In the realm of economics, major catastrophes often start slowly and then quickly escalate into complete chaos. This concept of a gradual build-up followed by sudden acceleration can also be applied to the phenomenon of de-dollarization, according to Mike Maloney, a financial expert. Maloney suggests that the dollar will gradually be replaced by alternative currencies as the global reserve currency, and then, all of a sudden, these alternatives will gain significant momentum and be widely adopted. Maloney refers to this process as “S-curve rejection,” which is based on Ernest Hemingway’s famous quote, “Gradually and then suddenly.”
The S-curve model is widely used to illustrate the pace of various processes. It depicts a slow start, followed by a rapid increase in adoption until it reaches a peak, and then gradually slows down. This model is commonly used to describe technological innovations. In the context of de-dollarization, the first inflection point on the S-curve is approaching. This inflection point involves the network effect, which means that a greater number of participants in a network increases the value of that network. Conversely, a decrease in participants lowers the value. As more nations move away from the dollar, the value of the dollar network diminishes.
The trend of de-dollarization is supported by recent data. The share of the dollar as the global reserve currency has been declining slowly over time. In the first quarter of 2023, the dollar’s share rose to 59.0%, after dropping to its lowest level since 1994 in the previous quarter. This decline is reminiscent of the period from 1978 to 1991 when the dollar’s share collapsed from 85% to 46%. Back then, there were no viable alternatives to the dollar for global trade, so the dollar eventually regained its dominance. However, the current situation may be different.
Trust plays a crucial role in maintaining the dollar’s status as the global reserve currency. The credibility of the U.S. government, its institutions, and even its military ensure the value of the dollar in the global market. However, recent events, such as the weaponization of the dollar and the failure of the FDIC to reimburse foreign depositors, have eroded trust in the currency. If trust is the foundation of the dollar’s global value, then it may be in trouble this time. Jim Rickards, another financial expert, believes that the reign of the dollar is rapidly coming to an end and that the “suddenly” part of the process is long overdue.
Central banks around the world are already preparing for a future without the dollar. They purchased a record amount of gold last year, the most since 1950. This move indicates that central banks recognize the declining power of the dollar and the need to diversify their reserves. Gold is considered an international currency with no counterparty or political risk, making it an attractive alternative.
Diversifying with gold is a wise decision, regardless of the future of the dollar. It serves as a hedge against inflation and uncertainty, making it a valuable asset during times of economic crisis. In 2022, central banks engaged in the largest gold buying spree ever recorded, highlighting the importance of gold as a long-term store of value and an effective portfolio diversifier.
The value of gold and silver as precious metals has stood the test of time for thousands of years. They have always served as reliable forms of currency and stores of value. If you are concerned about economic crisis, inflation, or simply want to diversify your savings, exploring the benefits of physical precious metals can provide you with the necessary information to make an informed decision.
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