The dollar has been losing value relative to its major peers, but also compared to gold, which is up 50 per cent this year.Dado Ruvic/Reuters
John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.
Last week the Governor of the Bank of Canada, Tiff Macklem, made an interesting remark about the future global role of the U.S. dollar. “For now, the greenback remains dominant,” he said, “and – without a clear alternative – I suspect it will remain the global reserve currency for the foreseeable future. But for many, its value as a hedge in times of stress has been dented.”
The governor gave voice to an emerging view in financial markets. When it comes to global trade, there is currently no alternative to the dollar. Almost all international trade and invoicing is done using the American legal tender, for the simple reason that it remains the one currency that is universally accepted, with no real prospect of that changing any time soon.
However, as a store of value – the hedge to which Mr. Macklem referred – something has changed. Not only is the dollar losing value relative to its major peers, such as the euro, yen, Swiss franc and pound sterling, but more significantly it’s plunging next to gold. The shiny metal is up 50 per cent this year, and 15 per cent since U.S. Federal Reserve chairman Jerome Powell announced in August at Jackson Hole that the Fed would be loosening its monetary policy. The last time this sort of surge happened was back in the 1970s.
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But gold isn’t rallying against just the U.S. dollar, it’s rising against all national currencies – up more than 40 per cent in Canadian dollars, for example, over the past year. In other words, against the oldest and most universal form of money, modern fiat currencies are losing value fast.
A key driver appears to be central banks. By and large they’re not diversifying away from dollars, as the distribution of their foreign currency holdings remains largely unchanged. What has changed is the amount of gold that central banks have collectively been purchasing. In part the move is driven by growing anxiety over the volatility of the second Trump administration, but that probably explains only a small part of it. A bigger fear is that Western central banks are resorting to currency debasement to tackle the enormous mountain of debt that has accumulated in the developed economies.
Despite inflation often remaining above their targets, the major central banks are cutting interest rates, thereby allowing the supply of money to grow faster than the economy. The world’s four biggest central banks – the U.S. Fed, the European Central Bank, the Bank of Japan and the People’s Bank of China – have since the start of the year increased the money supply at an annualized rate of 7 per cent.
That helps to explain the roaring stock-market rallies we’ve seen almost everywhere this year. While great for investors, it also means the purchasing power of cash is falling, which is why inflation remains above targets and in some places appears now to be rising. One way to look at it is that if we still used gold as our medium of exchange, and we measured the output of the economy using gold as our money, U.S. GDP is lower today than it was in the 1970s. A lot of our greater paper wealth is therefore due to the falling worth of our money.
Could we be slowly reverting to a gold-based economy? Not quite. Gold has little use as a currency, given its volatility and sheer weight – most dollar transactions are digital, and few bills ever change hands. But gold’s rising value underscores Mr. Macklem’s point that even if it hasn’t stopped being a dollar world, the search for alternatives appears to have begun. While the Trump administration is hoping that dollar-backed stablecoins will step into the breach, thereby solidifying the role of the greenback, so far the value of the dollar on world markets has continued falling.
Crypto enthusiasts still hope that something like bitcoin could become the new global currency, but its share in international transactions remains tiny and it is even more volatile than gold. Since the start of the year, gold has been rising faster than crypto, suggesting that investors no longer regard crypto as digital gold. They now want the real thing.
Instead, the signal from the relentless rise of precious metals – silver is up by even more than gold – is that people everywhere are losing faith in fiat money. When that happens, it can mean something bad lies around the corner – a surge in inflation, a fall into recession, a collapse in asset values. Those in the know may be heading for the hills.
Central bankers in the world’s big economies may therefore be nearing a moment of truth: amid the plunging value of the currencies they oversee, they may have to choose whether to stop the bleeding or let it rip. Because if everyone continues to doubt they’ll protect the value of their money, things could get ugly.