It’s our currency, but it is becoming everyone’s problem – Randall Forsyth
The U.S. dollar traded below 90 last week for the first time since 2014. At the World Economic Forum in Davos on Wednesday, Treasury Secretary Steven Mnuchin told the press that the dollar’s current performance does not trouble him, stating that a weaker dollar is good for trade. This came on the back of the Trump administration implementing more tariffs on imported goods.
This might finally be the beginning of the end for the dollar. If the dollar is no longer hailed as the world’s reserve currency, most foreign institutions will have no reason to hold it, trade with it, or even buy our debt.
Let’s look at the cards China is holding for a moment. China is the largest holder of U.S. debt, with more than $1.2 trillion, which equates to about 20% of all debt held by foreign countries. This number is down from the last several years and continues to decrease as China drops U.S. debt in attempts to prop up the yuan as the next reserve currency. Another strong “card” in China’s hand is the Petro-Yuan, which I have written about before. Replacing the petrodollar with the Petro-Yuan will amplify the yuan tremendously, and China is working toward this goal systematically and effectively. The country’s agreements with oil market heavyweights Saudi Arabia and Venezuela, to name only two, are remarkable. Trading oil for yuan that is convertible to gold is an outstanding and possibly irresistible option compared to the petrodollar.
While the Petro-Yuan may be nothing short of a certainty at this point, can we still hope that China will continue to hold U.S. debt?
If the worst were to happen and China decided to dump all U.S. debt, it would signal one of only a few things: China has lost trust in the ability of the U.S. to pay the interest due; China’s massive debt holdings are causing its own economic turmoil and the country needs to liquidate to prop up its own economy; the undertaking of an economic war between the U.S. and China; or a full-blown war wherein China would not want to be a holder of U.S. debt that could be disavowed or made worthless.
If nations such as China stop buying U.S. debt, our government will not be able to just shut down, kick the proverbial can down the road and open back up with a new debt ceiling just a couple trillion above their last kick. The government will have to collaborate and create a total reset, which would have to include a revaluation of the dollar against things that are actual stores of value – (re-)enter gold and silver.
With these things in mind, it seems China is holding better cards than the U.S. There is nothing that Trump could say or tweet that could change my mind on the actual strength of the dollar. The dollar was destroyed when the U.S. went away from the gold standard back in 1971. Nations like China saw this weakness and have been preparing to fill the void. Bearing in mind, history shows us the average fiat currency lasts approximately 38 years. I need not remind you we are on year 47. I am not predicting the dollar will go away any time soon. What I am predicting is our current purchasing power will continue to rapidly decline like we have seen in the last 12 months (14%).
Preparing for this global shift will directly impact you and the dollars you hold in your bank accounts as the dollar may be on the verge of revaluation. The best way to be prepared for a shift like this is to position yourself into an asset class that will absorb the wealth transfer. Time and again history has shown us that gold and silver will be that asset class and will protect your wealth for generations to come.
Many analysts are saying there is very little support to propel the dollar higher. In fact, there seems to be very little support until the USD index falls to 80. The last time the dollar was that low, gold was trading around $1,900 per ounce and silver was just under $50.
Buckle up – this could be a very fun ride for gold and silver.