The Old Dollar Cycle
For many years, the global financial system worked in a simple way. Countries such as China, India and Saudi Arabia exported goods and services to the US and received US dollars in return. They then used many of those dollars to buy US Treasury bonds. This created a cycle where the US bought goods from other countries, paid them in dollars, and those countries invested the dollars back into US government bonds. This system worked because countries had strong confidence that the US would repay its debt.
Why Confidence Is Falling
Over the last 10 to 15 years, that confidence has slowly started to weaken. China is one clear example. At one point, China held around $1.3 trillion in US Treasury bonds.
That holding has now fallen to about half of that level. Other countries are also becoming less willing to keep a large part of their reserves in US Treasury bonds. One major reason behind this change is the fear that financial assets could be frozen during a major global conflict or political dispute.
Russia Changed the Thinking
The events of 2022 made this fear much stronger. When the conflict between Russia and the Western world began, Russian assets held abroad were frozen. This made other countries think about the safety of their own reserves. The question became simple: if our reserves are held in another country’s financial system, what happens if those assets are frozen one day? Because of this concern, many central banks, especially in emerging markets, started buying more gold from 2022 onwards.
Gold Is Replacing Treasuries
This has created an important change in central bank reserves. Gold is slowly taking the place of US Treasury bonds. As older Treasury bonds mature, some countries may choose not to buy new ones. Instead, new money is moving towards gold and, in some cases, other currencies. This is part of a much bigger global shift away from heavy dependence on US dollar assets. If this trend continues, it could eventually lead to a major change in the global monetary system.
A New Monetary System?
The world has seen major changes in the monetary system before. The 1970s were one such period, when the US wanted the dollar to become weaker so that American exports could become more competitive. But today’s situation is different. Countries are increasingly focused on their own interests, while global cooperation and globalization are becoming weaker. There is no longer the same level of trust and cooperation between major countries. This makes the current situation much more difficult to predict.
Why Gold Matters for Investors
Gold could play a very important role in this changing world. As the dominance of the US dollar slowly falls, demand for gold could remain strong, especially from central banks. This is also why having some gold in a personal portfolio can be useful. Gold may help protect the overall portfolio if an extreme global event creates large problems in financial markets. The key point is not that the dollar will disappear, but that the world may be moving towards a system where gold and other currencies play a bigger role than they did in the past.
