Could Gold Replace the Dollar as the World’s Favored Currency?

May 8, 2023

I have written about my views on gold extensively in the past. I believe gold is the world’s longest standing currency. It is still used heavily by the world’s central bankers as an alternative asset holding to “fiat” currencies. When central bankers get nervous about fiat currencies (with the dollar being the largest fiat currency holding, by far) they tend to buy gold. Consequently, gold pricing tends to move in a negative corollary to the foreign exchange rate of the U.S. dollar. 

If you are worried about the state of affairs from a financial or political standpoint, gold has historically been a shelter for worried investors. The construct of a country’s monetary reserve status is a reflection of many things. This being said, central bankers tend to be a conservative lot, as their main goals are to provide policies to help ensure economic stability.

Dollar Losing Market Share

We all know the dollar serves as the world’s main reserve currency. However, over the last number of years the dollar has been losing market share of the world’s central bankers’ reserve balances. Currently, the dollar represents 58% of the world’s central bank reserves. That is down from 69% in 2014 and 75% in the year 2000. That is a reduction of 23% over the last 23 years. 

What has taken the dollar’s place? Other currencies and more recently, gold. An April article in the Financial Times outlined a recent report issued by the World Gold Council. The results of an annual poll of 83 central banks are as follows: 

  • A combined $7 trillion is under reserve status in these 83 central banks. This, of course, is serious money. 
  • More than two-thirds of those polled thought they and other central banks would increase gold holdings in 2023. 
  • This isn’t anything new. The amount of gold purchased by central banks increased by 152% year over year in 2022, to 1,136 tons.
  • Most respondents rated geopolitical risk as the number one reason behind the upsurge in holdings. More than 40% think this is the top risk, up from 23% the year before. 
  • One financial sanction that the U.S., UK and the EU has deployed against Russia has been a freeze on $300 billion in Russian monetary reserves. The central bank’s gold holdings didn’t fall under the direct control of these sanctions. 
  • Data shows that many gold purchases made over the last year have been made by central banks in countries not aligned politically with the West. It appears that one driver behind these countries’ gold purchases has been the sanctions that the West has applied to the Russian issue. 
  • For example, the People’s Bank of China purchased 62 tons of gold in the last 60 days of 2022, lifting its total gold reserves above 2,000 tons for the first time in its history. 
  • Turkey’s central bank now holds gold reserves of 542 tons, an increase of 148 tons from last year (an increase of 38% in one year). 

Gold Performs Well

As the dollar has continued to slowly lose positioning as the world’s number one reserve currency, we need to understand how this may affect our longer-term economic structure, if indeed this deterioration continues—more on this later.

Gold prices have, over the last two years, performed well in relation to other financial assets.

As noted above, over the last two years as the price of gold has risen by an average of 5.91%, U.S. inflation (as measured by the CPI all-items index) rose by an average of 6.6%. So, while gold lost nearly 1% of its “real” value annually over this period, stock and bond indices lost 5.19% and 11.16% of “real” value, respectively, on an annual basis.1

The Dollar’s Reserve Status

Since the Bretton Woods agreement reached following World War II, much of the world’s currency foreign exchange rates have been tethered to the U.S. dollar to one degree or the other. The Bretton Woods arrangement was altered when then-President Nixon decided to take the dollar off the gold standard in the early 1970s. But even with that move, many currencies have remained tied to the dollar on a foreign exchange basis.

It makes sense for many central banks to carry large balances in U.S. greenbacks. As noted above, 58% of the world’s central bank reserves are held in U.S. dollars. Compare this to the fact that U.S. gross domestic product represents about 26% of global GDP, and one can gain an appreciation as to how powerful the U.S. dollar is in a global financial sense. 

This ratio of 58% of global reserves relative to 26% of global GDP gives the dollar and the U.S. economy an advantage no other country enjoys. Demand for our currency helps keep our interest rates down. Most commodity contracts in the world have been based in U.S. dollars, which gives U.S. manufacturing and raw materials companies decided risk management advantages, as they don’t have to be overly concerned with foreign exchange risks as many of their foreign competitors do. Additionally, the reserve currency status acts as a “magnet” for foreign investment in the U.S. 

World Still Tied to the Dollar

The bottom line is the U.S. dollar, being the world’s main central currency, provides a big advantage to the U.S. economy. As noted, however, this advantage has been slowly deteriorating.

I am now receiving many questions as to the sustainability of the U.S. dollar being the global “go-to” currency for central banks and others. As noted, the dollar has been losing ground for the last 20+ years as a global reserve currency. So, this issue isn’t anything new. But the question still needs to be asked and answered. I see trends that may lead to further deterioration in the dollar’s standing on the global central reserve currency stage. I believe that while further deterioration and foreign exchange rate weakness may lie ahead over the next few years, the world is still highly tied to the dollar, a tie that will not vanish overnight.      

Those Smarter Than Me

Throughout my 44-year career in the investment management business, I have consistently surrounded myself with those who are smarter than me. One person who I was fortunate to have dinner with in New York City is Ruchir Sharma, the current chair of Rockefeller International. In the past, Sharma headed up Morgan Stanley’s emerging market equity effort. In finance circles, he is considered one of the brighter stars within that universe. 

Sharma recently wrote an article in the Financial Times in which he addresses the U.S. dollar reserve currency status issue. He states that much of the central bank purchases of gold of late include Russia, China and India. These three countries are in talks with Brazil and South Africa about creating a new currency to challenge the dollar. According to Sharma, their immediate goal is to trade with one another directly, in their own currencies. 

Revolt Against the Dollar?

A “revolt” seems to be building in central bank circles against the dollar, at least to a certain degree. It appears much of this revolt is around the edges, but it is still present and is coming from “emerging” economies as the U.S. has more aggressively turned to economic and financial sanctions as weapons against its economic or political foes. 

The words “In God We Trust” are on every dollar issued by the U.S. Treasury. While we may trust God, we don’t trust all our trading partners. Certain emerging economies are coming to the conclusion that while we in the U.S. may trust God, certain emerging market leaders don’t trust the U.S. 

In his article, Sharma highlights the fact that 30% of all countries now face sanctions of some sort from the U.S., the EU, Japan and the UK; up from 10% in the early 1990s. All countries know this and are seeking alternatives to the dollar as the currency has become an often-used economic weapon for U.S. politicians to wield. Along with gold, many foreign banks are studying the concept of launching their own digital currency. The number of central banks that are looking at this alternative? According to Sharma, his latest count is not 10 or 20, but 110, representing 95% of global GDP. 

For the time being, it seems many of these central bankers are starting to eschew U.S. dollar holdings in favor of alternatives. Their number one alternative now seems to be the oldest currency of all—gold. 



The S&P 500 Index is a market-value weighted index provided by Standard & Poor’s and is comprised of 500 companies chosen for market size and industry group representation. The Bloomberg US Aggregate Bond Index is a broad base, market capitalization-weighted bond market index representing intermediate-term investment grade bonds traded in the United States. The indexes are unmanaged and cannot be directly invested into.

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