Summary of Key Points
Countries around the world are continuously reducing their holdings of U.S. Treasury bonds. The proportion of foreign governments' holdings of U.S. debt has dropped from 45% in 2014 to 28% in 2023 (with major creditors such as Japan, the UK, and Saudi Arabia selling off their bonds). For the first time, gold has surpassed U.S. debt as the primary reserve asset for central banks globally. This shift reflects concerns about the safety and returns of dollar assets, as well as a renewed preference for gold as a "hard currency."
Why Do Countries No Longer Want to Hold U.S. Debt?
Simply put, U.S. debt is no longer considered attractive for several reasons:
1. Risk of Dollar Depreciation: The U.S. has printed a large amount of money in recent years (especially during the pandemic with massive stimulus measures), leading to a decline in the purchasing power of the dollar. The returns on U.S. debt may not keep up with inflation, resulting in losses.
2. Reduced Safety: The U.S. uses U.S. debt as a political tool (for example, by freezing Russian assets held in U.S. debt), which raises concerns among other countries: "What if I have conflicts with the U.S. and my money gets frozen?"
3. Principal Losses Due to Interest Rate Fluctuations: The U.S. hiked interest rates sharply last year, causing the price of U.S. debt to fall (bond prices and interest rates move in opposite directions). For instance, if you bought $100 worth of U.S. debt, it might be worth only $90 after the interest rate increase, so you would lose money if you don't sell it.
Will the U.S. Suffer from Foreign Countries Selling Off U.S. Debt?
Certainly, and it would be a significant blow:
- Higher Borrowing Costs: The U.S. government relies on debt to fund its operations (with annual deficits in the tens of billions of dollars). If foreign countries stop buying U.S. debt, the U.S. will have to raise interest rates to attract buyers. The higher the interest rates, the greater the pressure on the government to repay its debt, potentially leading to a vicious cycle of borrowing new debt to pay off old debt.
- Weakening of Dollar Hegemony: U.S. debt has been a cornerstone of the dollar's hegemony. Many countries were willing to hold dollars because they could buy safe U.S. debt. With more countries selling off U.S. debt, the credibility of the dollar will decline, and the status of other currencies (such as the Chinese yuan and euro) may rise.
Why Has Gold Suddenly Become So Popular?
The main reason gold has surpassed U.S. debt is its status as a "hard currency":
1. Hedge Against Inflation and Risk: Gold does not depreciate like paper money (for example, the value of the dollar decreases when too much is printed, but gold remains valuable). During geopolitical conflicts or economic instability, people seek to buy gold as a store of value.
2. High Safety: Gold is a physical asset that cannot be frozen or confiscated (for example, Russia's gold reserves were not frozen by the West), which makes it more reliable for central banks.
3. Positive Returns Expected: The U.S. interest rate hike cycle is coming to an end (interest rates may be lowered in 2024), and gold prices usually rise during these periods. Therefore, central banks are buying gold in anticipation of lower interest rates.
What Does This Mean for Ordinary People?
1. Higher Prices of Imported Goods: If the dollar depreciates, the cost of importing goods from the U.S., such as smartphones, cars, or raw materials (like oil), will increase, potentially raising living costs.
2. Changes in Investment Directions: Gold prices may continue to rise. If you want to invest in gold (such as gold bars or gold ETFs), you can consider it, but don't follow the trend blindly (gold prices can also fluctuate).
3. Global Economic Volatility: If the U.S. faces problems due to unsold U.S. debt, global stock markets and exchange rates may become unstable, affecting your investment returns.
The Larger Trend: Accelerating De-Dollarization
The current trend of selling U.S. debt and buying gold is essentially about diversifying risks—countries are no longer putting all their eggs in the same basket (the dollar). In the future, we may see more countries using their own currencies to settle trade (for example, China and Saudi Arabia using the yuan to buy oil) or increasing their reserves of other currencies like the euro and yuan. For ordinary people, this means that the dollar is not the only hard currency, and diversifying asset allocation will become more important.
In summary, this is not a short-term fluctuation but a sign of changes in the global economic landscape. The dollar's hegemony is weakening, and countries are placing more emphasis on the "safety" of their assets rather than their returns. Understanding this trend will help us better manage our financial affairs.