Is This the Beginning of the End for the Dollar?

Several observations by Sharps Pixley point to structural weakness in the dollar. In fact, the long anticipated decline of the dollar hegemony could be in front of us. The following five trends provide a confirmation of that. It should not come as a surprise that competition from China is a key driver in the the dollar reserve currency end game. During that processs, gold will play a crucial role as a stabilizer; it will offset the decline of the dollar by a higher gold price.

(1) China `De-Americanization’ Call Marks Key Point for Gold Prices
Comments from state-backed Xinhua that call for a “de-Americanized world” and a proposal to consider a new international reserve currency to replace the dollar mark a key event for gold prices. While the Chinese echoed the notion of a “super-sovereign reserve currency” before, their recent statement may have more sticking power as the U.S. struggles to reach agreements on debt ceiling talks and monetary policy actions.

(2) Dollar’s Role as World’s Reserve Currency Brings Gold Into Focus
Since the early 2000s, many gold bulls have held that excessive money printing by the Federal Reserve would lead to a complete destruction and devaluation of the world’s reserve currency as inflation picks up and cripples the dollar. While the notion of the dollar losing its status as the world’s reserve currency had appeared muted for some time given the lack of alternatives, it is now gaining credence, with calls in China for a new reserve.

Dollar_reserve_currency_1975_2013

(3) China Central Bank Gold Reserves May Be 2.5x Higher Than Thought
A deeper look into China’s gold holdings shows its reserves may be more than 2 1/2 times higher than thought. Its last reported holdings in April 2009 were 1,054 metric tons. After adjusting for net imports from Hong Kong and domestic output, the figure is closer to 5,086 metric tons. When taking away gold uses for jewelry, industrial and other categories and adding implied bar demand to central bank holdings, the figure is likely closer to 2,710 mt.

China_Gold_reserves_2000_2013

(4) China Needs 10 Years to Match Fed Gold Holdings at Current Pace
China would need 10 years for its gold holdings to catch up to the U.S., based on adjusted Chinese consumption for jewelry, industrial and other uses and using implied bar demand as the primary driver of incremental central bank additions. Based on run rates during 2013, China may have added 622 metric tons of bars to its central bank holdings, after adding 380 mt in 2012.

China_US_Gold_reserves_2000_2013

(5) China Reliance Means ‘De-Americanization’ Gold Boost Years Away
Gold may benefit from a move away from the dollar as the world’s reserve currency as some form of a goldbacked currency emerges, though it may be early for that to happen. China’s recent calls for “de-Americanization” are likely just a posturing maneuver. A large-scale sale of China’s U.S. Treasury holdings would likely cause a dramatic decline in the dollar, while increasing interest rates.

China_US_treasuries_2000_2013

 

 

 

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