What is a “global currency reset”? Let’s parse the term by first explaining that a currency reset is either a revaluation or devaluation of a nation’s currency within a fixed exchange rate system. If a nation revalues its currency, its central bank raises the value of the nation’s currency at a fixed peg with a reserve currency, such as the U.S. dollar. A devaluation would lower the value of the currency in relation to the reserve currency. The alternative — which most of the world’s developed economies use — is the free-floating currency, which means the currency’s value is independent of the values of other currencies. Hence, the value of a free-floating currency is determined by supply and demand.
Generally, a nation revalues its fixed exchange rate currency in response to positive economic growth and trade surpluses, as China did with the renminbi in 2005. If a nation runs trade deficits or suffers continuous capital outflows, they may find themselves obliged to devalue their currency. One way nations devalue free floating currencies is, intentionally or not, by inflation. Many economists assert that a fixed exchange rate muzzles inflation. However, the U.S. Federal Reserve has spent trillions buying securities through its Quantitative Easing program; officially, the federal government claims that the nation’s inflation rate has been around 2% annually. With all the new money introduced by the Fed over the past few years, the market dynamics of supply and demand dictate that high inflation or even hyperinflation is on the horizon for the U.S. dollar.
Thus, a “global currency reset” (GCR) would be either a revaluation or devaluation of a reserve currency. It could even mean that the world moves away from the reserve currency altogether. The most apocalyptic scenario would involve a hundred countries or more simultaneously devaluing their currency – an event unprecedented in world history but one not beyond the realm of possibility. Why would this cataclysm occur? It would be a currency world war where scores of nations compete to lower their exchange rate to boost their exports and remedy trade deficits. And according to some economists, currency wars don’t contribute to economic depressions — they end them.
As the U.S. dollar has been the world’s reserve currency since World War II, a GCR would have a profound impact on the dollar’s role in international finance and trade. Perhaps most significantly, the U.S., which has borrowed exorbitantly since the time of the Vietnam War, would see its borrowing costs skyrocket. European economists have conceptualized the term “exorbitant privilege” for the advantage that the U.S. holds over other nations by benefit of being the world’s reserve currency. By serving as the world’s reserve currency, the U.S. would never face a currency crisis (i.e., a sudden currency devaluation). A GCR would remove America’s exorbitant privilege. BRIC nations are already in the process of moving away from the dollar. For example, China has established bilateral trade agreements with with Australia, Japan, Thailand, Russia and Vietnam that allows for direct currency trade instead of converting to the U.S. dollar.
What does this have to do with precious metals? A GCR, which is already beginning, will devalue the U.S. dollar, causing inflation to rise rapidly. If Americans (or anyone else) have their wealth stored in the dollar, a fiat currency, inflation will rob them of their affluence. What will serve as a reserve currency? Gold and other precious metals have traditionally been a steadfast haven for protecting wealth. When fiat currencies collapse beneath their worthless weight, intrinsic assets like gold and silver will remain as a benchmark for the world’s currencies. Just look at the amount of gold China, India and the other BRICs have purchased since the Great Recession and draw your own conclusions.
Precious metal sages are fond of saying: “Don’t wait to buy gold and silver. Buy gold and silver and wait.” That’s what the world’s richest individuals do.