Rising Gold Price Threatens US Dollar's Reserve Currency Role Says Goldman

The US dollar's position as the world's reserve currency is under threat as a rise in gold prices show a shift in investors' preference for the metal as a safe-haven asset, according to a Bloomberg report citing a note by strategists at the Goldman Sachs Group Inc.

The strategists said that the American currency faces several risks, including that the US Federal Reserve may shift toward an "inflationary bias," a rise in political uncertainty and growing concerns of another spike in coronavirus infections in the country. It also added that the debt buildup as a result of the pandemic may lead to debasement fears.

"Real concerns around the longevity of the U.S. dollar as a reserve currency have started to emerge," wrote Goldman strategists, as quoted in a Bloomberg report.

"Gold is the currency of last resort, particularly in an environment like the current one where governments are debasing their fiat currencies and pushing real interest rates to all-time lows."

Gold prices in India and internationally have been relentlessly rising as concerns over the spread of the pandemic and recovery of the world economy do not appear to resolve anytime soon. Goldman Sachs recently raised its 12-month forecast for gold price to $2,300 an ounce. Spot gold hit an all-time high of $1,980.57 on Tuesday and gold futures on MCX (Multi Commodity Exchange of India) rose to Rs 52,750 per 10 grams.

Safe haven appeal

Gold and the US dollar are considered as safe-haven assets. A safe haven is an investment that is expected to either retain its value or increase its value during times of uncertainties that cause turbulence in capital markets.

While gold has an appeal of safe keeping since it is universally valued, not governed by any government and is unaffected by interest rate decision of any economy, the US dollar became the most accepted currency in the world.

The American dollar is a default safe haven for many companies and governments since it is the world's reserve currency and the preferred denomination for many international business deals (like for purchasing crude oil). Over 60 percent of all forex reserves maintained by central banks (including RBI) are denominated in US dollars.

Despite periods of high inflation and high unemployment in the US, the dollar has remained the world's reserve currency largely due to the size and strength of the country's economy and its dominance in the financial markets.

Even with large deficit spending, trillions of dollars in foreign debt, unbridled printing of the American currency, US Treasury securities are considered risk-free storage of money due to the confidence in the US government to pay its debts.

However, currently, the level of debt in the US has exceeded 80 percent of its GDP (gross domestic product) and Goldman Sachs feels the ballooning debt has increased the risk that the central banks and governments may allow inflation to accelerate after economic activity has normalized.