In the past couple of days, a wave of attention has surged around the employment data released by the United States, particularly following the recent publication of the small non-farm payroll figures. The numbers came in at a strikingly low 99,000, falling short of the anticipated 145,000, representing a nearly 40% decrease from expectations.
This disappointing data subsequently triggered a significant drop in the value of the U.S. dollar, reinforcing ongoing bearish momentum.
As global markets were looking towards a potential interest rate cut to stimulate further economic recovery, the dollar, unfortunately, failed to meet the high expectations of many analysts and traders.
A report from Reuters on September 5, 2019, highlighted that the Federal Reserve's decision to cut interest rates possibly signals the end of the dollar's stronghold that it has maintained for several years. This impending shift could lead to a gradual weakening of the dollar.
In light of these developments, Brian Roach, a senior economist at UBS Global Wealth Management, made a notable prediction: "In any scenario, once the Federal Reserve initiates a policy of rate cuts, the dollar's value will inevitably begin to decline."
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In addition to this prognosis, a recent report from Russian state media on September 6 announced that following the BRICS summit, Russia would endorse the use of gold or cryptocurrencies for oil purchases.
Such a move undoubtedly adds to the struggles of an already weakening dollar, raising questions about whether the dollar-dominated global financial framework is nearing its end.
A Return to the Gold Standard?
As we approach the end of 2023, gold has successfully overtaken the euro to become the second most prominent reserve currency globally.
In contrast, the share of the dollar in total international reserves has silently dropped to 48%. Meanwhile, gold, in this evolving context, has seen its percentage of total reserves consistently rise from 11% in 2008 to 18% by 2023.
Today, gold occupies a superior status over the euro, which has stagnated at around 16% for some time.
In the first half of 2017, global central banks hit a historic record in gold purchases, acquiring a staggering total of 483 tons. Concurrently, gold prices soared beyond $2,500 per ounce, with spot gold reaching highs of $2,531 and gold futures on the New York Mercantile Exchange climbing to $2,570 per ounce.
At the domestic level, gold futures continuously hovered near 570 yuan per gram. Given the significant appreciation of the yuan this year, domestic gold prices have yet to breach new heights.
Almost all aspects of gold trading have seen a steady rise on the international stage.
Following Russia’s commitment to binding oil with gold, it is plausible that OPEC might also announce plans to trade oil for gold shortly.
After the BRICS summit, Russia could directly state that European or American entities wishing to purchase oil must do so using gold for settlements.
This strategy would also incentivize Russia to bolster its gold reserves, consequently enhancing the credibility of the ruble and facilitating its circulation in international markets.
At present, the dollar remains the primary currency used in international trade negotiations, with the ruble standing at roughly a 90 to 1 exchange rate with the dollar. However, due to U.S. sanctions on Russia, this exchange ratio has generally remained theoretical.
Interestingly, in Russia's underground markets, one dollar has been reportedly exchanging hands for as much as 400 rubles.
This exchange rate provides lucrative opportunities for many, and related authorities in Russia find it challenging to clamp down on this black market activity.
Thus, enhancing the ruble's international circulation becomes of utmost importance.
Should Russia seize the moment to link oil with gold and further anchor the ruble to gold, a new currency exchange system could emerge, substantially elevating the ruble's standing on the global stage.
Should this approach gain the approval of BRICS nations and some European countries, the dollar's status could face serious challenges. This is a scenario the U.S. would find intolerable, yet militarily, the U.S. appears unable to confront Russia directly, leading to a reliance on proxy conflicts to maintain its standing.
What, then, does the future hold for the dollar?
The Dollar’s Eroding Status
Both the "dollar" and the "euro", two major global currencies, are increasingly demonstrating characteristics that are disadvantageous for economic stability, especially concerning Russia, whose substantial foreign reserves have faced severe freezes.
In this context, many countries express concerns about continuing to increase their dollar reserves.
Despite the public facade of sanctions on Russia by Europe and the U.S., including the sabotage of the Nord Stream pipeline, EU member countries have never fully ceased their oil imports from Russia.
America has employed various strategies to compel European nations to boycott Russian oil while simultaneously ramping up its imports of Russian oil to combat domestic inflation.
By the first half of 2024, U.S. imports of Russian oil are projected to grow by 43%.
Simultaneously, European countries have not paused their own purchases; between April and June this year, the EU imported up to 127 billion cubic meters of natural gas from Russia, while purchasing only 123 billion cubic meters from the U.S.
Consequently, Russia's natural gas supply to the EU has eclipsed that of the U.S.
This situation exemplifies a reality in global politics: countries may publicly advocate for alliances and morality, yet engage in backdoor betrayals.
In matters of life and death, all known agreements often lose their weight in the face of self-interests.
For those who still hold onto the myth of dollar dominance, the once-powerful greenback allowed them to purchase Chinese-manufactured goods worldwide.
For China, the dollar served as a vehicle for acquiring much-needed resources globally.
However, that era appears to be waning; traders can now directly utilize the yuan to procure oil, gold, copper, and iron ore.
De-dollarization is an urgent necessity for Russia, yet for China, it represents a natural progression.
Amid these developments, what direction will the global financial landscape take?
The Dollar's Purchasing Power Plummets
In 2020, the U.S. government and the Federal Reserve joined forces to enact the most aggressive fiscal and monetary policies to avert an economic downturn. However, such stimulation is not a sustainable solution.
When vast amounts of currency flood the market, it inevitably incites global inflation and elevates asset prices.
Furthermore, while injecting liquidity into the economy may appear manageable, withdrawing it proves a far more complex endeavor.
Extracting cash from individuals' pockets and subsequently destroying it poses tremendous challenges.
Since 2022, when the Federal Reserve sought to withdraw dollars from the global market through interest hikes and balance sheet reductions, this strategy has come at a substantial cost.
As we approach 2024, we witness a situation where dollars have predominantly flowed back to the U.S., driving up housing and stock prices while simultaneously causing inflation to soar.
Currently, with the economy on the brink of recession, the Federal Reserve is preparing to initiate rate cuts.
Yet, this time, the dollar will encounter a formidable competitor—gold.
Gold has never failed to deliver for its era.
Ever since the dollar divorced from the gold standard, despite relentless efforts from the U.S. government and the Federal Reserve, gold's conversion rate against the dollar has consistently trended upward.
In the past, $14,000 would have afforded one 400 ounces of gold, yet by 2024, that same amount would only yield about 6 ounces of the precious metal.
In this light, it is evident that gold has stood the test of time.
- 2024-07-07
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