The Dollar: Gold Beating Green
National Review Online, June 17, 2025
Espanola, New Mexico, August 2016 © Andrew Stuttaford
The Israel-Iran war has triggered yet another rise in the price of gold. That is no surprise. Gold has been seen as a safe harbor by investors for a long, long time. More interesting is that the price of gold has been strengthening for a while now, something I discussed in a Capital Letter from April 2024. I attributed its strength to, among other factors, worries about inflation, worries about America’s fiscal position, and worries about a tense geopolitical situation. Since then, concern over the latter two has not exactly gone away, and tariff wars have only added to investor jitters. In April 2024, gold was trading at around $2,400, an all-time high. It is now priced at about $3,400, up about 6 percent on the month.
In part, the surge in the gold price (in dollars) is the flipside of the greenback’s weakness. Year to date, the DXY (a dollar index calculated against a “basket” of major currencies) is down about 9.5 percent, a fall made steeper by the fact that nervous investors view the dollar as less of a refuge than they once did. More of their money is now going to alternative safe havens, such as gold and the Swiss Franc. Over the past month, the gold price in Swiss Francs is up only 1.5 percent). The inflow of flight capital has pushed up the Swiss Franc to such a level (it is up over 11 percent against the U.S. dollar this year) that it is threatening the country’s export industries. As a result, the Swiss central bank is reportedly contemplating cutting interest rates to zero.
In an entertaining and educational twist, gold, a lump of metal, has overtaken the euro, a junk currency dreamt up by central planners, as a reserve asset held by central banks. That reflects both buying by central banks and the increase in the price of gold already held by them, but it is hard not to laugh. One of the reasons the euro was established was to operate as a rival reserve currency to the dollar. Many of Europe’s leaders regarded that position as (in the words of a French finance minister) an “exorbitant privilege.” They envied the power and the freedom of maneuver that it gave the U.S., something worth remembering when Washington is paying less attention to preserving that status than it should.
Gold] Bullion accounted for 20 per cent of global official reserves [in 2024], outstripping the euro’s 16 per cent and second only to the US dollar at 46 per cent, data from an ECB report published on Wednesday showed. “Central banks continued to accumulate gold at a record pace,” the ECB wrote, adding that central banks for the third year in a row acquired more than 1,000 tonnes of gold in 2024, a fifth of the total global annual production and twice the annual amount in the decade of the 2010s.
Central bank gold reserves are hitting levels last seen in the Bretton Woods era, which ended in 1971. According to the FT, they reached 36,000 tonnes in 2024, a figure not too far short of its mid-1960s’ peak (38,000 tonnes). The FT singles out the central banks of India, China, Turkey and Poland among those doing the buying. The former two (or three: Turkey?) have seen how Western sanctions regimeshave made holding euros and dollars far riskier than once anticipated. Poland, which has wisely stayed out the euro, has a better understanding than most of how badly things might go to its east. Should Russia’s military move against an European Union country, which is better likely to hold its value, gold or the euro?
After a lag, some other precious metals, such as silver and platinum, are following gold’s lead. That’s not unusual after a rally in gold but it is yet another sign that dollar worries may haunt the markets for a while.
Silver prices have surged to a 13-year high, and platinum prices are at their highest levels in four years, with both metals up more than 10 per cent this month.
Analysis of the silver and platinum markets is complicated by the fact that both metals have industrial uses, meaning that they are less “purely” speculative than gold. Nevertheless, the inflow into platinum ETFs indicates that more is at work than a mismatch between industrial demand and supply. Its price is up 18 percent this month. Hook also quotes a precious metals analyst who observes that the gold price-to-silver price ratio is traditionally around 65, but is now roughly 93, suggesting that silver is undervalued when compared with gold (please note that we don’t give investment advice here at Capital Matters!).
For all that, the dollar remains the closest that the world has to a reserve currency, the foundation on which much of the financial system stands. One way in which that role is reinforced is by the Fed’s operation of “dollar liquidity swap lines” to supply a limited number of highly rated central banks with dollars in the event they run short. For example, if troubles in a country’s banking sectors are setting off a dash for cash, the result may be a local shortage of dollars. A domestic central bank cannot, of course, print its own dollars, but, if it qualifies, it can draw on a swap line with the Fed to secure the dollars it needs.
This is no giveaway. The Fed explains here how the swap lines work:
When a foreign central bank draws on its swap line with the Federal Reserve, the foreign central bank sells a specified amount of its currency to the Federal Reserve in exchange for dollars at the prevailing market exchange rate. The Federal Reserve holds the foreign currency in an account at the foreign central bank. The dollars that the Federal Reserve provides are deposited in an account that the foreign central bank maintains at the Federal Reserve Bank of New York. At the same time, the Federal Reserve and the foreign central bank enter into a binding agreement for a second transaction that obligates the foreign central bank to buy back its currency on a specified future date at the same exchange rate. The second transaction unwinds the first. At the conclusion of the second transaction, the foreign central bank pays interest, at a market-based rate, to the Federal Reserve. Dollar liquidity swaps have maturities ranging from overnight to three months.
Swap lines are in place with the Bank of Canada, the Bank of England, the European Central Bank (which only benefits EU countries that have adopted the euro), the Bank of Japan, and the Swiss National Bank.
And what happens if a central bank lends some of those dollars to an embattled local institution?
The Fed explains (my emphasis added):
[T]he dollars are transferred from the foreign central bank’s account at the Federal Reserve to the account of the bank that the borrowing institution uses to clear its dollar transactions. The foreign central bank remains obligated to return the dollars to the Federal Reserve under the terms of the agreement, and the Federal Reserve is not a counterparty to the loan extended by the foreign central bank. The foreign central bank bears the credit risk associated with the loans it makes to institutions in its jurisdiction.
This arrangement is not an act of charity by the U.S. The worse a financial crisis in one major economy becomes, the greater the chance that it will spread, and the lower the possibility that the U.S. will be spared its effects, whether directly or because financial markets are so susceptible to “contagion.” Financial problems in one country’s banks can damage confidence in another’s banks too.
One of the most dangerous forms that contagion can take is when banks stop depositing money with each other. In a recent (May) article on Reuters, the authors related what happened when Credit Suisse, a major Swiss bank (as its name would suggest) ran into trouble in May 2023. Clients were withdrawing billions from the bank, and then banks started reducing their exposure too. The Fed sent tens of billions of dollars via the swap line to the Swiss central bank, which then sent those dollars to Credit Suisse (while remaining itself on the hook to the Fed), reducing concerns of an imminent collapse. A broader crisis was averted.
On top of relatively routine operations, in the past two decades the Fed’s dollar liquidity swap lines have helped the financial system weather the great financial crisis, the eurozone disaster, and the pandemic. The sums involved were not small. In an article for the Financial Times Gillian Tett noted that:
[D]uring the 2008 financial crisis, the Fed activated some $583bn in swap lines for non-US central banks, to enable dollars to flow to commercial banks. It did the same during the Eurozone crisis and then provided $450bn during the Covid pandemic in 2020 — a move that quelled financial contagion, according to the Richmond Fed.
But apart from some minor administrative expenses, these operations came at no net cost to the Fed. Given the likely economic damage in the U.S. had these crises inflicted even more damage on the financial system, the swap lines saved Americans money and jobs. Moreover, their very existence operates, like the FDIC’s deposit guarantee, as a form of inoculation that stops smaller problems spiraling into something more serious.
The swap lines also help underpin the role of the dollar as the world’s leading currency, a role that is an immense source of American political and economic power (and incidentally, helps it borrow more cheaply than would otherwise be the case), a massive force multiplier.
Donald Trump 47 is proving to be very different from Trump 45 and that is stirring concern that the swap lines may not be as secure as has been assumed. Should anxiety about this spread, it will contribute to the erosion of the dollar’s status and add to the appeal of its golden alternative. Fed chairman Powell’s term ends in 2026, raising worries that his successor may be more open to closing the swap lines. Powell understands that keeping them open is in America’s interest. The Senate should make sure that his successor feels the same way.
However, as the FT’s Aditi Sahasrabuddhe writes, Congress has a broader role to play in this area:
The Fed’s ability to act relies on a grant from Congress from 1914 that authorizes such actions. Congress grants the Fed its authority, and it can take it away. The Fed’s five current standing swap lines with central banks in Europe, Japan and Canada are not as long-standing as many believe; they are reconstituted annually…
There has long been concern in Congress that crisis support amounts to “bailing out foreigners”.
As explained above, the swap lines are far from being that.
The FT’s Tett adds that:
It is also unclear whether Washington might attach conditions to the permanent swap lines. After all, Scott Bessent, Treasury secretary, views finance, military, trade and tech issues as being deeply entwined.
If he does, his influence must be negligible. One of the distinguishing features of this administration’s early months has been the failure to connect those different elements. For example, reducing America’s economic dependency on China (a worthwhile, and in certain areas, urgent objective) would be much easier without simultaneously launching a trade war against large chunks of the rest of the world.
Tett’s specific concern about Bessent regarding “finance, military, trade and tech issues as being deeply entwined” is based on her fear that the U.S. might attach conditions to any renewal of swap lines have that have expired (those to central banks in nine other countries, including Australia, Brazil, and Canada): “If the Fed offered swaps to the Danish central bank, say, would Trump demand concessions on Greenland? It is also unclear whether Washington might attach conditions to the permanent swap lines.” But for the administration to attach such non-financial conditions to the extension of the swap line would be an example of policymaking that owes more to the souk than to geopolitical strategy in which (as they should be) “finance, military, trade and tech issues” are “deeply entwined.”
Unfortunately, the administration’s recent record suggests that such a blunder is not inconceivable. This explains why, despite comments coming out of the ECB expressing confidence in the survival of the swap lines, preparations for a plan B appear to be under consideration.
European Central Bank supervisors are asking some of the region’s lenders to assess their need for U.S. dollars in times of stress, as they game out scenarios in which they cannot rely on tapping the Federal Reserve under the Trump administration, three people with knowledge of the discussions said.
Nearly one-fifth of euro zone banks’ funding needs are denominated in U.S. dollars, with the lenders borrowing in markets for short-term funding that can shut down abruptly in times of financial stress.
According to Reuters, the ECB is pressing banks in its region to reduce dollar exposure that would not be adequately covered in the event of a dollar squeeze. That’s sensible, but it too would chip away at demand for dollars and the idea of the greenback as the linchpin of the global financial system.
Talk like that only adds to the appeal of gold and other alternative safe havens, and, if talk were to be followed by deed, well . . .
Extract from the Capital Letter for the week of June 9, 2025