In the wake of the trade war with China that expanded last week, a new danger has emerged that threatens the dollar’s global status. This concerns the dollar’s role as preferred reserve currency. It is now the first instance in ten years that many global central banks are actively seeking another vehicle besides the dollar in which to park their currency reserves. This threatens the considerable benefits that the country receives from enjoying the primary reserve currency status.
The threat to the dollar’s hegemony in global trade and reserves is a key reminder to you of why you need to invest in gold with your IRA. The overwhelming majority of your retirement assets are denominated in dollars. A significant decline in the dollar’s value affects your standard of retirement. Gold offers insurance and protection during market turbulence. Now is the time to consider what gold goes in an IRA.
The Dollar Has Been the Main Reserve Currency
Since the Second World War, the dollar has been the world’s primary reserve and trading currency. Today the dollar still controls approximately 64 percent of the $11.3 trillion in global currency reserves. The number two reserve currency remains the euro. It is the second choice by far. Today the euro makes up about 20 percent ($1.93 trillion) of the official central bank reserves. The rest of reserves come from major economy currencies such as the British pound, Canadian dollar, and Japanese yen.
You may not be aware that only a small shift in the reserve composition can lead to dramatic consequences. For a few years now the euro has been out of favor with global reserve managers at the more important central banks. Several foreign exchange strategy heads who routinely communicate with these individuals note that the reserve managers have expressed a desire to increase their euros holdings.
Case for Rival Reserve Currency Euro Now Looking Stronger
The euro previously reached its high mark in reserve shares back in 2009 when it commanded around 28 percent of them. Since then the continent’s common currency suffered from a series of setbacks. Greece fell apart financially, the European debt crisis erupted, and Britain elected to withdraw from the European Union. Growth had been weak in the block and the confidence in the euro suffered as a result.
The European Central Bank pursued drastic measures to take interest rates and yields on sovereign bonds under zero percent in consequence. Reserve managers drifted away from the euro during the years 2010 to 2016. In this time, the currency saw its value plummet 30 percent versus the U.S. dollar.
Today the situation has changed dramatically for the euro zone. Threats to the block have diminished. The region’s economy has surged, and the ECB talks of ending its emergency policies. Most importantly, the EU is working on extensive free trade deals throughout Latin America and Asia.
Top ranked Wall Street currency strategist (of five years) Jens Nordvig expects to see half a trillion dollars move into the euro over the coming two years. This would amount to a 25 percent increase in its global reserve share. Nordvig explained the rationale behind this move with:
“A lot of countries around the world are turning to Europe for increased partnership in trade. It’s not crazy to think that’s also going to be happening in the area of capital markets and reserve allocations. The bottom line is, this trade stance the U.S. has now is not helpful in terms of making the dollar attractive” to central banks with vast reserves.
The U.S. is moving towards protectionism at the same time as the EU blazes stronger trade ties overseas. The block is seeking greater trade with China, Japan, and Brazil and Mexico especially. In the last ten years, European Union trade with China has skyrocketed by about 75 percent. It reached $590 billion by 2016. This means the EU is close to overtaking the United States’ largest trading partner status with China.
Countries With Huge Reserves Likely to Shift to Euros
Nordvig believes that those countries most dependent on international trade will be the ones which shift reserve allocations to euros. This include Middle Eastern oil exporting countries and developing countries. Nearly 50 percent of all world currency reserves are held by six of these emerging nations, as the chart below shows:
This includes Brazil, China, India, Saudi Arabia, South Korea and Taiwan. All by itself China commands more than $3 trillion in foreign exchange reserves, most of which is held in dollars today.
Two Motivations Driving Reserve Managers to Euros
There are two main motivations encouraging reserve managers to think euros. The euro zone economy has turned around from dire to significantly growing. In 2017 it grew by a solid 2.3 percent. This year looks like it will expand faster.
The economic expansion is four times greater than its average growth over the past decade. With the EU on politically sound footing again after Emmanuel Macron won in France and Angela Merkel held onto power in Germany, foreign reserve managers have taken note.
At the same time, the dollar’s global reputation risks suffering harm from rising American protectionism. Last week the administration erected $60 billion worth of tariffs on Chinese goods. Besides this, the Trump administration has suggested a few times that it would rather see a pro-manufacturing and -exporting weaker dollar. University of California Berkeley Economics Professor Barry Eichengreen warned if the government:
“not only abandoned the strong dollar policy but was intent on pushing the dollar down aggressively to secure trade advantages, that would diminish the currency’s luster as a reserve asset.”
This has important implications for the value of the dollar and the United States.
Consequences of Shift to Euros Dramatic for the Dollar
Such reserves shifting from dollars to euros have real world consequences. The dollar has enjoyed its reserve currency status with most of the global central banks for more than fifty years. It boasted unrivaled stability and depth in world trade and markets. Because of this status, America has obtained significant benefits.
The country has been able to borrow enormous amounts of money at extremely low prices. This permitted the country to spend more than it takes in from revenues. The nation’s trading partners were happy to store their dollar reserves in the federal government’s Treasury bonds, which made it possible to borrow for so little. With the dollar commonplace in commodities’, oil, and general trading, American corporations also obtained the advantage of borrowing for less than much of their international competition could.
These advantages will begin to erode as dollar reserves dwindle as a share of the global total. It would mean higher borrowing costs for the federal government on its higher than 100 percent debt to GDP at $21 trillion and counting. It would also translate to greater costs for American businesses’ borrowing at home and abroad.
Gold Protects the Purchasing Power of Your Retirement Assets
Such changes to the dominant world reserve currency status of the dollar will also impact the value of your retirement holdings. The vast majority (if not all) of your IRA assets are denominated in dollars. Gold exists independently of the dollar. As the dollar declines, gold increases in value. This is a powerful hedge for your portfolio that you can not afford to ignore. Now is the time to think about how to invest in gold and the choices for gold IRA storage.