Short and Sweet

Is the dollar the Humpty Dumpty of the global monetary system?

Graphic image of Humpty Dumpty perched happily on a wall, antique

The dollar at the moment is something of a Humpty Dumpty in the global monetary system – sitting on his wall oblivious and seemingly immune to all that goes on around him.  Whether or not there will someday be a Great Fall remains to be seen, but increasingly forces are lining up against it. Over the past few years, we have seen protracted movement among various central banks out of the dollar and into gold and other currencies. Though the dollar remains something of a Humpty Dumpty oblivious to all that goes on around him, a good many analysts believe it is poised for a major decline.

It is with that in mind that we took an interest in a Bloomberg report posted recently that “[g]old stored at the Bank of England has been selling for unusually high premiums recently, signaling that central banks may be back in the market buying.” The report goes on to say that the reason for the burgeoning gold demand from central banks is “to diversify their portfolios away from the U.S. dollar to safeguard their finances amid concerns over the Fed’s ultra-loose monetary policy, massive U.S. government spending and inflationary pressures.”

We see that as a rational response to current economic circumstances and a way of taking advantage of the dollar’s current strength to load up on gold. For example, Brazil, the world’s ninth-largest economy, recently reported a hefty 42-tonne purchase of gold to shore up its central bank reserves. Poland has announced its intent to add another 100-tonnes to its coffers in the months ahead. And those are only two in an expanding list of central banks in the market to buy gold. We hasten to add that it is not just the United States that is in the business of debasing its currency, but most, if not all, of the states issuing internationally traded currencies.

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