TOKYO – Long-time gold bulls owe Jerome Powell a debt of gratitude as the easiest credit policies ever to pour out of Federal Reserve headquarters send the yellow metal into the stratosphere.

Gold’s surge to record highs, though, has Asian central banks thinking about actual debt, and the idea of gratitude has no role in this collective brainstorming. The jump in gold to about US$2,000 per ounce, and corresponding resurrection of Bitcoin values, is not about inflation, but rather waning trust in the US dollar.

That waning trust may be good news for America’s number one competitor China – where hints of an upcoming gold-renminbi exchange standard could provide traders, markets and banks with a compelling new currency: an international gold-underwritten yuan.

Markets don’t tend to move in straight lines, of course. The rally took a breather on Wednesday, with gold posting its biggest drop in seven years. That’s partly a reaction to a slight upward bump in US producer price inflation, and partly investors locking in their winnings.

Yet the odds favor gold resuming its uptrend as the dollar stumbles.

The most immediate worry for Asia is the roughly $3.5 trillion of US Treasury securities held by the region’s biggest economies. Years of worrying about titanic paper losses on Washington’s IOUs may now become a reality. But bigger concerns can no longer be ignored.

One is the possible collapse of the cornerstone asset of the global financial system. Should the dollar stumble, the shockwaves could upend markets, economies and perhaps even governments as financial dislocation spreads.

The US dollar is sinking amid twin health and economic crises. Image: Twitter

A falling dollar drives Asian exchange rates higher, slamming export competitiveness. The other: finding a viable alternative, or perhaps even a few.

This month’s run on the dollar is not a drill. The July 31 move by Fitch Ratings to lower Washington’s credit outlook to “negative” from “stable” merely added momentum to the selling pressures of recent months.

Though Fed Chairman Powell has been slashing rates for 12 months now, the monetary spigots really opened in March. That’s when Powell’s team unveiled a new and uber-aggressive dose of quantitative easing – purchasing both government and corporate debt.

The Fed moved, too, to offer ever-bigger piles of dollars to central banks around the globe via swap arrangements.

This largess explains why Wall Street bourses can rally even as the coronavirus crisis has a fast-growing number of nations around the globe barring Americans from entry. Or as the economy skirts depression.

In May, the amount of credit being supplied by the Fed swelled to more than $5 trillion, roughly equivalent to Japan’s annual gross domestic product. It marked a 50% jump in America’s money supply in the space of three months.

In May, the number of US dollars that central banks around the globe hold as part of foreign exchange reserves is a record $8 trillion.

Then, that might have been seen as a sign of confidence in the dollar. Yet the rapid deterioration in America’s fiscal health seems to have crept up on many punters.

The trillions of dollars Congress and the Trump White House have spent combating the Covid-19 fallout is a drop in the proverbial bucket. Several more trillions of emergency spending will push the national debt – now just over $26 trillion – toward $30 trillion in short order on the way to $40 trillion.

Hence, Fitch’s warning to yank away Washington’s AAA status.

US Donald Trump is presiding over a historic weakening of the US dollar. Image: AFP

Trump’s Covid-19 fiasco is credit-negative in itself. The roughly 33% rate at which the US economy is contracting is self-inflicted. It’s the result of Trump’s failure to act early to contain the pandemic.

As such, economists at Nomura Holdings “expect the US dollar to follow a path of reduced dominance and weaken over the long term.” They say it’s “thanks to the Covid response.”

The greenback is really suffering from a triple whammy: a fiscal train wreck everyone can see coming, a coronavirus disaster savaging trust in Washington’s competence and a Trumpian foreign policy losing allies near and far.

The upward swing in gold prices isn’t a straight line. The rally hit a powerful burst of selling on Tuesday as US bond yields rose. Such price volatility is apt to continue.

Perhaps the least surprising news item of last week was that China and Russia were teaming up to ditch the dollar – a move long-hinted at and reported. Recent media reports suggest a “financial alliance” between Beijing and Moscow may be afoot to downgrade the role of the dollar as the main medium of exchange in bilateral trade.

It dovetails with a recent Goldman Sachs analysis that the dollar’s reserve-currency days may be numbered. Yet, here you have China and Russia giving the US the shove Trump might not see coming.

The dollar’s share of trade between China and Russia has fallen below 50% for the first time, accounting for 46% of transactions, according to media reports. The euro was used 30% of the time, an all-time high. Other currency units were 24%, also a record high.

Within the latter cohort is the Chinese yuan. It is no secret that Beijing and Washington are at daggers drawn across multiple battlefronts – economic, diplomatic and strategic. A new front in the battle – currency – may lie ahead.

The yuan is rising while the dollar falls. Image: Facebook

One of President Xi Jinping’s top priorities is increasing the yuan’s role in global trade. That, of course, would mean making the currency fully convertible and foregoing all capital controls – things that aren’t going to happen in 2020.

All this has observers getting creative. Among them is economist Liu Shanen, secretary-general at the Beijing Gold Economic Development Research Center. In a recent interview with news portal Guancha, Liu detailed a plan to “revive the gold standard” as the US dollar loses luster.

There’s a certain irony to this very idea. It was Richard Nixon, the former US president who normalized relations with China, who ended the direct convertibility of the dollar to gold in the early 1970s. Nearly 50 years later, the idea has gone full circle.

That is, in part, because of the rogue-nation dynamic behind Washington’s efforts to maintain the primacy of the dollar.

“In fact,” Liu says, “the biggest problem now is that when the US’s strategic demand for the gold market has changed from a tool for stabilizing the exchange rate of the US dollar to a tool that reflects the usefulness of the US dollar.” US policies, he adds, started “with the gold market and alienated the function of the gold market.”

Today, Liu says, a succession of US administrations are “focused on developing the virtual gold trading market to support the usefulness of the US dollar and maintain the hegemony of the US dollar.”

Now, though, dollar centrality is giving way to a yuan-dominated future – an argument economist Charles Gave of Gavekal Research also has been making in recent months. He makes an intriguing case for China to hitch the yuan’s future to the most popular precious metal.

Speculation is rising China may create a gold-backed yuan. Image: Facebook

“As I look at what China has done in the last 15 years to make the renminbi a credible currency – just as the old Deutsche mark emerged from the 1960s onward – I conclude that it wants to put gold back at the center of the global payments system using Bretton Woods-era type arrangements,” Gave says.

Back then, any nation that acquired too many US dollars via current-account surpluses and did not want to buy US Treasuries could swap them at the Fed’s “gold window,” no questions asked. The US closed that window.

Now “having secured control over Hong Kong, I believe that China will fairly soon move to offer a gold-renminbi exchange standard,” Gave reckons.

“The key difference with the Bretton Woods-era arrangements will be that gold gets exchanged at a market price, rather than at a fixed price, as the US did after 1944,” Gave said.

“This implies that over the medium term, the return on gold should match the returns of a 10-year [Chinese government bond], which is more or less what we have seen since 2008.”

One year ago, the Global Times suggested as much.

In an August 2019 editorial, the government-run tabloid predicted China won’t be alone in having to back currencies with a metal John Maynard Keynes called a “barbaric relic.” Global Times argued that a “gold standard is an effort by the world market and financial system to balance the ‘Trumpian future’.”

Asia could be excused for hoping there isn’t a future for Trump – that soon they can call on a Joe Biden White House with less animus toward the world’s most dynamic region.

Yet January 20, when Trump might be escorted out of the White House, is a long way off for Beijing wondering about the fate of its $1.1 trillion of US Treasuries. Or Tokyo, for that matter, holder of some $12.6 trillion of Washington’s IOUs.

For now, though, traders are left watching how much spending the US government does in the weeks ahead. As Bob Haberkorn, senior market strategist at RJO Futures, puts it: a “trade through $2,000” is possible, as punters wait “to see what the US Congress does.”

A money changer with stacks of dollars and yuan. Image: AFP

The Powell Fed, after all, is far from finished printing dollars.

As we’ve learned from the Bank of Japan these last 20 years, quantitative easing over time becomes a treadmill that is nearly impossible to get off. As the wheels of stimulus turn faster and faster at the Fed and at Trump’s White House, the US dollar is running out of energy.

It is also running out of credibility, upping China’s odds of filling the void.