Originally Published November 3, 2022
Reading financial headlines is an important part of my job as CEO of U.S. Money Reserve. Not only do I need to stay as informed as possible, but every once in a while, I come across something truly fascinating that I’m then able to pass along to the rest of the company as well as our clients.
For example, on October 31, 2022, I came across an article published by Fox Business in which they wrote, “China and Russia may be working toward a new gold-backed currency in a move that would aim to dethrone the dollar as the primary reserve currency of the world.”
I think it’s highly doubtful that any currency could overtake the U.S. dollar, but this news story has stuck with me. I can’t help but wonder: What would a new gold-backed currency look like, and what would it mean for the gold in my portfolio?
While China has been buying large quantities of gold, Russia has continued to reduce its reliance on the U.S. dollar.
For years, Russia has been attempting to move away from the dollar. In 2021, Bloomberg reported that since 2010, the Russian central bank’s holdings of U.S. Treasuries had shrunk by 98% and that dollars make up only 16% of the nation’s total stockpile. Then, after being placed under sanctions for its invasion of Ukraine in early 2022, Russia completely barred citizens from buying U.S. dollars. The goal of these actions, according to Bloomberg, is to reduce the impact of economic sanctions placed upon Russia by the United States.
Meanwhile, China has been buying historically large amounts of gold. In July 2022, for example, the Chinese government purchased 80.1 tons of gold valued at $4.6 billion. According to Fox Business, that’s more than double the nation’s gold purchase from the previous month and the second-highest amount they’ve purchased in a single month since 2012.
What do these two things have in common? According to the Fox Business article, “The idea of a joint Russian-Chinese currency has periodically surfaced over the past decade, especially after the Russian Central Bank opened its first overseas office in Beijing in 2017.” And since Russia and China have become closer allies after much of the world has economically isolated Russia, some theories surmise the nations may be working together to create a new currency that would allow both to further reduce their reliance on the dollar and dollar-backed assets.
Why would any currency be backed by gold? For the same reason that I and so many other Americans turn to gold to help protect our portfolios: It’s a hard, physical asset that people trust. It’s been used as a store of wealth for thousands of years, so using gold to back a new currency would provide it with more credibility than a new currency with no backing asset.
A new gold-backed currency could lead to increased gold prices.
As the article states, any new currency created by Russia, China, and any other allies is unlikely to dethrone the U.S. dollar or even make much of a splash on the global stage. According to Min-Hua Chiang, a research fellow and economist at the Heritage Foundation’s Asian Studies Center, creating a new multinational currency would require “a level of political and economic coordination and integration that is not present in Asia today.”
But for me and other planners like me, the potential for a new gold-backed currency leaves us wondering how such an invention would impact the gold market. If China continues to buy up billions of dollars in gold, available supplies may begin to dwindle. This could lead to increased demand, and thus increased gold prices.
Whatever the future holds for this potential new currency, I believe it will be beneficial to keep an eye on how the gold market may respond.
If there’s one lesson to take from this news, it’s that gold isn’t going anywhere.
The idea of a new world currency backed by gold serves as evidence of something we’ve known to be true for a long time: Gold isn’t going anywhere. Its historic use as a form of wealth protection has led to gold being used for generations as a hedge against market and geopolitical uncertainty, as well as a way to create an enduring, physical legacy that can last lifetimes.
Gold will likely outlast us all, and that is why it continues to serve as the bedrock of many Americans’ portfolio diversification strategies.
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