De-Dollarization Is Not the Same as A Weaker Dollar. Gold Is the Clue.

The de-dollarization story is everywhere. You see it in publications from the New York Times to the Economist and in financial media including CNBC, Fox Business, and Bloomberg.

The idea is that countries around the world are preparing to ditch the dollar. This takes many forms including efforts by China to pay for imported oil from Saudi Arabia and the UAE with yuan, and a major bilateral agreement between China and Brazil that allows each country to pay for exports from the other using their local currencies. Russia got in the act by agreeing to receive rupees for oil delivered to India and paying for imports from China with rubles.

All these efforts will be converging and coming to a head in late August when the BRICS (Brazil, Russia, India, China, South Africa and other invited countries) meet to announce a new BRICS+ currency linked to gold.

With all of that going on, one might expect to find the dollar in freefall. Yet, that’s not the case as reported in this article. The dollar has been strong lately and I expect it to get stronger in the months ahead.

What gives? How can the dollar be under global attack and yet be strong at the same time?

The answer is found in the way you measure value in any currency. Dollar strength or weakness is typically measured in major currency indices, including DXY (used for futures trading and quoted in the Wall Street Journal) and the Bloomberg Dollar Index. Other major indices include those computed by the Federal Reserve (I use the Fed indices in my own research and analysis).

What all these indices have in common is that they compare currencies to currencies, usually the major reserve currencies. A typical dollar index will compare the dollar to a basket consisting of euros, sterling, yen, Swiss francs, and perhaps one or two others.

Because of the importance of the euro in world trade and reserves (second only to the dollar), these indices tend to be just more complicated versions of the EUR/USD cross-rate. The emerging markets’ currencies are typically left out of such indices.

Meanwhile, the bilateral currency deals described above do not include dollars. When you look at a bilateral currency deal involving yuan or rubles, the dollar is not included at all. So, it’s entirely possible to have a strong dollar (measured mainly against euros) and a growing de-dollarization trend involving yuan, rubles and rupees. The two trends are talking past each other.

Is there some way to tell if the dollar is actually getting stronger or weaker without making reference to reserve currencies or EM currencies? Yes. The answer is gold.

It’s not a currency, and the comparison is made by the weight of gold, not currency-to-currency. When the dollar price of gold is lower, the dollar is stronger, and vice versa.

The new BRICS+ currency may throw a monkey wrench into this market by linking itself to gold. In that case, Russia and China will have a strong interest in higher gold prices because that means their BRICS+ currency will be worth more. And that may trigger the real decline of the dollar. Investors should buy gold now while they still can and get on the BRICS+ bandwagon.

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