The Dollar Will Die with a Whimper, Not a Bang

The same force that made the US dollar the worlds reserve forex is working to dethrone it.

22 This summer 1944 marked the official conclusion of the Bretton Woods Conference in Nh. There, 730 delegates from Forty four nations met at the Attach Washington Hotel in the final days of the Second World War to devise a new international monetary system.

The associates there were acutely aware that the actual failures of the international monetary system after the First Globe War had contributed to the outbreak of the Second World War. They were determined to create a more stable system that would avoid beggar-thy-neighbour forex wars, trade wars along with other dysfunctions that could lead to capturing wars.

It was at Bretton Woods the dollar was officially designated the worlds leading reserve currency a position that it still holds today. Under the Bretton Woods system, all major currencies had been pegged to the dollar in a fixed exchange rate. The actual dollar itself was pegged to gold at the rate of US$35.00 per ounce. Indirectly, the other currencies had a fixed gold value due to their peg to the dollar.

Other currencies could devalue against the dollar, and for that reason against gold, if they obtained permission from the International Financial Fund (IMF). However, the dollar could not devalue, at least theoretically. It was the keystone of the entire system intended to be permanently moored to gold.

From 1950C1970 the Bretton Forest system worked fairly well. Trading partners of the US that earned dollars could cash those dollars in to the All of us Treasury and be paid in gold at the fixed rate.

Trading partners of america who earned dollars could cash those dollars in to the US Treasury and be paid in gold at the fixed rate.

In 1950, the US had about 20,Thousand tons of gold. By 1970, that amount had been reduced to about 9,000 tons. The 11,000-ton decline went to All of us trading partners, primarily Indonesia, France and Italy, who earned dollars and cashed them in for gold.

The UK pound sterling had previously held the dominant reserve forex role starting in 1816, following the end of the Napoleonic Wars and the official adoption of the gold standard through the UK Many observers presume the 1944 Bretton Woods conference was the moment the US dollar replaced sterling as the worlds leading reserve currency. In fact, that replacement of sterling through the dollar as the worlds leading reserve currency was a process that required 30 years, from 1914 to 1944.

The real turning point was the period JulyCNovember 1914, whenever a financial panic caused by the start of the First World War led to the closures of the London and New York stock markets and a mad scramble around the world to obtain gold to meet obligations. At first, the US was really short of gold. The New You are able to Stock Exchange was closed so that Europeans could not sell All of us stocks and convert the actual dollar sales proceeds in to gold.

But within a few months, massive US exports of cotton along with other agricultural produce to the United kingdom produced huge trade surpluses. Precious metal began to flow the other method, from Europe back to the US Wall Street banks began to underwrite massive war loans for the UK and France. By the end of the First World War, the US had become a major creditor nation and a major gold power. The dollars percentage of total global reserves began to soar.

Scholar Barry Eichengreen has documented how the dollar as well as sterling seesawed over the 20 years following the Very first World War, with 1 taking the lead from the additional as the leading reserve forex and in turn giving back charge. In fact, the period from 1919C1939 was really one in which the world experienced two major reserve currencies dollars and sterling operating side by side.

Finally, in 1939, England suspended gold shipments in order to fight the Second World War and the role of sterling like a reliable store of value was greatly diminished apart from the UKs unique trading zone of Australia, Canada and other Commonwealth countries. The 1944 Bretton Woods conference was merely recognition of a process of dollar reserve dominance that had started in 1914.

The significance of the procedure by which the dollar replaced sterling over a 30-year period has large implications for you today. Slippage in the dollars role as the leading global reserve currency isn’t necessarily something that would happen overnight, but is more likely to be a slow, steady process.

Signs of this are already visible. In 2000, dollar assets were about 70% of global reserves. Today, the equivalent figure is about 62%. If this trend continues, one could easily begin to see the dollar fall below 50% in the not-too-distant future.

It is equally obvious that the major creditor nation is emerging to challenge the united states today just as the US emerged to challenge the UK in 1914. That power is The far east. The US had massive precious metal inflows from 1914C1944. China has huge gold inflows today.

Officially, China reviews that it has 1,658 metric tonnes of gold in the reserves. However, China has acquired thousands of metric lots since without reporting these types of acquisitions to the IMF or World Gold Council.

Based on available data on imports and the creation of Chinese mines, it is possible to estimate that actual Chinese government and private gold holdings exceed Eight,500 metric tonnes, as shown in the chart below.

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Assuming half of this is government owned, with the other half in private hands, then the real Chinese government gold placement exceeds 4,250 metric tonnes, an increase of over 300%. Of course, these figures are only estimations, because China operates through secret channels and does not officially report its gold assets except at rare times.

Chinas gold acquisition is not the consequence of a formal gold standard, but is going on by stealth acquisitions on the market. Theyre using intelligence and military assets, covert operations and market manipulation. But the result is the same. Gold is moving to China today, just like gold flowed to the All of us before Bretton Woods.

China is not on your own in its efforts to achieve creditor status and to acquire precious metal. Russia has doubled its gold reserves in the past five years and has little external financial debt. Iran has also imported massive levels of gold, mostly through Turkey and Dubai, although no one knows the exact amount, because Iranian precious metal imports are a state secret.

Other countries, including BRICS members Brazil, India and South Africa, have became a member of Russia and China to construct institutions that could replace the stability of payments lending of the International Monetary Fund (IMF) and the development lending of the World Bank. All of these countries are clear about their desire to break free of US dollar dominance.

Sterling faced a single competitor in 1914, the US dollar. These days, the dollar faces a host of rivals China, Russia, India, Brazil, South Africa, Iran and many others. Additionally, there is the world super-money, the special drawing right (SDR), which I anticipate will also be used to diminish the role of the dollar. The US is actually playing into the hands of those rivals by running industry deficits, budget deficits and a huge external debt.

What would be the implications for your portfolio? Once more, history is highly instructive.

During the glory years of sterling as a global reserve currency, the trade value of sterling was remarkably steady. In 2006, the UK House of Commons produced a 255-year price index for sterling that covered the period 1750C2005.

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The index were built with a value of 5.1 in 1751. There have been fluctuations due to the Napoleonic Wars and the First World War, but even as late as 1934, the actual index was at only Fifteen.8, meaning that prices had only tripled in 185 years.

But once the sterling lost its lead reserve currency role to the buck, inflation exploded. The catalog hit 757.3 by 2005.

In other words, during the 255 years of the index, prices increased through 200% in the first 185 years while the sterling was the lead reserve forex, but went up?5,000%?in the Seventy years that followed.

Price stability appears to be the norm for money with reserve currency status, but once which status is lost, inflation is actually dominant.

The decline of the dollar as a reserve currency started in 2000 with the advent of the actual euro and accelerated in 2010 with the beginning of a new currency war. That decline is now being amplified by Chinas emergence as a major creditor and gold power. Not to mention the actions of a new anti-dollar alliance composed of the BRICS, Iran and others. If history is a guide, inflation within US dollar prices can come next.

In his 1925 poem?The Hollowed out Men, T. S. Eliot writes: This may be the way the world ends/ Not with the bang but a whimper. Individuals waiting for a sudden, spontaneous collapse of the dollar may be missing out on the dollars less dramatic, however equally important slow, steady decrease.

The dollar collapse has already started. The time to acquire inflation insurance is now.

Regards,

Jim Rickards,

Strategist, Strategic Intelligence

Ed note: The above essay first appeared in the US Daily Reckoning 28 May 2015. It has been up-to-date to include Chinas current gold supplies.