Could Gold Ever Become a Reserve Currency?

Could Gold Ever Become a Reserve Currency?

October 3, 2018

Reserve currencies are the foundation of international business. Many Americans are blissfully unaware of the fact that their currency—the U.S. dollar—has been the world’s reserve currency for the better half of the past century. This economic dominance provides Americans with a number of economic and political advantages, both at home and abroad.

Benefits of holding a reserve currency

To understand the benefits of owning the world’s primary reserve currency, it’s important to understand the role that reserve currencies play.

Because the U.S. dollar is the world’s predominant reserve currency, all commodities are priced using U.S. dollars. If Canada wants to sell a barrel of oil to a country located in the European Union, for instance, it needs to complete the transaction in U.S. dollars, rather than in Canadian dollars or Euros.

A number of countries maintain currency boards. Currency boards are essential centralized banking systems that only hold and issue notes and coins—these currency boards guarantee the notes and coins they issue against a reserve currency. The currency issued by the currency board can always be exchanged for or converted to the reserve currency at the currency board.

The imposition of sanctions on certain state actors, like Iran, Cuba and Russia, has made it harder for those countries to access the U.S. dollars necessary to complete essential global trade actions. While the intention of these sanctions is to penalize the bad behavior of these state actors, they actually end up reducing the U.S. dollar’s strength as a global reserve currency. Because a number of states can no longer operate in U.S. dollars, they may execute bilateral trade agreements that allow them to complete transactions in their currency of choice.

Changes on the horizon

Because of these extenuating economic factors, the position of the U.S. dollar as the world’s preeminent reserve currency is shaky at best. Investors looking to place their capital in the globe’s next central reserve currency may be better served by deciding to buy gold.

Gold, for centuries, functioned as the world’s de facto reserve currency, and current economic conditions may indicate a return to that standard within the next century. Because gold isn’t reliant on the success of any one government, market or central banking system, it’s a more reliable global standard that holds its value in a much more effective manner.

Already, gold prices are frequently used to measure the value of a local currency, as the value of a currency against the gold standard is a more reliable indication of its value than the currency’s value against the U.S. dollar.

If you’re looking for a way to begin your precious metal investing journey and are seeking out helpful tips on the best steps to take before you buy gold, reach out to Gold Wealth Financial. We are a full-service investment advisory approved by Investopedia. We’re proud to offer high-quality, trustworthy investment advice to our diverse client base. Contact one of our friendly representatives today to learn more about ways that we can help you increase your capital.

- by Steve Hunt

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