Can gold be an alternative to the American dollar?

Wall Street pundits and investors are schizophrenic about the dollar. The dollar weakened after Moody’s cut the US credit rating by one notch from Aaa (the highest rating — to Aa1, attributing the downgrade to the increasing fiscal deficit, as well as the rising interest rate costs on Federal government debt. On the other hand, the S&P500 not only recovered after the April Trump tariff shock, but is now only 3.4 per cent off its record high last February.

Nevertheless, the 30-year US Treasuries yield exceeded 5.0 per cent per annum, indicating investors’ nervousness about US deficits and debt sustainability. Whilst leading Financial Times columnist Martin Wolf worries about Trump’s Assault on the Dollar, he and most economists agree that there is no suitable alternative to the dollar. I beg to disagree. Wolf listed five possible alternatives: first, either Renminbi or Euro may replace the dollar; second, a two or three reserve currency world; third, the dollar status quo; fourth, a global currency like Special Drawing Rights (SDRs); or fifth, a crypto-currency world.

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I agree that fiat currencies are not serious alternatives to the dollar, since the Euro is a weak second, whilst the Yen and renminbi are not even close contenders. A global currency like the SDR is a pipe-dream, as rival powers cannot agree on a global central bank, whilst the US has de facto veto on any IMF reforms that would allow the expansion of the role of the SDR. Finally, even though crypto-currencies have reached $1.5 trillion in market value and Bitcoin rose above $100,000 after the tariff shock, most people would not be able to access cyber-currencies if during a world war, all internet cables and satellites are cut for security reasons.

Hence, if we cannot trust the human governance of any monetary system, the only zero counterpart asset that has been a historically safe store of value is gold. For most of human history, gold, silver and copper have been used as money, with paper currency considered only a good store of value after the British Master of the Mint, Sir Isaac Newton pegged the sterling to a fixed gold:silver price in 1717, with legal adoption of the gold standard to sterling in 1819.

The United States formally adopted the gold standard in 1900, which President Nixon abandoned in 1971, launching the era of floating exchange rates. The dollar is supremely efficient as a unit of account, means of payment (over 80 per cent of trade is invoiced in dollars and half of foreign currency payments are through the interbank SWIFT system), as well as store of value (currently 57 per cent of official foreign exchange reserves, down from roughly 70 per cent in 2000). Backed also by superior military, technology, finance and economy, the dollar supremacy is America’s to lose, not easily taken by any challengers. However, the exorbitant dollar privilege is actually a winner’s curse, because the flip side of an (almost) unlimited ability to print dollars to meet foreign demand, and hence enjoy unprecedented fiscal and trade deficits, is an inexorable rise in external debt and consumption. Lacking internal fiscal discipline due to proliferate spending, America’s debt has risen to a critical point whereby interest rate payments today are one of the largest drains on fiscal resources.

As Wolf admits, gold is a good hedge against inflation in uncertain times. The European Central Bank’s latest Financial Stability Report “confirms that gold is a safe haven during times of stress in financial markets or elevated geopolitical or policy uncertainty.” Although central bankers used to think that holding gold does not have a “yield”, the compound annual growth rate (CAGR) of gold prices since August 1971 (when Nixon delinked the dollar from gold) to end-April 2025 was 8.8 per cent per annum, versus 8.7 per cent CAGR in total US Federal debt over the same period. This crude comparison glosses over wide fluctuations in gold price over the 54 year period, but if the relationship holds, the price of gold hedges the trajectory of the Fed debt growth. The World Gold Council estimated that in Q1 2025, 33 per cent of gold production was used for jewellery, 6 per cent for technology, 19 per cent by central banks and 42 per cent as an investment, with central banks increasing their holdings of gold by roughly 1,000 tonnes per year for the last three years.

After the freezing of Russian assets after the Ukraine invasion, central banks have looked at ways to diversify their reserve assets away from sanctions, confiscation or swaps into long-dated or zero-coupon paper. The confluence of dollar weaponization, increases in geopolitical uncertainty and conflicts means that everyone is looking for alternative safe haven assets. Incredibly, the Americans and Europeans who have the largest tonnage of gold holdings all stand to benefit from higher gold prices, as does China, today the largest gold producer. In short, as the United States seeks to monetize her gold holdings of 8,133 tonnes, whilst gold is increasingly viewed as a hedge against inflation and geopolitical risks, the new demand for gold may push prices higher, creating the second largest reserve or contingency asset to the dollar in official reserves.

We cannot return to another pure gold standard, because the vagaries of gold supply may tighten liquidity exactly when the global economy may need more money supply. The 1930s Great Depression was partly blamed on the return to the gold standard. However, having larger gold holdings to back the money supply would give investors confidence that governments cannot debase the currency by too much fiat currency creation. Having more gold at home safeguards national security against foreign confiscation. Since 1945, the dollar has been the sole anchor of the international monetary system. Sailors know that if one anchor is perceived as wobbling, they need two or three anchors to create some stability against turbulent currents. Gold will not replace the dollar as an efficient means of payment, but it will become increasingly an alternative store of value.

(The writer is a former Central banker)