Dollars Moving Out, Gold Moving In

While the global move away from U.S. dollars was always possible, it has progressed beyond probable and is now imminent.  Russia has announced that it is removing all dollar-based assets from a key part of its strategic reserves and plans to complete the transactions before the end of this month.  The $600 billion reserves include a rainy-day fund called the “National Wealth Fund” (NWF) worth $180 billion.  Currently, 35% of the NWF is held in dollars, which will be exchanged for euros, yuan, and gold.  Russia has been moving in this direction for a while and has held more gold than dollars in reserve since June of 2020.  We last wrote about Russia’s intentions concerning gold and the dollar in 2019.  Since then, it has continued to grow its other types of reserves, while simultaneously reducing its dollars.

As we pointed out in this 2018 article, there comes a point at which sanctions begin to harm the sanctioning party (United States) more than the sanctioned party (Russia, in this case).  It now appears that we may be reaching that point.  Former U.S. Treasury official Michael Greenwald expressed concern about the impact to the dollar, not only from Russia’s actions, but from what other nations might do, as well.  Russia is seeking to replace current dollars with gold and create a central bank digital currency to replace future dollars, beginning next year.  In a recent interview with CNBC, Greenwald said, “What alarms me is if Russia, China, and Iran each creates central bank digital currencies to operate outside of the dollar and other countries followed them...That would be alarming.”

Why should we as Americans care what the rest of the world is doing with their dollars? Because what other people and nations do with their dollars indirectly affects what we can to with our dollars. The more that dollars are needed and used around the world for international trade, the more valuable our dollars at home become. Conversely, when fewer dollars are needed or used around the world, the less valuable our dollars at home will be. Today, the United States is largely a consumer nation, with much of our manufacturing capacity moved overseas. The shuttering of American factories began to pick up steam in the 1990s. This trend has only recently begun to reverse. It may reasonably take us 10 to 15 years of focused effort to regain our manufacturing base once again.

In the meantime, we still need to purchase from someone else what we no longer produce at home.  Due in part to overused sanctions, we have forced other nations of the world to develop alternative supply chains and mechanisms of payment to keep international commerce going.  As a practical matter, several of our large trading partners have learned to conduct trade with each other without using dollars.  I believe Mr. Greenwald’s concerns are appropriate, given that the inherent value of our currency is little more than the paper and ink used to produce it.  The value the world ascribed to the U.S. dollar has long been based on a system of trust, reinforced by exhibited good will and responsible fiscal policies.  Unfortunately, we have, at times, used dollar sanctions to financially bully other nations into submission, with diminishing degrees of success.

The danger for the average American is skyrocketing consumer goods prices. For example, the shirt purchased last year for $15 becomes $45 the next year because the nation that produced the shirt no longer wants or needs dollars.  The extra $30 required then becomes an “inconvenience” fee to sell the shirt to someone paying with dollars.  Another example could be the barrel of oil that used to cost $50 becomes $150, for the same reason.  The same could be said for any number of products Americans purchase and use every day.  Even our daily food supply is affected by the value of the dollar, with costs rising significantly more in dollar terms than the official inflation rate suggests.  Part of the reason for this is we no longer produce all of our own food as a nation, with food imports reaching record levels this year.  Storing part of your savings in gold and silver can help to neutralize increased food costs in the years ahead, as I explain below.

The danger for the average American is skyrocketing consumer goods prices. For example, the shirt purchased last year for $15 becomes $45 the next year because the nation that produced the shirt no longer wants or needs dollars.  The extra $30 required then becomes an “inconvenience” fee to sell the shirt to someone paying with dollars.  Another example could be the barrel of oil that used to cost $50 becomes $150, for the same reason.  The same could be said for any number of products Americans purchase and use every day.  Even our daily food supply is affected by the value of the dollar, with costs rising significantly more in dollar terms than the official inflation rate suggests.  Part of the reason for this is we no longer produce all of our own food as a nation, with food imports reaching record levels this year.  Storing part of your savings in gold and silver can help to neutralize increased food costs in the years ahead, as I explain below.

When we look at the types of food products we import versus the foods we export, it provides further insight into why the cost of food is rising here in America.  A major food group we export is meat, including beef, pork, and chicken.  Additionally, much of the corn and grain grown domestically that could otherwise be used to feed those cows, hogs, and chickens is also exported.  Consequently, we now must import grains back into our supply networks to help meet our agricultural feed needs.  As the value of the dollar decreases, the cost of purchasing those imported grains increases.  This, in turn, drives up the cost of bread, meat, eggs, and milk for average Americans.  While agricultural traders might be coming out ahead when they balance exported products versus imported products, American citizens end up paying more to meet nutritional needs. 

When we look at the types of food products we import versus the foods we export, it provides further insight into why the cost of food is rising here in America.  A major food group we export is meat, including beef, pork, and chicken.  Additionally, much of the corn and grain grown domestically that could otherwise be used to feed those cows, hogs, and chickens is also exported.  Consequently, we now must import grains back into our supply networks to help meet our agricultural feed needs.  As the value of the dollar decreases, the cost of purchasing those imported grains increases.  This, in turn, drives up the cost of bread, meat, eggs, and milk for average Americans.  While agricultural traders might be coming out ahead when they balance exported products versus imported products, American citizens end up paying more to meet nutritional needs. 

Lumber provides another example of what can happen when dollars become less valuable on the world stage.  Because we import a significant amount of logs used to make lumber, and the cost of those logs, and therefore, of the lumber they turn into, has been soaring as of late, the cost for construction projects in general (which almost always require some amount of lumber) has, as a result, recently gone through the roof.  About the only thing that is worth less today than it was a year ago is the dollar itself.  Besides an overuse of sanctions, irresponsible American fiscal policies are also to blame for an increasing de-dollarization effort going on overseas.  Whether demonstrated by Russia, China, or various other nations, there is a growing preference for gold to match the decreasing desire for dollars.

It is important for average Americans to own physical gold and silver, for the same reasons why foreign nations and central banks want to own and transact business using gold.  The acceptance and future value of dollars is currently in question.  As an increasing number of global actors decides to sell goods and services for something other than dollars, it becomes more important for individual Americans to have something other than dollars to offer them.  Hopefully, in a few years, we as a nation will become more self-sufficient once again.  But until then, the urgency to own physical precious metals, which can be converted into the higher amounts of dollars needed in the future to enjoy the same or better standard of living as today, continues to intensify