Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Why Most Investors LOST Money by Investing in ARK FUNDS - 27th Jan 22
The “play-to-earn” trend taking the crypto world by storm - 27th Jan 22
Quantum AI Stocks Investing Priority - 26th Jan 22
Is Everyone Going To Be Right About This Stocks Bear Market?- 26th Jan 22
Stock Market Glass Half Empty or Half Full? - 26th Jan 22
Stock Market Quoted As Saying 'The Reports Of My Demise Are Greatly Exaggerated' - 26th Jan 22
The Synthetic Dividend Option To Generate Profits - 26th Jan 22
The Beginner's Guide to Credit Repair - 26th Jan 22
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

If the U.S. Dollar Were to Fall How Important is Gold to the States?

Commodities / Gold and Silver 2010 Aug 06, 2010 - 01:10 PM GMT

By: Julian_DW_Phillips


Best Financial Markets Analysis ArticleSince the demise of the Gold Standard, monetary authorities have tried as many ways as possible out there to sideline gold as part of the monetary system. Since the early eighties they have succeeded to some extent, but this was by discrediting it and by emphasizing the benefits of paper currencies. Paper money in a paper system was working very well and everybody felt that much more prosperous, so ignored gold's departure.

Since then the developed world has had a full twenty-five year long growth period. Then began the real rise of the east! Then, in mid-2007, a 'credit crunch' knocked the stuffing out of the solidness of that system. Seven years before that crunch, when boom times were enriching the developed world the most, the gold price started to rise, when it was realized that central banks were not keen to sell all their gold at all. Only small amounts were sold and the bulk retained in the vaults of central banks. So why is it still in the system?

In 1999 the announcement of the 'Washington Agreement' laid emphasis on central bank held gold, stating, "That Gold will remain an important element of Global Monetary Reserves". This has been emphasized in subsequent agreements. If central banks were so keen to get gold out of the way, why didn't they keep selling gold constantly until, like silver, it was out of their reserves? The purpose of that statement is critical to the understanding of gold in the monetary system.

Why is Gold a Reserve Asset?

A nation's reserves serve two prime functions: -

  • To act effectively as the savings of a nation and to earn their keep. Many analysts state that gold is a useless reserve item because it does not earn any income. Quite frankly this is a fatuous argument, because as any good fund manager knows, investments are measured on the basis of 'total return', not just on income. A glance at gold's total return puts it a huge distance ahead of other reserve assets in central banks.
  • It must be sufficiently liquid to supply 3 months or more international trade obligations for a nation facing difficulties in its international trade. Asset Managers are often prevented from buying a great company share, simply because there is not enough liquidity in its market to get in without sending the price skyrocketing and to get out without sending the price into a tailspin. The same applies to currencies. Liquidity in all situations is vital.

When a currency loses credibility it is unacceptable as an international asset. It is not accepted in payments for goods. It is sold quickly by foreign holders and becomes an entirely localized means of exchange. A look into the history books shows us many examples of currencies that have become unacceptable outside their borders and many that failed miserably inside their borders. With politics and local demands influencing money management, a solely paper money system has been subject to debilitating influences often. Even a look around the currency world today highlights many currencies that are not managed solely with their international exchangeability and value in mind. The U.S. Dollar leads the way in that herd.

When this happens to the point of damaging the international reliability and value of a currency a real danger exists, because that 'reserve tank' of reserves becomes a lifeline to that country in the event that other nations start to turn away from the currency.

To clarify, imagine if Europe and Asia stopped accepting the U.S. Dollar and oil and Chinese goods were priced in other currencies? The U.S. would have to try to sell Dollars to buy other currencies. We assume that U.S. power would have waned at this point and other governments would not be keen to even 'swap foreign currencies for U.S. Dollars. The U.S. would have to use gold as collateral to raise these foreign currencies [through swaps] rather than sell it outright. Now we have perspective on the value of reserve assets, "in extremis". Take a look at U.S. gold reserves as a percentage of their reserves: -

Gold in tonnes and as a percentage of reserves

Please note that the percentage that gold occupies in reserves enlarges with any rise in the gold price. That's why a swap is preferable to an outright sale. It allows that central bank to benefit from such a rise.

As the days get more stressful and extreme we expect the gold price to keep on rising, reflecting falling confidence in all currencies and acting as one would want a reserve asset to act. While a local currency will fall against all currencies gold will rise against all currencies, even the ones deemed sound [as in the last decade].

In Extremis

Look back across the last three years and note these points about the developed world's monetary system: -

  • Downgrades are reducing the pool of eligible assets internationally, whether they are government bonds or currencies.
  • Currently, significant planned bond issues together with the contagion risks we saw made government bonds increasingly unattractive.

When this happens, gold's rising price and liquidity add to its value as a reserve asset. Last year for instance the U.S.'s gold was only 57% of its reserves, now it is 72.8%

Liquid asset in times of financial stress

Gold should not be measured for its liquidity and value in times of growth and global financial health because that's not when gold is likely to be used as reserve assets are designed to be used. Reserve assets are there for times of financial stress or worse. In really extreme times [not necessarily as bad as wartime] what counts in a reserve asset is its ability to settle foreign obligations timeously. It is at that time that gold as a reserve asset comes into its own.

One of the situations we believe is possible in the monetary world is very extreme. Let's imagine that oil producers decide to accept all 'hard' [main global] currencies and likewise China does so for its export goods. Let's imagine too that the Yuan invades the currency markets of the world. What will lie ahead for the U.S. Dollar? With the quantitative easing that is needed currently, it is possible that the Dollar will lose a significant portion of its global use and will tumble on foreign exchanges. The currency turmoil ensuing would encourage other nations to ask for more than simply the Dollar in payment. Its gold reserves would have to come into play, even as backing to a Dollar/foreign currency swap. By that time, the gold price would be considerably higher than at present, possibly even multiples of present prices. Would gold be liquid enough to satisfy foreign obligations then?

Thanks to the excellent work of the Gold Council in London we can see in measured terms just how liquid it is. At the moment, before the scene we drew exists, gold liquidity is third after U.S. Treasuries and Japanese bonds. Gold is 2 to 6 times more liquid than U.K. Gilts and twice as liquid as U.S. Federal Agency Securities. This measure is against the gold traded on the London gold market alone, recently. If we were to add the rest of the gold traded worldwide its liquidity would jump still more, today.

Now factor in the above scene. Japan is heavily dependent on the U.S. for its own financial stability, so the liquidity of its bonds would follow that of the States. Gold would then undoubtedly be the most liquid reserve asset out there.

We believe this scene is possible, not yet probable, but possible. That would certainly move gold confiscation onto the agenda of the U.S. economy if it had not already happened.

[We are issuing a further 'Confiscation article' in the next issue of the Gold Forecaster].

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2009 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

Julian DW Phillips Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in