Dollar vs Gold: Go for the Gold

Ensuring Socio-economic Justice

Waseem Shehzad

Muharram 13, 1442 2020-09-01

Special Reports

by Waseem Shehzad (Special Reports, Crescent International Vol. 49, No. 7, Muharram, 1442)

On August 17, the Market Insider reported that Warren Buffet’s “Berkshire Hathaway made its first investment in a gold mine last quarter, even though the famed investor has warned against betting on the precious metal for at least two decades. The conglomerate bought 20.9 million shares of Barrick Gold, worth about $564 million at the end of June, according to its latest portfolio update. The miner was its only new holding in the period. The news of Buffett’s backing sent Barrick’s stock price up as much as 11% on Monday. Berkshire’s move is a shock given Buffett’s repeated dismissal of gold as a compelling investment. He has called it less appealing than a farm or a business because it doesn’t produce anything and pointed out that it has massively underperformed stocks in the long term.”

Since the end of WWII, the US essentially established its economic hegemony by replacing gold with the US dollar. This was the step which sealed US economic dominance of the contemporary system. In 1971, then US President Richard Nixon announced decoupling of the dollar from gold. Priced at $35 an ounce, today gold is hovering around $2,000.

For 75 years, gold vs the dollar has remained one of the key economic debates. While many businesses and economic textbooks praise gold as an excellent store of value, the precious metal is usually put down through other means, many of which could also be applied to the dollar.

As the price of gold has skyrocketed due to economic uncertainty caused by the pandemic, gold can’t be ignored any longer. Buffet’s turn around on gold should be an affirmation of this fact, even to those who are accustomed to thinking within the conventional paradigm of economics. The precious metal has been used as a medium of exchange for centuries. It can be revived to restructure the contemporary usury based economic order which favors the wealthy.

The fundamental question is, how can it be done? There is no specific answer to this question. However, the first step in this process is the political will to task major institutions with developing a practical policy of reintegrating gold as a medium of exchange. How this will affect people’s daily lives must also be considered. No great idea ever became great by simply sitting on pages of books. Someone needs to act upon an idea in order to test it so that it can be improved.

Given the current state of global politics, this appears to the most suitable time to begin the process of reintegrating gold as a practical financial instrument. It is, however, first and foremost, a political decision. True, Washington would not be thrilled with the idea. The US, however, is an empire in decline. This fact is recognized and agreed upon even by a broad spectrum of Westerners. This is precisely why other regional powers are already taking practical steps to ditch the dollar.

In mid-August the Financial Times reported that “in the first quarter of 2020, the dollar’s share of trade between Russia and China fell below 50 per cent for the first time on record, according to recent data from Russia’s Central Bank and Federal Customs Service. The greenback was used for only 46 per cent of settlements between the two countries. At the same time, the euro made up an all-time high of 30 per cent, while their national currencies accounted for 24 per cent, also a new high… Beyond trading in national currencies, Russia has been rapidly accumulating renminbi reserves at the expense of the dollar. In early 2019, Russia’s central bank revealed that it had slashed its dollar holdings by $101bn — over half of its existing dollar assets. One of the biggest beneficiaries of this move was the renminbi, which saw its share of Russia’s foreign exchange reserves jump from 5 per cent to 15 per cent after the central bank invested $44bn into the Chinese currency.”

In December 2019, Dr Mahathir Mohamad, then prime minister of Malaysia proposed that “if we use gold as standard, we can call our currency by whatever name we want, but they must relate to the value of gold in your country. So, if you know the value of gold in your country and the value of gold of your trading partner, we know how much gold is being traded. That is the gold dinar standard, that was what was proposed, so we will look at it carefully.” Hopefully a government institution or group in Malaysia would take up this idea in earnest.

Then there is Bitcoin. It is essentially virtual money. A few years before its launch, it would have sounded bizarre to suggest that Bitcoin could be a serious contender on the money market, until someone put the idea into action. Several Muslim governments have talked about bringing gold back into the financial system, but no practical steps have been taken so far to implement the idea. The theoretical basis for reconfiguring the role of gold is there, it is the political will that is missing. Such grand ideas that aim to reconfigure the conventional economic paradigm will not go far without state backing.

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