The U.S. Dollar is currently the world’s reserve currency, meaning most foreign countries rely on the Dollar as a hedge against domestic instability. Any discussion about replacing the U.S. Dollar always ends with the same uncertainty about which currency should replace it. The Japanese economy has too much debt, the Chinese Yuan is too restricted (and has a picture of Chairman Mao on it), and the Euro is trash.
Gold, on the other hand, is not issued by any government, and cannot be controlled by one. It is the only true denationalized money, to borrow a term from Hayek.
According to the IMF’s data, governments of the world disclosed that they held $3.2 trillion worth of U.S. Dollars as apart of their total foreign exchange reserves. There was a total of (U.S.) $9.6 trillion worth of foreign exchange in the world. (That means some governments were too embarrassed to admit which currencies they hold as reserves.)
At about the same time, governments of the world held about 30,684 tones (986 million ounces) of gold. (World Gold Council data, free membership required to access the data.) If we divide $3.2 trillion by 986 million ounces, we get:
3,219,964,000,000 / 986,521,284 = $3,263.96
Meaning: If the price of gold reaches $3,264 per ounce, the value of national gold reserves would surpass the value of allocated U.S. Dollar reserves. The current value of one ounce of gold (July 8th, 2011 Monex closing price) is $1,544 per ounce. That means the value of national gold reserves is $1.5 trillion. This is more than the value of allocated Euro reserves, which stood at US$1.4 trillion at the end of 2010.
Gold has already surpassed the Euro, which is the Dollar’s most likely alternative as a reserve currency.
The problem with these calculations is that we only know the allocated reserves of the world. There are still $4.4 trillion worth of reserves that we do not know which currency they are held in. Even if we assume this total amount is held in U.S. Dollars, which is not likely, the price of gold would only have to reach $7,713 per ounce to surpass the U.S. Dollar as the world’s reserve currency.
Anyone who believes the U.S. Dollar will remain the world’s reserve currency should ask why gold has already surpassed all of its most likely competitors, yet no one seems to be talking about it.