The United States enjoys the privilege of issuing the world’s reserve currency. But it increasingly uses that privilege as a hammer to shape foreign policy.
Could Americans end up feeling the blows from that hammer?
Economist and the author of Currency Wars Jim Rickards thinks that’s already happening.
After gold futures closed at a record high last Friday, the intraday spot price of gold surged over $2,100 per ounce on Monday, knocking on the door of its all-time high of $2,135 set last December.
What is driving this big rally in gold?
There are many factors. Recent inflation and economic data revived hope that the Federal Reserve would cut interest rates sooner rather than later. But is likely a more fundamental factor driving gold strength as well – de-dollarization.
Jim Rickards explained it this way in a post on X (Twitter).
Last month, U.S. Treasury Secretary Janet Yellen turned heads by brazenly calling for liquidating frozen Russian assets totaling around $300 billion and using the proceeds to help rebuild war-torn Ukraine.
“It is necessary and urgent for our coalition to find a way to unlock the value of these immobilized assets to support Ukraine’s continued resistance and long-term reconstruction. I believe there is a strong international law, economic, and moral case for moving forward. This would be a decisive response to Russia’s unprecedented threat to global stability.”
Meanwhile, legislation is working its way through Congress titled the “Rebuilding Economic Prosperity and Opportunity (REPO) for Ukrainians Act.” The bill would authorize the U.S. to seize assets held by the Central Bank of Russia.
It remains unclear how many Treasury bonds and notes the Russian central bank holds.
Last November, the Russian bank released a statement claiming, “The Bank of Russia does not have U.S. treasury bonds; we do not buy these securities.” But the Treasury Department released data in September showing the Bank of Russia owns $73 million in U.S. Treasuries. Russian residents reportedly hold around $33 million in Treasury Securities.
The amount is relatively small because — recognizing the risk of U.S. sanctions and seizures — the Russians divested themselves of most of its dollar-denominated assets in 2018. The Russian bank sold roughly 85 percent of its Treasury holdings. At the same time, it aggressively bought gold.
Regardless of how many Treasuries the Russians still hold, repossessing them would set a major precedent, and as Rickards pointed out, the rest of the world is watching… and acting.
The Dollar as a Foreign Policy Hammer
Sen. Jim Risch (R-Idaho) called the Repo Act “a big hammer.”
“This is intended to be a big hammer. It’s intended to be a very new way of attacking a country that does not behave itself.”
Using U.S. bonds as a foreign policy billy club could certainly incentivize other countries to “behave,” but as Rickards warned, it is already sending another message – get out of Treasuries now while you can.
He warned about this kind of move during a Fox & Friends Weekend interview in April 2023, saying the biggest risk to the dollar isn’t other countries moving away from using the greenback as payment. Rickards pointed out that the biggest threat to the dollar is the U.S. Treasury itself.
“The U.S. Treasury has weaponized the dollar, frozen the reserves of the Central Bank of Russia and other countries looking around saying, ‘Hey, what if they don’t like what I did? What if they don’t like one of my policies, are [they] going to freeze my reserves?’”
And if you are holding something that could be used against you, what would you do?
You’d get rid of it to minimize the risk. After all, something you don’t have can’t be used against you.
Of course, you would need to replace dollars and dollar-denominated assets. As Rickards said in his post on X, if U.S. bonds aren’t safe, other countries’ bonds probably aren’t either. That leaves one logical place to turn, according to Rickards.
“If you say, ‘I want to get out of the dollar as a reserve currency,’ the only really good alternative is gold.”
Over the last several years, central banks have been gobbling up gold. Central bank net gold purchases totaled 1,037 tons in 2023. That fell just 45 tons short of 2022’s multi-decade record, continuing a multi-year trend of strong central bank gold buying.
The World Gold Council cited “diversification” as one of the key reasons central banks are stocking up on gold. That’s a technical way of saying, “Rely less on dollars.”
Poland’s central bank president Adam Glapiński said “security” was one reason his country was increasing its gold reserves.
“Gold will retain its value even when someone cuts off the power to the global financial system, destroying traditional assets based on electronic accounting records. Of course, we do not assume that this will happen. But as the saying goes – forewarned is always insured.”
Is it a coincidence we saw a big spike in gold at the same time U.S. policymakers are again rattling sabers and threatening to repossess Russian assets? It could be. But as Rickards points out, it’s probably not.
De-dollarization might not be the primary factor driving more people to buy gold today, but it is almost certainly one factor. And if the U.S. keeps swinging that hammer, it will become a bigger and bigger factor down the road.
U.S. officials would be wise to take notice. They might end up hitting themselves with those hammer swings.
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