The Dollar Isn't Collapsing – It's Being Replaced Slowly
Peter Reagan

The U.S. dollar has been the world’s reserve currency (as the petrodollar) for decades now, but the current conflict in the Middle East seems to have accelerated the dedollarization trend.

Now, I’m not talking about an immediate radical shift in how the world approaches the dollar. But I am talking about a clear and definite shift away from the dollar, a shift that didn’t start in the last few weeks. 

Dedollarization may not sound like a threat to our way of life. Nothing could be farther from the truth. Remember, since the dollar has no intrinsic value, its purchasing power is based on supply and demand. When global demand goes down, prices go up. That's why I keep talking about this topic. Not because I care whether China pays for Iranian oil with rupees or yuan or dollars. But because our purchasing power is dependent on global dollar demand.

And that demand just took a severe blow...

"War Has Caused Lasting Damage to the Dollar System"

Let’s start with the viewpoints of Simon White with Bloomberg on this situation. Now, White isn’t a headline chaser. He doesn’t write clickbait to catch eyeballs on a screen. He’s someone who looks for the deeper drivers in a situation to better understand the whole, and White has written an uncomfortable warning about the state of the U.S. dollar on the world stage.

White says that the dollar’s dominance on the world stage is declining due to a number of factors including higher energy prices and supply constraints and what he calls the “weaponization of the dollar.” 

Other people point to the weaponization of the financial system in general with actions such as the Biden administration’s seizing of Russian reserves in the U.S., tariffs and financial sanctions, and, now, spillover from the conflict with Iran that has Iran declaring that any organization which helps to fund the U.S. government (by holding government bonds, for example) is a legitimate war target in their eyes.

All of these conflict efforts from both sides make the world wary of holding dollars both due to concerns about dollar valuation but also due to concern over being targeted for overt violence from Iran simply for investment decisions.

It’s a scary spillover.

White also notes that banks are shifting from keeping their reserves denominated in dollars to keeping larger portions of their reserves in gold.

And if major banks are shifting away from dollars, that makes it less desirable overall. Less dollar demand means less dollar value. That doesn't just affect central banks, though. That affects you and me, and everyone else who earns or spends dollars. When dollar demand does down, prices go up.

For those who have studied the history of currencies, though, this really shouldn’t be much of a surprise. After all…

We’ve seen this pattern before

Just look at what happened to the value of the British pound sterling after World War I and then, further, during and after the Great Depression. 

The pound still has value. It just has significantly less value against other currencies than it used to have.

But this devaluation wasn’t an instantaneous thing. It happened gradually, step by step, over time.

Just like we’re seeing happen with the dollar now.

As I mentioned earlier, the decreasing desirability of the dollar on the world market and the devaluation of the dollar have and will continue to happen gradually. After all, the decline of global dollar reserves goes back to at least 2013. 

Most people just didn’t notice it until more recently.

Whereas central banks in a number of countries would, in the past, buy dollars when their valuation fell so that they could sell them during a rally of the dollar, those banks aren’t doing that anymore.

Possibly because they don’t see the dollar rallying again to be able to make a profit on those transactions.

And that’s a problem for the federal government because they need more lenders now than in the past. Treasury Secretary Bessent has auctioned off over $8 billion in federal government debt every business day this year (so far). Some of it is to fund new spending, and the rest is just to refinance the current $38.9 trillion debt load.

That’s an insane amount of borrowing. It's not as though we're repaying any principal. We're just rolling over old debt!

Some people out there deny what is going on in this situation. After all, they argue, this has been the way of things for years now.

They’re not wrong that we’ve been dealing with this situation for quite a while. However, key aspects of the situation have changed.

Money is trust

Many people don’t stop to consider that all business, including investment markets like government bonds, work on trust.

People won’t buy if they don’t have enough trust that the purchase will give them what they’re looking for in return. In the case of a government bond (government debt), they are buying the bond with the trust that they’ll receive the promised financial return on their loan to the government.

But what happens if there isn’t any more trust (or enough trust) for enough people and organizations to buy all of those bonds that the federal government issues? 

Then, you end up with a government that has a cash crunch. They don’t have enough cashflow to pay the bills. 

And what do governments who can’t pay the bills do? Historically, they inflate the currency to pay the bills, thus devaluing the currency even more.

To make that situation even worse, Iran is saying that they will charge transit fees across the Straight of Hormuz to anyone trying to get oil out of the region, and those fees will be collected in cryptocurrencies, not dollars.

When the U.S. sanctioned Russia back in 2022, what did Russia do? They started accepting payments in rubles, yuan or gold for their oil. 

So, higher energy prices and a complete circumvention of the dollar just be able to get access to that supply of oil both putting downward pressure on the dollar’s value.

Fewer countries are getting oil using U.S. dollars now, and the dollars used to buy oil have tended to be used to, then, buy U.S. debt. Since dollars aren’t being used as much for oil purchases, fewer dollars are coming in towards buying U.S. federal government debt.

It’s a giant, slow moving downward spiral on the dollar’s value, and that affects prices within the U.S. for imports (for a surprising amount of produce and everything manufactured in China, for example), along with the price of everything in general in the U.S.

So, instead of buying U.S. dollars for reserves and instead of U.S. dollars overseas buying U.S. government debt, other countries are buying gold. A lot of gold.

Just like countries have done in history time and time again when this kind of monetary crisis has happened.

This exact situation (and anticipation of the situation) is one reason that many people are choosing to diversify into precious metals. 

If this makes sense as a possibility for helping you to reach your investment goals, the first step is education, and you can start your due diligence by finding out more about the benefits of precious metals. 

On the other hand, if you already know that you want to diversify into precious metals, you can call us toll-free at (877) 749-7738.

Peter Reagan is a seasoned financial market strategist at Birch Gold Group with over 15 years of experience in the precious metals industry. He has been featured in several leading publications, including Newsmax and Zerohedge. At Birch Gold Group, Peter leverages his deep market insights to help educate customers on how they can diversify their savings into gold and other precious metals. His commitment to education has made him a trusted thought leader in the field. In addition to the Birch Gold website, you can follow Peter on LinkedIn.

www.birchgold.com