli or a “done deal.” It is highly likely that wars will be fought to determine this new monetary system and, unfortunately, our political leaders ignorantly pushing us to this inevitable solution.

Now, more than ever, the 36,000 metric tonnes of gold held by Central Banks worth approximately US$2.5 trillion (at US$2,000/ounce) will play an increasingly important role. Approximately 190,000 metric tonnes of gold have been mined throughout history but approximately 70,000 tonnes in most likely lost (i.e., electronics, burials, art, etc.). Beyond these 36,000 metric tonnes, we estimate approximately 85,000 metric tonnes are being held as investment or jewelry by the public with a value of another US$6 Trillion for a total of US$8.5 Trillion in accessible gold. Bloomberg estimated in 2021 that the world’s current debt stands at US$281 Trillion, which clearly has risen over the past year. Total assets are estimated at approximately $650 Trillion. It is beyond the scope of this short blog to evaluate or analyze the amount of debt, derivative contracts, or assets circulating in the world. It is fair to assume, however, that the price of gold will increase during this transitionary period while we sort-out this mess.

In closing, I will warn those that simply will divide the amount of debt (or other instruments) by the amount of gold to get to an equilibrium price/ounce of gold. This “linear” thinking is part of the reason why we are in trouble. It is highly conceivable that the price of gold will rise and, simultaneously, the amount of debt or asset prices dramatically decrease due to defaults and re-pricings. The next ten years will be characterized by a tremendous amount of uncertainty and nervousness. Gold thrives under these conditions.