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The dollar is done dude. It was nice while it lasted. But I believe that the U.S. dollar's reign as a universal reserve currency has ended. Over time fewer countries will hold U.S. treasuries and do business in U.S. dollars.
But why?
The dollar is a bad investment. How would you feel about holding a currency that is controlled by the government of a foreign country? You'd feel pretty bad if that country is $35 trillion in debt and will need to print trillions more every year to have any hope of even making the interest payments.
China is dumping U.S. treasuries and buying gold instead. It just makes financial sense.
U.S. treasuries are suffering their worst bear market possibly ever. Let's say you bought TLT (a long-term treasury ETF) at its peak in 2020. Today, you'd be down by more than 50% in real terms. What is supposed to be a "safe" investment becomes very unsafe in the presence of inflation.
The long-term picture isn't much better. Since the end of the gold standard in 1971, gold has outperformed U.S. treasuries. Simply buying and holding a lump of rock is better than holding the debt of the U.S. government. And the government was actually in good financial health for most of those years, unlike now.
The U.S. is not a trustworthy partner. Before Russia invaded Ukraine, Russia held about $600 billion in currency and gold reserves. About half of those reserves, $300 billion, were held in the West. After the invasion, those reserves were frozen. Now, they are now likely to be given to Ukraine.
Because of this, there is no reason for a country like China (or any other country for that matter) to store their wealth in the West, or to hold U.S. dollar-denominated assets. It's all conditional on U.S. allegiance.
For most countries, trade with China is more valuable than trade with the U.S. China now dominates most of the world's industries, and the trend continues to point in that direction. Third world countries often have much stronger trade ties with China than they do the U.S. They export natural resources and import Chinese goods. Increasingly, they can do without U.S. goods and services. Do what we say or otherwise you can't have our, um, Microsoft Excel licenses...
As this process strengthens, China will be able to lean on these countries to do business in Yuan, or perhaps in some resource-demoninated currency.
Okay, so the dollar is done. What comes next? Probably nothing major. I don't think that the Yuan will become the reserve currency, or that we'll move back to the gold standard (although global reserves will be held increasingly in gold). But the U.S. dollar will no longer be the uncontested reserve currency. The world will once again be multipolar, with the U.S. just one of multiple competing forces, and not necessarily the strongest one.
In the long run (10+ years) I expect gold to significantly outperform treasuries.
Gold Bugs love to talk about the price of gold since 1971. But the performance really depends on what year you start in. Turns out 1971 was an exceptionally good time to purchase gold, as it had just been deregulated and could be bought for like $50 an ounce because no one was paying attention. By the end of the decade it had already boomed to a price similar to what it is now, like $2000 an ounce. And there have been several boom and bust cycles since then. It's (ironically) not really a long-term, buy-and-hold investment, but something that can maybe save you during a big market crash but can just easily tank. Treasuries have outperformed over almost any period other than starting in 1971.
Incidentally- treasuries right now have a great interest rate and are still rock-solid safe. This might be the time to just park your money in bonds.
Not quite. Gold very briefly spiked in 1980. It reached a high of $843 for a single day. It's true that if you somehow managed to top-tick this speculative bubble, you'd have performed poorly.
The returns for most periods after 1971 look decent.
It's actually a wonderful buy and hold investment. What it isn't is a low-volatility investment. And it's pro-cyclical so it almost certainly won't save you during a market crash either. Gold is best as a hedge against a period of high inflation when other assets perform poorly.
5% is not great by historical measures, but I agree the Fed is likely to lower rates in the next 2 years which might make long-term treasuries a decent investment in the short run. If they lower rates, the new bonds at 2% or whatever will be terrible investments. But you will get paid back. In dollars.
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