August 20, 2020

The dollar risks losing its dominance as the world’s reserve currency

Goldman Sachs warns that the U.S. dollar is in danger of losing its dominance as a global currency reserve and also predicts that gold will continue to rise as another analyst and millionaire Robert Kyosaki prefers Bitcoin to gold.

As Bitcoin and gold prices have risen sharply in recent days, analysts at Goldman Sachs, one of New York’s investment banking groups, warn that the U.S. dollar is in danger of losing its position as the global reserve currency.

The Federal Reserve (Fed), with its second round of stimulus to mitigate the impact of the pandemic, has disproportionately increased the printing of money and U.S. policies are generating concerns that the dollar will lose its dominant position.

Gold is the commodity of last resort and especially useful in situations like the present where governments are printing too much money, devaluing their own currencies and lowering interest rates to historical lows.

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Analysts at Goldman Sachs Bank were quoted by many media outlets as saying that the dollar has several risks. The first is that the level of debt has risen to 80% of the country’s annual GDP. The second risk is that it will be overpriced. It is also understood that there is a high probability that in the future, after economic activity has normalized, there will still be incentives for central banks to continue printing money, devaluing the currency, in order to reduce the country’s debt burden.

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Gold has seen an increase in the last few days of up to 27% and is expected to reach $2000 soon. According to the U.S. bank this is mainly due to the Fed’s actions towards an inflationary model, it is also due to geopolitical tensions, U.S. political and social uncertainty and possible new Covid-19 outbreaks.

Goldman Sachs are not optimistic about Bitcoin despite it being known as digital gold and being a deflationary asset. However, a recognized figure such as financial guru Robert Kiyosaki does recommend Bitcoin as a cover and has also voiced his opposition to the Federal Reserve’s money printing policies. The price of Bitcoin in recent days broke the $11,000 barrier, making it an annual high. A recognized group of financial analysts recently showed their optimism and are much more confident about Bitcoin than gold. However, more traditional investors rely more on gold as a safe haven asset in the face of a financial recession.

History of world reserve currencies

The first global coin was minted in Athens, known as the Silver Drachma in the 5th century BC. It was later replaced by Rome with the Aureus and Denarius coins from the 1st century BC until the 4th century AD. Soon after it was replaced by the Arabian Dinar as the currency of global trade between the 10th and 13th centuries the Fiorino emerged in Florence which predominated until the 15th century.

In modern history, different countries have been protagonists in the monetary history, starting with the currency of Portugal during 80 years (1450 to 1530) and ending its predominance by a crisis in the Portuguese crown. Then Spanish coins prevailed for 111 years (1530 to 1641) until the Dutch trade boomed and lasted 78 years (1642 to 1720). Then when paper invoices became popular in front of the coins, France took over after the war with Holland and imposed its own currency for international trade that lasted 95 years (1720 to 1815). After Napoleon’s defeat, the United Kingdom imposed its own British currency which lasted 105 years (1815 to 1920). After the First World War until today, the United States imposed the American dollar with the Bretton Woods system in which a possible exchange of the dollar with gold was established, that is, the currency was backed by gold, until the 1970s when President Nixon freed the dollar from this parity and support of gold and the value of the dollar passed to the trust and supremacy of the American government.

For a currency to become a global reserve, there must be some basic requirements, such as: need, liquidity, availability and security. A good candidate to replace the dollar is believed to be the Yuan which is China’s currency, although this does not seem to be an easy task. Many hope that one day Bitcoin will take over as the world reserve, but it is believed that this will not be possible until its tremendous volatility is reduced and the problem of scalability is solved.

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