This option was also included in the Brahmastra of Europe that was being talked about, because about 20 percent of the American debt is with Europe and its companies. Overall, gold or any other currency does not seem to be in a position to replace the dollar, but it can definitely act as a shield of protection.
Gold prices rose due to Trump's policies.
Countries are increasing gold reserves by reducing American bonds.
India sold US bonds worth $51 billion.
Shivkant Sharma. The rising and falling prices of gold and silver are in the headlines these days. According to the World Gold Council, last year there was a record production of 3,670 tonnes of gold in the world. China and India alone consume about 40 percent of global gold production. However, due to skyrocketing prices there too, instead of a surge in gold demand, a decline of about 10-11 percent was recorded. In such a situation, the question arises that despite the recent 10 percent decline in such consumption, why has there been this surge in the price of gold? The biggest reason for this is American President Donald Trump.
Because of their creditworthiness, the dollar and American bonds issued for payment in it remained the principal medium of international transactions and treasury reserves for almost a hundred years. America tried to drive Russia out of Ukraine by weaponizing them. Excluded Russia and its supporters from the international system of dollar transactions and froze Russian assets held in US bonds and dollars in European banks. As soon as Trump came to power, he started using them more openly and weaponizing business. Because of this, the world started doubting America's intentions and the credibility of its currency and bonds started falling. Even at the time of Trump's announcement of Liberation Day tariffs, US bond and dollar prices had fallen and gold prices had risen.
In times of credit crunch, gold has always played the role of a universal and reliable medium of transactions. Due to its limited quantity and universal availability, its prices have also remained stable on average except during times of crisis. Therefore, these days, central banks and multinational investment companies around the world have started reducing American bonds and dollars in their respective treasuries and replacing them with gold. In the last five years, China has bought 351 tonnes of gold, India has bought 218 tonnes and Japan has bought 81 tonnes of gold to increase its gold reserves. India has reduced its reserves by 21 percent by selling US bonds worth $51 billion and instead increased its gold reserves to 880 tonnes, which is 16 percent of its foreign exchange reserves. This is the main reason for the continuous rise in gold prices. Some market experts say that the price of gold can even reach Rs 30,000 per gram in the next two-three years.
The credibility of US bonds is built on long-term fiscal discipline and fixed income coupled with political stability. In addition to repaying the loan amount in dollars, it also pays interest, the rates of which depend on the term of the bond and current interest rate trends. Generally, the interest rates on American bonds remain higher than the inflation rate. Therefore, a country or company keeping American bonds in its treasury gets some benefits in the form of interest along with the security of purchasing power of the treasury. This benefit cannot be obtained by keeping dollars or gold. This is why the proportion of US bonds in foreign exchange reserves remains higher than cash dollars and gold. Countries which have been making profits year after year in trade with America accumulate American dollars. These countries buy American bonds with dollars. Due to this business cycle, America's national debt has increased to 126 percent of its GDP, or 1.25 times, of which 25 percent is with other countries, the major ones being Europe, Japan, China and India.
As long as the credibility of the US dollar and bonds remains intact, the US is not particularly concerned about the growing mountain of debt, because 57 percent of the world's foreign exchange reserves are still in US bonds and dollars, despite having already reduced after the dot-com of 2000 and the financial crisis of 2008. Although this year India is going to propose the establishment of exchange link of digital currencies of central banks for mutual trade of BRICS countries, but the share of BRICS countries in world trade is only 25 percent and the credit for that also goes to China.
According to a recent report of the International Monetary Fund, more than half of the trade, except in America and Europe, is still done in dollars. Even though Russia, China, India and South American countries start doing mutual trade in their own currencies, the mutual exchange of small currencies and pricing of important things like oil, gas and gold happens only in dollars. Even after transactions in other currencies, multinational companies and countries have to do swaps or hedging in dollars to avoid market fluctuations. It is certain that due to Trump's trade disarmament policies, the world has become conscious of its dependence on American bonds and dollars.
To avoid this, active efforts are being made to include precious metals like gold and silver and other currencies along with US bonds and dollars in trade and fiscal collections. There is also an option of planned selling of US bonds to curb America's arbitrariness. Such selling may lead to a rise in the loan rates available to America, due to which the arbitrary government may have to step back.
In the Greenland dispute, Danish pension company Akademiker gave this signal by selling all its American bonds, which forced Trump to relent. This option was also included in the Brahmastra of Europe that was being talked about, because about 20 percent of the American debt is with Europe and its companies. Overall, gold or any other currency does not seem to be in a position to replace the dollar, but it can definitely act as a shield of protection.
(The author is a former editor of BBC Hindi)
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