Introduction
The Trump 2.0 presidency is expected to accelerate the trend of deglobalization and supply chain diversification. According to Global Trade Alert, from 2021 to 2024, approximately 3,000 restrictive trade measures were imposed globally each year, slowing down the growth of international trade. In response, companies have been shifting their supply chains to India, ASEAN countries, Taiwan, Japan, South Korea, among others, which has inadvertently stretched supply chains and prolonged lead times.
Meanwhile, the Russia-Ukraine war has led to frequent financial sanctions by the U.S. and Western nations, with the weaponization of the dollar prompting emerging market economies to reassess the legitimacy of the dollar’s hegemony. At the BRICS summit this October, the creation of the BRICS Bridge platform was proposed to counter the SWIFT cross-border payment system. Currently, more than 30 countries, including China, Russia, the UAE, Brazil, and India, are using the Chinese renminbi (RMB), or yuan, for trade settlements. Coupled with the US's debt ceiling and fiscal deficit issues in recent years, confidence in the dollar and U.S. Treasuries is waning, prompting countries to scale up gold reserves as a hedge against risks of fiat currency devaluation.
With 2025 and a second Trump administration on the horizon, the global political and economic order is poised for major transformation. In this article, we delve into the following questions in detail:
- Is the dollar's supremacy under threat, and who could replace it?
- What are the consequences if emerging markets continue to offload U.S. Treasuries?
- With rising global economic uncertainty, what are the trends shaping gold’s long-term potential?
I. Is Dollar’s Supremacy at Risk? Could Renminbi’s Internationalization Challenge It?
The de-dollarization trend has been a key topic of discussion in recent years. To understand whether Trump’s return could further undermine the dollar’s dominance, let's first revisit the fundamental characteristics and criteria of an international currency.
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A currency must serve three basic functions: a medium of exchange, a common measure of value, and a store of value. An international currency is one that can perform these functions beyond domestic borders. It is widely used by governments and private sectors for international trade and finance, such as pricing, payment, clearing, and investment. Examples include the U.S. dollar, euro, yen, pound sterling, and the Chinese yuan, which has gained prominence in recent years.
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Of the roughly 180 fiat currencies recognized by the United Nations, which ones meet the requirements to qualify as international reserve currencies? According to the U.S. Treasury Department's Report to Congress on International Economic and Exchange Rate Policies in 2009, six key factors determine a currency's status as a primary international reserve currency: (1) the size of the domestic economy, (2) importance of the economy in international trade, (3) size, depth, and openness of financial markets, (4) convertibility of the currency, (5) use of the currency as a currency peg, and (6) soundless of domestic macroeconomic policies.
In the chart below, we’ve compiled data on the use of international currencies from the International Monetary Fund (IMF), Bank for International Settlements (BIS), and Society for Worldwide Interbank Financial Telecommunication (SWIFT). All indications show that the dollar's market share remains significantly higher than that of other major currencies like the euro, yen, pound, and renminbi, suggesting the dollar’s dominance remains hard to displace.
As for the yuan, the currency of utmost market interest, has only seen notable growth in its role for quotations in international trade. China first introduced cross-border trade settlements in yuan in July 2009. Fast forward to today, data from the People’s Bank of China (PBoC) shows that, in the first eight months of 2024, the share of country's cross-border trade in goods settled in yuan was 26.5%, up from 24.8% in 2023 and 18.2% in 2022.
Data from SWIFT also shows that the dollar still accounts for over 80% of international trade finance (in terms of letters of credit and documentary collections), but the yuan has overtaken the euro as he second most used currency for that purpose, with its share for documentary credit transactions reaching a record high of 5.9% in 2024.
The status of an international reserve currency is often entrenched, with shifts away from dominance only occurring slowly over long periods. In his book The Changing World Order, Bridgewater Associates founder Ray Dalio points out that the decline of a reserve currency’s status on average occurs roughly a century after an empire has reached its zenith.
Drawing from history, the U.S. economy surpassed European powers in the 1870s after the Civil War, but it was only until the 1920s, during the two World Wars, that the dollar’s share of global foreign reserves and foreign debt issuance exceeded 50%, with its hegemonic status solidified following the 1931 sterling crisis and the 1944 Bretton Woods agreement.
Returning to the current context, given that China's nominal GDP and per capita GDP have yet to surpass the U.S., and its trade volume is still only half that of the Eurozone, it’s still difficult for the RMB to compete with the dollar and euro as a major global reserve currency.
II. Emerging Economies Have Been Offloading US Treasuries, Could Trump’s Comeback Spur Further Sell-Offs?
Beyond directly holding currencies, U.S. Treasuries are another preferred option for store of value. From 2008~2019, China was the largest foreign holder of U.S. Treasuries, with its holdings peaking at $1.3 trillion in 2013. However, following the PBoC’s forex interventions in 2016 and the onset of the U.S.-China trade war in 2018, China’s holdings have dropped to $772 billion, trailing Japan and close to being overtaken by the UK.
Similarly, Russia offloaded over 80% of its Treasury holdings ($81.2 billion) in just two months in 2018, in response to sanctions imposed by the Trump administration. Other emerging markets, including Brazil, Saudi Arabia, Turkey, and South Africa, have also been reducing their holdings in recent years. Could Trump’s impending return to the White House trigger another wave of sell-offs?
Our analysis suggests a more nuanced picture. The Treasury Department’s Treasury International Capital (TIC) reports only record the locations of transactions, rather than the final holders of the securities. For example, if a Chinese investor buys Treasuries through a European clearing house, such as Euroclear in Belgium or Clearstream in Luxembourg, the TIC report will list Belgium or Luxembourg as the transacting party, not China.
From early 2018 to early 2024, TIC data shows that China's Treasury holdings have declined by around $370.5 billion, but over the same period, holdings by Belgium and Luxembourg have increased by $168.5 billion and $155.6 billion, respectively. While it's impossible to pinpoint the exact final holders, considering China's foreign exchange reserves have remained relatively flat during the period, it is reasonable to infer that China may be reducing the transparency of its Treasury holdings through intermediaries.
Similarly, financial hubs like the UK, Switzerland, Ireland, and the Cayman Islands, with more favorable financial and tax conditions, can also serve as conduits for foreign investors to invest in U.S. Treasuries. In fact, foreign holdings of Treasuries have continued to rise at an average annual rate of 6% over the past 15 years, growing from $3.4 trillion in early 2009 to $8.7 trillion in September 2024. This indicates that the selling pressure may not be as severe as expected.
Even if overseas interest wanes, the capacity for domestic demand to absorb Treasuries remains strong. Foreign ownership of U.S. Treasuries accounted for a record 55% during the during the 2008 financial crisis, but this share has since fallen to 30% in 2024, marking the lowest level since 1997. Meanwhile, through multiple rounds of quantitative easing, the Fed has increased its holdings from less than 8% in the Q1 2009 to 21% in Q4 2021.
Also, from 2008 to 2023, domestic investors, including U.S. residents, domestic banks, and money market funds, have significantly increased their Treasury holdings. Respectively, their shares of holdings have risen from 6%, 0.96%, and 4% to 11%, 5.5%, and 5.6%, representing a 5- to 10-times increase in absolute value. In short, robust demand from the Fed and domestic investors has filled the gap, supporting demand for U.S. Treasuries.
While foreign ownership of U.S. Treasuries has declined from a peak of 50% to 30%, and emerging economies have been reducing their holdings in recent years, we believe the impact will remain limited, for two reasons: (1) As noted, China is likely masking the visibility of its Treasury holdings through custodial banks in Belgium, Luxembourg, and other countries, and the total amount of foreign holdings has continued to grow at 6% annually since the financial crisis, suggesting limited selling pressure; (2) Even if foreign purchases diminish due to factors like de-dollarization, currency interventions, or reserve currency diversification, domestic buyers, including the Fed, financial institutions, and U.S. residents, can fill the gap. As a result, Treasuries remain as one of the world's key stores of value.
III. Gold Emerges as Top Safe-Haven Asset, Benefiting from De-Dollarization, Rising Public Debt, and Global Monetary Easing
While the status of the dollar and Treasuries may not be as vulnerable as many perceive, in today’s era of heightened uncertainty, gold can still emerge as the biggest winner. Below
we examine the asset’s medium-to-long-term potential based on three key trends: central banks bolstering gold purchases, rising public debt, and global monetary easing.
1. Central Banks Bolstering Gold Reserves:
The over 180,000 sanctions imposed by Western nations against Russia since the outbreak of the Russia-Ukraine war in 2022, including the freeze on $300 billion of Russian central bank assets, have sparked concerns over the dollar's “weaponization” and prompted emerging economies to rethink their reliance on the dollar. Gold reserves of BRICS central banks have risen from 4,360 tonnes in 2018 to 5,550 tonnes in 2024, with China and Russia being the most active buyers. In 2023, gold reserves of emerging economies worldwide surpassed 10,000 tonnes, signaling that the gold-buying trend extends beyond the BRICS nations. According to a survey by the World Gold Council, most central banks intend to increase their gold reserves in the coming year, underscoring the asset’s growing importance in central bank portfolios.
2. Rising Global Public Debt Boosting Gold’s Appeal:
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