Gold is the main reserve alternative to the dollar

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 14:27

   take it away. Yeah. So, you know, the best way I've heard the U.S. dollar described as the winner of an ugly dog contest. Right. You can only compare this particular dog to the rest of the dogs that are out there in the competition. Right. As everybody knows, when you trade currency, you're always trading it relative to other currencies. There it is. That's right. So, it's not clear if you're losing faith in the dollar, whether the United States would, for example, have to inflate away its debt, what you're going to move into.

2. 15:05

   Right. What's your alternative? Right. So, broadly speaking, major central banks around the world have been answering that question over the past 20 years. They have not, broadly speaking, sold dollars for other currencies, but they have- They've been buying gold. Gold. Yes. Okay. And, you know, historically, gold has been the foundation of global financial markets. It goes back to the late 19th century.

3. 15:34

   And the top currencies, the leading currency is sterling. By the way, just interrupt for a second. There was a movie I saw a long time ago. It was like a Sherlock Holmes movie. And the story basically was that all the gold of all the major countries was in New York, in this huge vault. Yeah, at the New York Fed. At the New York Fed. And each country had its own storage unit. And so whenever there was trade, they would move it from one locker to another locker.

4. 16:09

   And the great thing about the movie was Sherlock Holmes got called in because they opened the door one day and there was no gold. And they freaked out. And so, I'll just finish the story. What had happened was the bad guys had built an alternative floor just on top of the floor. And so, it looked exactly the same except no gold, which gave them a lot of time to pull the gold out. But I just thought it was fascinating.

5. 16:38

   All the gold was in one spot. They were just moving the gold from one room, one locker, to another. Right. And historically, that's the way it's been done. That's the way the Bank of England did it in the 19th century. But as I was saying, go back to the late 19th century and the leading currencies in the world of sterling, the Deutsche Mark, the French Frank, the U.S. dollar were all— all more or less credible vouchers for gold.

6. 17:00

   Right. So, fast forward to the end of the Second World War, and now the U.S. dollar was the only credible voucher for gold. Because we were the only country left standing, basically. The only economy left standing. We had about 60% of the world's monetary gold reserves. Over time, we cut that link. As you know, Nixon closed the gold window in 1971. Having said that, countries have learned that during a crisis, gold is approximately as good, some could argue, better than the U.S. dollar, because gold tends to do well during times of stress.

7. 17:42

   And so, the Chinese and the Russians, in particular, have been building up their gold stocks. They've been moving them to safe locations, re-domesticating it. As you know, even the Dutch recently repatriated their gold holdings from the New York Fed. And one of the benefits that that has is that, as you know, the U.S. has been very aggressive in recent years with dollar-based financial sanctions. In other words, if you cross us on a foreign policy initiative, we will cut you off from the dollar-based financial system.

8. 18:25

   Like Iran, for example. Absolutely. So countries are learning that they need alternative vehicles for storing their sovereign. Outside of the dollar. Outside of the dollar. But where do you go? Right. So it's only gold.