Unintended Consequences of US Dollar ‘Weaponization’: Here’s How Gold and Bitcoin Are Using the Moment

(Kitco News) Are we witnessing a reversal of globalization? What are the unintended consequences of sanctions against Russia and the weaponization of the world’s reserve currency, the US dollar?

With uncertainty remaining the dominant theme at the start of the second quarter of 2022, the main beneficiaries of this environment are safe-haven assets such as gold and Bitcoin, as the search for diversification becomes a priority for countries, institutions and individual investors. , according to analysts.

Existing trade agreements and supply chains that have taken decades to build have been severely disrupted – first by the COVID-19 pandemic and now by war in Ukraine and sanctions against Russia.

Following Russia’s February 24 invasion of Ukraine, the U.S. dollar was “armed” to pressure Russia through numerous financial sanctions, analysts told Kitco News. For example, around $300 billion of Russia’s approximately $640 billion in foreign exchange reserves have been frozen, while Moscow has been banned from the SWIFT international payment system (except for some energy payments).

“This is a very delicate matter. The Federal Reserve does not want to damage its reputation and its confidence in the US dollar, which has not been backed by gold since 1974. At the same time, they are confiscating the money from other central banks using the SWIFT system because their foreign policies are not aligned with the United States,” Frank Holmes, CEO and CIO of US Global Investors and Executive Chairman of HIVE Blockchain, told Kitco News.

And now Russia is retaliating by demanding payment for the gas in its own currency, the rouble. On Wednesday, Moscow cut off gas supplies to Poland and Bulgaria. Russian gas giant Gazprom said it would only resume supplies once the two countries paid for the gas in Russian rubles.

Poland and Bulgaria said they refused to pay in roubles, with the EU saying it violated sanctions imposed on Moscow and constituted a breach of contract. After the shutdown, gas prices in Europe jumped.

In March, Russia also signaled that it might consider accepting bitcoin for its oil and gas exports after the chairman of Russia’s Duma Committee on Energy said the country would be more flexible in this regard. regarding payment options with “friendly” countries. Meanwhile, “unfriendly” countries could be required to pay for gas in Russian rubles or gold, Zavalny added.

And Russia is not alone in starting to think so. Saudi Arabia is in active talks with China to accept the yuan for some of its oil sales to Beijing, a move that could put a damper on the US dollar’s dominance in the oil space.

These are all signs that globalization may be reversing or even dying, something that has already been recognized by many central bankers around the world.

Federal Reserve Chairman Jerome Powell said last week that when this is all over, the world will be different.

“It’s clear that [globalization] definitely slowed down and can reverse. You have seen questions about globalization and this series of events around Ukraine certainly has the potential to lead to a more fragmented political and economic situation,” Powell said during a roundtable at the IMF and meetings of World Bank Spring. definitely be a different world. It could be a world with maybe higher inflation, maybe lower productivity, but more resilient and robust supply chains. The supply chains we had were very efficient but quite fragile at the end of the day.”

There is a distinct reassessment of globalization and a tilt towards large-scale populism, Holmes noted. “This movement had a big shock with Brexit, because the UK was tired of conforming to policies instituted by unelected bureaucrats in Brussels, and it has only grown since,” he said. -he declares. “Globalization has brought us lower prices for finished goods, but it has also created many more vulnerabilities in terms of access to strategic metals and energy resources.”

Unintended consequences

On the one hand, this geopolitical situation has propelled the dollar as a safe haven currency, with the US dollar index reaching two-year highs due to all this uncertainty.

“The US dollar is strengthening against all other FIAT currencies and will continue to do so as the United States continues to be the nicest home in a tough neighborhood. The success of sanctions and the problems Russia has in Ukraine make everyone think twice about taking any action that might upset the United States,” said Alex Mashinsky, CEO of Celsius Network.

Additionally, the Federal Reserve’s hawkish stance strengthens the case for the U.S. dollar against the euro and other currencies that don’t have such an aggressive tightening plan, said Aryan Chopra, wealth manager at Castell Wealth Management.

“My position on the USD is neutral and while I don’t see the US Dollar losing its status as the world’s reserve currency in the long term, I am however not bullish on the USD against emerging markets and base currencies. on commodities in the short term,” Chopra told Kitco News. “In an environment of high inflation…I am more concerned about countries that have high debt to GDP ratios and have limited ability to control their own currency in which they hold the debt. The United States is well equipped in this regard. Therefore, I don’t see the USD losing its status as the world’s reserve currency.”

Russia’s invasion of Ukraine untied the West and extended the life of the US dollar as the world’s reserve currency by 30 to 50 years, Mashinsky told Kitco News.

“The United States successfully weaponized the USD and proved to the world that it still holds the global power to decide who can transact and who cannot. Even Switzerland has agreed to join the SWIFT sanctions this time,” he said.

Yet, on the other hand, the widely used financial sanctions against Russia via limiting access to the US dollar and international payment systems could encourage more countries to diversify their reserves away from the US dollar, which Russia done for years already.

All of this is bullish for gold and Bitcoin, Holmes said. “Think of Maslow’s Hierarchy of Needs. People have an intrinsic need to feel secure – financially, in this case – and if they can’t get it with a savings account or a government bond , they will surely get it with gold or its digital cousin,” he pointed out.

The sanctions against Russia have made it clear to others that holding dollar reserves in other banks does not mean they can be accessed or spent at any time, Mashinsky noted.

“Every central bank and commercial bank needs to reassess who they have reserves with and what denomination they use. This gives Bitcoin, gold and other digital assets a much higher value than before and forces adoption fastest of these assets around the world,” he said. .

Also, following supply chain disruptions, countries will have to consider offshoring and be forced to review all components of the supply chain, Mashinsky added.

One consequence of the weaponization of the dollar is increased demand for gold as a hedge, Chopra agreed.

“Sovereign nations will seek greater diversification of reserves and payment systems with increased exposure to gold, bitcoin and currency reserves depending on their trading and supply chain partners,” he said. he declares. “This is a bullish case for the long-term precious metal which has returned over 500% since 2000 (in two decades).”

Chopra said it was too early for countries to start buying Bitcoin as part of their reserves, as the world’s largest cryptocurrency is still in its infancy and remains highly volatile and highly leveraged.

“As an asset class, bitcoin behaves like a growth or technology stock and tends to do very well in a risky environment. In an environment of stagflation or economic downturn, it remains to be seen whether bitcoin will hold and act as a commodity or store of value,” he explained.

However, Bitcoin’s history as a reserve may change when large pension funds are involved, Chopra added. “This will require government acceptance, regulation and asset compliance.”

According to the IMF, foreign exchange reserves in dollars have already been falling since 2000, dropping from 71% to 60%. Meanwhile, gold as a percentage of total reserves rose for emerging economies and fell for advanced economies, according to data from the World Gold Council (WGC).

Warning: The opinions expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. This is not a solicitation to trade commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for loss and/or damage resulting from the use of this publication.

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