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old has long been considered a safe haven asset. Together with foreign exchange reserves and assets, it forms an integral part of a country’s reserves. Gold can facilitate trade, either in national currencies or in digital currencies. Moreover, wars, geopolitical tensions, financial crises, and high price volatility can all lead to increased demand for gold. However, recently, political impulses have played a relatively greater role than fundamental supply-demand or arbitrage dynamics.

Gold has recently been the main instrument of political revolt against the U.S.-dominated financial order. The dominance of the U.S. dollar is increasingly being challenged by gold and digital currencies as well as the growing trend to trade in national currencies. Many emerging or developing economies are building up their gold reserves. Even the BRICS countries are now working on a new gold-backed reserve currency.

Other key risk factors driving demand for this precious metal include, but are not limited to, rising geopolitical tensions in the South China Sea, the Middle East, South America, and the war in Ukraine. In addition, the tendency to avoid sanctions, the impulse to avoid other external influences, and the fact that the dollar’s role as an international reserve currency is increasingly being replaced by gold, the euro, and the renminbi all contribute to the same end. Moreover, rising interest rates and realized losses due to decreasing market value of the treasuries in reserves is also raising demand for gold reserves.

Despite rising interest rates, there is still a general increase in market demand for gold due to the risk of a banking crisis, geopolitical risks, and the financial turmoil. Gold should therefore continue to be used for hedging against catastrophic scenarios. For all these reasons, this most archaic—for some, even barbarous—instrument of trade and investment has today become a modern instrument of hedging and even of revolt against the financial hegemony of the U.S. dollar.

The rush to gold reserves

Central banks around the world are building up their gold reserves. In fact, these purchases are at one of their highest levels since the 1960s (Fig. 1). Central banks now account for almost a third of monthly gold demand. Meanwhile, most of these record purchases in 2022 were made by central banks of countries at odds with the West. Central banks are reducing their dollar and even euro reserves and replacing them with more and more gold.

Sizable gold imports are now a reality in most developing countries as they seek greater economic and financial independence. In this vein, a huge current account deficit challenge is also a certainty: exports are strong, but imports are even stronger. Energy and other commodity imports (such as gold) are massive in emerging markets. Thus, imports, energy, and broader commodity dependence have led to a new current account deficit spree.

As shown in Figure 1, according to the World Gold Council, gold purchases rose 152% year-on-year to a record 1,136 tonnes in 2022. This buying cycle is expected to continue this year. However, in order to keep gold reserves free from the direct influence or intervention of other major external powers, it is better to keep gold within one’s country.

Russia’s recent experience of increasing its gold reserves is a good example. Russia has been gradually increasing its reserves for a long time, doubling them to $640 bn in the last five years alone. Especially since the annexation of Crimea in 2014, Russia has consistently reduced its dollar-denominated reserves and has tripled its gold reserves.

Brazil and France are also well known for their criticism of over-reliance on the U.S. dollar for trade and financial transactions. Many experts believe that countries and companies alike are now too dependent on the U.S. dollar as their main currency. Some, such as French President Macron, have even called it a “sovereignty issue.” EU members such as Poland and Hungary, two of the largest Eastern European countries, have also recently increased their gold reserves.

Indeed, major continental European countries such as France, Germany, and Italy, already hold around 60% of their reserves in gold (Fig. 2). Many others are already accumulating huge amounts of these gold reserves. Turkey, Germany, and Russia (even China and Iran) are steadily increasing their precious metal reserves as an independent tool against the financial dominance of the U.S. dollar.

Perhaps a similar idea was behind the gold reserves that Turkey has built up or withdrawn from the UK and the U.S., especially in the last 10 years (Fig. 2). Thanks to its recent attempts, Turkey is currently pushing for a place among the top 10 countries in the world in terms of gold reserves (Fig. 3).

Turkey’s gold reserves

Turkey has been accumulating gold reserves for a long time, mainly, among other things, in response to rising geopolitical tensions and increasing efforts to pursue an independent policy. According to the World Gold Council, the Turkish Central Bank has been accumulating gold reserves in a continuous cycle for at least the past few years. Meanwhile, Turkey has also been withdrawing its gold reserves from the U.S. and the UK. Today, as the importance of this precious metal has begun to grow, the value of these initiatives is clear.

Reserves are rising fast. Turkey has increased its gold reserves by 148 tonnes in 2022 to a total of 542 tonnes by the end of 2022 according to data from the World Gold Council. They bought another 30 tonnes of gold reserves in 2023 and as of the first quarter of 2023, has a total of 572 tonnes. Nearly a third of all its reserves (34%) are gold. Central Bank of Turkey (CBRT) statistics from June 2023 show that the Turkish Central Bank had $67 billion in foreign exchange reserves and $41 billion in gold reserves.

However, an extraordinary sale of more than 130 tonnes of gold to meet domestic demand in the second quarter of 2023 should also be noted. Though, thanks to its recent bullion moves, Turkey is closer today (more than ever) to being among the top 10 countries in gold reserves (Figure 3). The withdrawal of gold reserves from abroad, on the other hand, had been on the agenda in Turkey since at least the 1960s; however, it held the potential to leave the country in deep political turmoil.

Other developing economies

The sanctions against Russia have surely led to great concerns about where to keep international reserves, especially among the central banks of countries that are not aligned with the West. The sanctions following the war in Ukraine froze almost $300 bn of Russian reserves held abroad. Russia was able to use its huge gold reserves even during the sanctions in 2022, but most other international reserves were frozen. If these reserves were in bullion and held at home, they would not have been affected by the sanctions.

Following the invasion of Crimea, Russia has made an even more assertive attempt to diversify its reserves and other countries may follow suit. This de-dollarization trend, or shift away from U.S. assets, could in turn have major implications for the role of the U.S. dollar, its value relative to gold and other currencies, and its impact on the global economy.

Another example is China, which has increased its gold reserves to more than 2,000 tonnes for the first time in history. India is the world’s number one gold buyer with Indian consumers accounting for almost 20% of global demand per annum. China, Russia, and India are building up huge gold reserves. Together, these BRICS economies are making no secret of their ambition to find an alternative to the currently dominant U.S. dollar and are even looking for a new gold-based global reserve currency.

On March 24, 2022, the International Monetary Fund (IMF) released a working paper entitled “The Stealth Erosion of Dollar Dominance: Active Diversifiers and the Rise of Non-traditional Reserve Currencies.”

In its findings, notable attention was given to the fact that the dollar’s share of global reserve currencies has been in a steady decline over the last 20 years as the role of non-traditional currencies such as the yuan is rising. Other than China’s national currency, currencies that are gaining ground include the Singaporean dollar, the Korean won, the Australian dollar, and the Canadian dollar.

With the advent of the Russia-Ukraine war, the U.S.-led western allies have imposed sweeping economic sanctions on Moscow and knocked it off the SWIFT (Society for Worldwide Interbank Financial Telecommunications) system. Gita Gopinath, the IMF’s first deputy managing director, stated that “the financial sanctions imposed on Russia threaten to gradually dilute the dominance of the U.S. dollar and could result in a more fragmented international monetary system.”

Hence, “the war would also spur the adoption of digital finance, from cryptocurrencies to stable coins and central bank digital currencies,” she added.

One can’t afford to ignore the IMF findings on the decline of the U.S. dollar as few countries can already be seen looking for alternatives of the currency lingua franca—the U.S. dollar— to trade with other countries.

Looking for “dollar” alternatives, countries picking up the gauntlet!

China is purchasing Russian oil and coal using its local currency, the yuan. Since the advent of the Russia-Ukraine war, many countries cut off their Russian imports to put pressure on Russia’s economy. On the contrary, Chinese firms decided to use the yuan to buy Russian coal, which will be arriving this month at independent Chinese refiners. As Bloomberg reported, this Chinese move will mark the first commodity shipment paid in Chinese currency since the Russian invasion of Ukraine.

In a similar vein, Saudi Arabia is in talks with China regarding using the yuan instead of the greenback to price some of its oil sales. The trend between Beijing and Riyadh over the usage of yuan to buy and sell oil has been fluctuating for the last six years. But experts predict that this year may witness serious steps to use national currencies in trade between Saudi Arabia and China.

Moving towards South Asia, reports speak of initial consultations between New Delhi and Moscow to reinstate a rupee-ruble trade mechanism. India’s commerce minister Piyush Goyal added that the rupee-ruble trade mechanism is just being discussed and that no decision has been made yet.

In addition, Iran put emphasis on the usage of rupee-rial trade for the export of gas and oil. According to the Iranian Ambassador to New Delhi Ali Chegeni, “If both countries launch a rupee-rial trade mechanism, the bilateral trade could grow to $30 billion.”

He further stated that “a rupee-rial trade mechanism can help companies from both countries deal with each other directly and avoid third-party intermediation costs.” However, there was no response from the Indian counterpart on this statement.

Dollar in the digital currency race

As nations are looking for an alternative to the U.S. dollar to buy oil and other commodities, the concept of central bank digital currency (CBDC) is gaining traction. A CBDC is the digital form of a country’s fiat currency by the central bank. Instead of printing money, the central bank issues electronic coins backed by the full faith and credit of the government.

At present, nine countries in the Eastern Caribbean, the Bahamas, and Nigeria have launched their sovereign digital currency. Fourteen countries are in the pilot stage and are preparing for a possible full launch. Some of them are major economies that are a part of the G20 such as China, South Korea, Saudi Arabia, Russia, and South Africa. Other major countries include Canada, India, Brazil, Turkey, Japan, and the European continent.

As countries worldwide are adopting the concept of CBDC, the United States started considering the potential of digital currency. On March 9, the Biden administration released an executive order in which Biden has instructed the federal government to work on CBDC, a digital dollar. Following that, Treasury Secretary Janet Yellen highlighted the federal digital currency of the U.S. in a speech.

However, dissenters are emerging in the U.S. over the possible benefits of digital currency. Recently, Christopher Waller, a member of the Federal Reserve Board of Governors, said he is not convinced of the need for CBDC.

As the U.S. is still working on the idea of sovereign digital currency, China has already introduced the digital yuan to its 15th city. In 2021, transactions of more than $8 billion were made using the digital yuan. Hence, the pressure is rising on the U.S. to take quick action regarding the creation of a sovereign digital currency of its own.

Considering the pattern among nations to look for alternative currency for trade, one could expect a significant reorganization of existing global payment networks. However, the reorganization seems to be bolstered by a sharp escalation in the use of digital sovereign currency.

Academia and the currency war debate

Will the dominance of the U.S. dollar erode as more countries look to trade in alternative currencies? Could the adoption of CBDC among nations have any significant impact on the dominance of the U.S. dollar? Will the U.S. dollar give way to a multipolar system of currencies? These are the question that are widely being debated among academics.

According to Gal Luft, the co-director of the Institute for the Analysis of Global Security, the U.S. stinging economic measures may lead central banks to diversify their portfolios of foreign reserves instead of relying heavily on the dollar. He stated that central banks are starting to question whether reliance on the U.S. dollar is a good idea.

In regard to digital currency, Michael Sung and Christopher A. Thomas argue in their latest article that “the primacy of the U.S. dollar grants the U.S. government and economy special privileges… as the adoption of crypto and CBDC increases, the benefits afforded to the U.S. by the dollar’s dominance will gradually decrease.”

However, experts like Professor Paul Krugman  clearly denied that U.S. dollar’s world dominance is at risk. According to Krugman, the U.S. dollar dominance still looks pretty secure because its major competitor, China, is an “autocracy with a propensity for erratic policies” and therefore people will not prefer yuan assets.

In the aftermath of the financial crash of 2008, many countries struggled to access the U.S. dollar (USD) to save their national currency as the U.S. Federal Reserve Bank tightened its grip on the global reserve currency. The resulting liquidity shortages and lack of access were severe to many currencies which saw their values decrease against the dollar. Export-led economies gained some competitiveness due to such devaluations, but those that rely on imported raw materials struggled to finance their main industrial inputs due to the higher cost of borrowing dollars.

In search of solutions, many countries proposed to de-dollarize trade and instead conduct bilateral trade in national currencies. Such trades will be based on fixed exchange rates which will mitigate the risks associated with currency devaluations and severe exchange rate fluctuations. Furthermore, geopolitical troubles and the impact of currency wars can be better managed in such an internally controlled relationship with no exposure to USD influence.

In recent years, with the increased weaponization of the dollar and the use of sanctions, many countries became more incentivized to explore trading in national currencies and using international payment systems other than SWIFT, which is heavily influenced by the U.S. The calls to trade in national currencies have grown even more recently in the aftermath of the largest ever western U.S.-led sanctions on Russia after it launched a “military operation” in Ukraine “to prevent it from joining NATO.”

The sanctions alarmed more countries to the risks associated with relying only on the USD as the international trade currency and promoted the need to encourage trade in national currencies that are not influenced by the U.S. government and financial institutions.

This global trend has extended to the Middle East region. Many efforts, led by Iran and Turkey, were made in the past few years to discover and promote trade in national currencies. Thus far, bilateral trade among Middle Eastern countries increased, but remains limited. However, Iranian and Turkish leaders have increasingly voiced their willingness to boost such trading.

The path to de-dollarization

Globally, China, Russia, and India are leading the efforts to conduct trade in national currencies especially after Russia fell under western sanctions in 2014 following the annexation of Crimea. To enable such a process, Russia and China have created their own alternative payment mechanisms to SWIFT, namely the “System for Transfer of Financial Messages” (SPFS) and the “Cross-Border Interbank Payment System” (CIPS) to conduct bilateral and multilateral trade. India has also joined such efforts.

More recently, following the war in Ukraine and the ensuing western sanctions, Russia has asked “unfriendly countries” engaged in sanctions against it to pay for their fuel purchases in rubles. This would help stabilize the ruble and undermine the significance of sanctions.

The BRICS countries have also sought to discuss deepening trade in national currencies. For example, the R5 initiative was proposed and targets the use of the respective national currencies of BRICS countries—ruble (Russia), rand (South Africa), real (Brazil), rupee (India), and renminbi (China)—to settle trades mutually and globally.

Such a strategy would include measures to boost trade and long-term investments, the creation of common settlement/payment systems, and promoting BRICS currencies as reserve currencies. On 9 April 2022, the Finance Minister of Russia called on the BRICS group of emerging economies to speed up work in the following areas: the use of national currencies for export-import operations, the integration of payment systems and cards, the creation of a financial messaging system and the creation of an independent BRICS rating agency. The call for urgency signals Russia’s embracement of a new financial architecture needed to overcome western sanctions that are strangling Russia’s economy.

In March 2022, the Eurasian Economic Union-China dialogue said it was discussing the development of a project for an independent international monetary and financial system that will be based on a new international currency, whose value will be calculated as an index of the national currencies of the participating countries and commodity prices. The aforementioned efforts confirm the direct development of the global financial system away from the dollar towards a multipolar financial global order.

De-dollarizing MENA

In the MENA region, Iran has conducted trade in national currencies with Lebanon, Syria, and Iraq, and is seeking further trade with Turkey which has been reluctant in growing its trade in national currencies due to sanctions. Iran is motivated by its wish to overcome western sanctions and to extend its trade in national currencies conducted with Russia, India, and China.

Turkey has also sought to expand its trade links in national currencies in the region and beyond. Most recently, Turkey signed a 5-billion-dollar currency swap deal with the UAE for three years. It also signed a similar agreement with Qatar for 15 billion dollars. The Turkish lira is also now heavily used in Syria and Libya by citizens who do not trust the value on their own national currencies and wish to continue trade with Turkey.

Globally, Turkey has signed swap agreements to trade in national currencies with Russia, China, South Korea, and some Islamic countries. In the future, regional powers are expected to deepen their interregional trade settlement and financial dealings in their national currencies further.

The limits of trading in national currencies

Trading in national currencies can relieve anxieties about using the dollar in trade which undermines countries’ abilities to import affordable raw materials and energy for their manufacturing activities. However, there are many limitations to watch out for.

First, national currencies are not always stable, and they can easily be influenced by domestic economic and monetary policies. In Turkey, the value of the lira swung heavily in November 2021. Similar things happen in China, which exercises heavy controls over its currency in order to maintain its import competitiveness in the global market.

While national currencies might be useable for short-term trading, in the long term they remain unreliable as an option to save or as reserve currencies that can survive the test of time and changing policy, geopolitics, and international alliances.

Second, national currencies are particularly unstable for smaller countries whose economies are small, political systems are unstable, and lack the ability to protect themselves from outside threats. Thus, national currencies might be more realistically used by regional and global powers only, and hence will have limits to their universal adaptability.

Technology can help in overcoming such problems by creating an indexed digital international currency, but there will remain the need to ensure the security of small countries by regional or global guarantors who can ensure stable economic activity and security and thus local currencies.

The move towards de-dollarization remains in its nascent stage; however, the Russian war in Ukraine may have accelerated the growing move towards trading in national currencies to avoid the weaponization of the dollar and sanctions.

All in all, it remains to be seen if international mechanisms will be established to formalize such steps and discuss the introduction of guarantees that can protect such a trading system from diverse kinds of shocks such as domestic instability and international conflicts. In the MENA region, Iran and Turkey are likely to remain the main prominent forces supporting such an idea. However, realignments might hinder such efforts or slow their progress as both countries draw closer to the west.

When bitcoin first emerged in 2009 in the aftermath of the greatest financial crisis in human history in 2008, its utility was questioned and scrutinised. Today, the price of bitcoin stands at $47,000 after it rallied from $5,000 when coronavirus lockdown hit the global economy back in March 2020. This is 10x value unfold in less than a year. The spectacular rise in value boggled the minds of many including investors, regulators, and bankers.

So why bitcoin is rising? Since the financial crash of 2008, questions were raised about the future of the US dollar as the global reserve currency. The quantitative easing policy adopted by the Federal Reserve Bank was described by many economists and financiers as the recipe to the destruction of the US dollar exorbitant privilege and its status as the global reserve currency.

Simply put, no one wants to save and invest their wealth in a currency that constantly loses its value to inflation. Loss of wealth that happened to many countries and investors that save in dollars is significant. The dollar had an average inflation rate of 1.64% per year between 2007 and today, producing a cumulative price increase of 25.63%.

Investors who have to deliver profits to their clients needed to hedge against dollar inflation. Thus, an influx of institutional investors lined up to buy bitcoin as they saw it become the gold standard for the digital era. The limited supply of bitcoin at 21 million coins means it is inflation-proof.

Scarcity of bitcoin operates as the catalyst for the increased demand on bitcoin and thus its price increases against the dollar. Therefore, institutional investors such as MicroStrategy and Guggenheim Partners fund managers increased their portfolio holdings of bitcoin and offered related financial services to their clients.

Not only institutions are lining up to buy bitcoin, but also retail investors have increasingly shown greater interest in the coin and used it to hedge against losses to their savings in dollars due to inflation and to trade it. Companies such as PayPal, Square, and Visa have allowed or about to allow their customers to deal in bitcoin and used that to boost their payment solution for their customers which increased the number of retail investors who got into bitcoin.

The ongoing changes in the global economy are also part of the reasons for bitcoin rise. The Bretton Woods system of a gold-pegged dollar made the US (which owned 80% of world’s gold reserve at the time) the world leading economy. Eventually, to maintain the financial privilege, the US economy deindustrialised and became a service and finance-based economy.

With China’s rise, and due to security concerns around the safety of its supply chains, the US is interested in getting industry back onshore. Devaluing the dollar helps achieve such strategic objective as the US seeks to reclaim its domestic manufacturing capabilities.

The economic dynamic of bitcoin is simple. As USD value decreases, conversely, the price of bitcoin increases.

Overall, the economic dynamic of bitcoin is simple. As USD value decreases, conversely, the price of bitcoin increases. The increased demand helps institutional investors save their treasury, increase their profits, and adapt to technological changes in digital payment systems using blockchain-enabled technologies such as bitcoin.

Thus, China tried to exercise regulatory control over Chinese holding bitcoin by banning cryptocurrencies. However, the Chinese crackdown on bitcoin led to more Chinese investments in the coin as it proved the need for non-government-controlled assets.

Today, China is a dominant actor in bitcoin mining. This is due to the cheap cost of electricity, mining equipment, and land. Furthermore, the strong capital controls exercised by China lured many Chinese who cannot move money abroad to bitcoin. Since China could not beat bitcoin, it decided to play its own blockchain game.

Globally, by deploying the digital yuan, China aims to offer foreign governments an opportunity to save and invest in a currency other than the dollar.

Hence, in April 2020, China announced its commitment to launching the digital yuan which would use blockchain technology. The aim of such move was to maintain the power of the Chinese state over the wealth of the nation, to reap the benefits of the new technology to reduce transactions cost and time, and to preserve the domestic power of the Chinese Communist Party.

Globally, by deploying the digital yuan, China aims to offer foreign governments an opportunity to save and invest in a currency other than the dollar. This shall help, according to the government view, boost the status of the yuan as a global reserve currency. Over the past few years, the yuan value has been appreciating, and China continues to implement policies that encourage its internationalisation.

Bottom line, China is happy the USD is losing its status as the global reserve currency which was used by the US to exercise power globally over the past seven decades. Furthermore, China’s mind is open to technological changes and is trying to harness the blockchain technology to boost the global financial status of the yuan, which is expected to help China materialize its goal of becoming the world’s top economy by 2050 and contribute to the success of its Belt and Road Initiative.

From the US point of view, the Federal Reserve Bank continues to signal a quantitative easy policy via trillions of dollars of stimulation packages. In 2020 alone, $10 trillion were injected in the US economy to offset COVID19 depression.

The Biden administration promised more stimulus packages and an increase in the minimum wage to $15, which is expected to inflate prices. Therefore, American and international investors and retailers alike have a low level of confidence in the Fed’s willingness to protect the value of the dollar.

Is all bitcoin story gloomy? Of course not. Despite the rosy picture bitcoin enthusiasts show, mass adoption of the coin lags due to several concerns about the high volatility of bitcoin prices and the impact of bitcoin mining on the environment. However, on the long run, as more institutional and retail investors adopt bitcoin, the price will stabilise. Furthermore, mining bitcoin using green energy will become viable.

Taxing bitcoin holding is another issue due to the anonymity enjoyed by the holders. However, many governments have figured out ways to tax bitcoin holders and mechanisms continue to be developed to achieve such objective.