Gold price has had a strong performance this year as the US dollar index (DXY) crashed from $115 to $100. The XAU/USD pair jumped to 2,045, a few points below its all-time high. It has jumped by more than 10% in 2023.
Hunt for a dollar alternative
Countries and central banks are in a journey to find the next alternative to the US dollar. Most countries, including well-known American allies, have been uncomfortable about the dollar hegemony for many years.
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The distrust of the US rose sharply after Russia invaded Ukraine, leading to the unprecedented move for the US to sanction the Bank of Russia. As a result, many countries are now worrying about the safety of their dollar reserves if the US can unilaterally sanction them.
The other reason is that the actions of the Federal Reserve have put many countries in peril. As I wrote here, countries like Zimbabwe, Pakistan, and Lebanon are facing the worst dollar shortage in modern times. Unfortunately, the Fed’s quantitative tightening policies will make it worse.
One of the biggest forex news last week was a statement by Brazil’s Lula for the end of dollar dominance. He supported the use of a new BRICS currency. And in the US, several states have voted to allow gold as a legal tender.
However, as I wrote last week, creating a dollar alternative will not be easy. For one, as I wrote here, China will want its yuan to be the next alternative. However, China is not trusted by both allies and foes, and its central bank is known for currency manipulation.
Is gold a good dollar alternative?
Some analysts believe that gold is a better alternative to the US dollar. For one, unlike the US dollar, gold has been used as a currency and a means of exchange for millenia. Also, over the years, gold has done better than the US dollar and other currencies. And as gold mine reserves dwindle, the price could continue rising.
Many central banks have started buying gold as an alternative to US dollars. In 2022, these banks purchased the most gold on record. Some of the top banks that bought gold are Turkey, Russia, and India.
However, gold has its pitfalls in its path as a world reserve currency. For one, it can be highly illiquid and moving it is not as easy as moving cash. Also, gold is usually traded in dollars, meaning that demand for fiat currencies will be there.
I believe that gold faces an uphill task to dethrone the supremacy of the dollar. I also expect that the likelihood of an alternative fiat currency like yuan or Russian ruble challenging the dollar will be limited.
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