US dollar’s reserve status at risk: Goldman

Goldman Sachs warns of ‘real concerns’ about the US dollar’s status as the world’s reserve currency, as the gold price soars.

The US dollar’s reserve status is considered a special privilege. Picture: Bloomberg

Goldman Sachs has warned of “real concerns” about the US dollar’s status as the world’s reserve currency as America grapples with soaring debt and rising political and social uncertainty.

The Wall Street investment bank said that investor fears about the American dollar’s long-term status were evident in the gold price, which has soared to new highs and is expected to continue rising. Gold is considered the ultimate safe haven as its limited supply provides inflation protection.

America’s central bank will reveal its latest rate decision tonight (AEST) and, although policy is expected to be unchanged, fears are growing that the Federal Reserve will tolerate high inflation and will keep interest rates low to reduce post-pandemic debt.

“Real concerns around the longevity of the US dollar as a reserve currency have started to emerge,” Goldman’s analysts wrote. “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.”

The US dollar’s reserve status is considered a special privilege, as it allows the United States to punch above its considerable weight as all dollar transactions are subject to US jurisdiction. Although the US accounts for 15 per cent of world GDP, half of all trade and two thirds of all currency reserves are in dollars. The March market collapse, prompted by a dash for dollars, underscored its dominance.

Goldman said that the US dollar’s status was at risk. Huge public debt issuance to contain the pandemic and a $US1 trillion-plus expansion of the Fed’s balance sheet, largely through quantitative easing, has raised concerns about inflationary monetary financing.

“The resulting expanded balance sheets and vast money creation spurs debasement fears,” the bank’s analysts said. This created “a greater likelihood that at some time in the future, after economic activity has normalised, there will be incentives for central banks and governments to allow inflation to drift higher to reduce the accumulated debt burden”.

With expectations that real US interest rates will sink further below zero to grapple with public borrowing, Goldman raised its 12-month gold price forecast to $US2300 per troy ounce. Gold this week hit a record high of $US1945.26 per troy ounce, just above its 2011 peak.

“We see inflationary concerns continuing to rise well into the economic recovery, sustaining hedging inflows into gold exchange-traded funds, alongside the structural weakening of the dollar. We see gold being used as a dollar hedge by fund managers,” Goldman said.

It raised its silver forecast to $US30 per troy ounce on a three, six or twelve-month horizon “pulled upward by higher gold prices and better prospects for silver industrial demand, particularly in solar energy”.

The Fed said that it would extend to the end of the year its emergency lending facilities, introduced during the market panic in May to stabilise markets and ensure credit flows to “households, businesses and government”. The facilities, which stretch to hundreds of billions of dollars and included loans to struggling medium-sized businesses, had ben due to expire at the end of September.

“The three-month extension will facilitate planning by potential facility participants and provide certainty that the facilities will continue to be available to help the economy recover from the COVID-19 pandemic,” the Fed said.

The Times