VanEck’s Bold Gold Prediction if the Dollar Loses Reserve Status

Most investors view the price of gold through the lens of supply and demand for the metal itself. However, Eric Fine, Portfolio Manager at VanEck, suggests that viewing gold through the lens of currency debasement paints a radically different picture. He compares the sensation of currency devaluation to riding in an elevator: you often cannot tell the building is moving until your stomach drops. In the financial world, it is not necessarily that the asset price is skyrocketing, but rather that the "floor" of the currency you are standing on is collapsing.

VanEck recently published a provocatively titled analysis asking a simple yet difficult question: "If the dollar loses reserve status, what would the price of gold be?" By applying a rigorous methodological framework to central bank balance sheets, Fine and his team arrived at specific, data-backed price targets that far exceed current market valuations. The implications suggest that the global financial system is shifting from an era of trust in fiat currency to a renewed focus on "outside money" like gold.

Key Takeaways

• Fiscal dominance is the catalyst: When governments accumulate too much debt, central banks lose the ability to fight inflation without bankrupting the state, forcing a devaluation of the currency.
• The "Implied" Price of Gold: VanEck’s methodology suggests that if gold were to back the global M0 money supply, the price would reach approximately $34,000 per ounce. If backing M2, that figure jumps to $189,000.
• Sanctions changed the game: The freezing of Russian central bank reserves signaled to other nations that sovereign debt is no longer a risk-free store of value, accelerating the demand for gold.
• Emerging Markets (EM) are now the "adults in the room": Unlike Developed Markets (DM) that rely on printing money, many EM countries have adopted orthodox monetary policies and maintain higher gold backing relative to their money supplies.
• The shift to currency blocks: The global economy is likely moving toward regional trading blocks rather than total globalization, which will force currencies to compete on stability and asset backing.

The Thesis: Fiscal Dominance and the Weaponization of Reserves

The core of VanEck’s thesis relies on the concept of "fiscal dominance." This economic condition occurs when a country’s debt and deficit levels become so high that the central bank can no longer act independently. In a normal environment, a central bank raises interest rates to quell inflation. Under fiscal dominance, raising rates would make the interest payments on government debt unsustainable, potentially causing a sovereign default or a financial system collapse.

Consequently, central banks in developed nations are forced to keep real interest rates artificially low (or negative), effectively inflating away the debt. This results in currency depreciation. While this phenomenon has historically been associated with emerging markets, Fine argues it is now the primary operating mode for developed markets like the US, UK, and Japan.

The Impact of Sanctions

The urgency of this shift was accelerated by the geopolitical response to the war in Ukraine. When Western nations sanctioned Russia’s central bank reserves, effectively freezing hundreds of billions of dollars, it sent a shockwave through global central banking.

"It’s a major event and central banks cannot ignore it... It became very acute and central banks have always looked at gold as a currency and that they’re the center of money for every country."

For central banks holding US Treasuries or Euros, those assets are liabilities of another state—liabilities that can be canceled. Gold, conversely, is an asset with no counterparty risk. This realization has driven central banks to buy gold at a record pace, not merely as an investment, but as a necessity for sovereignty.

Calculating the "Finite" Price of Gold

Critics often dismiss high gold price predictions as sensationalism. To counter this, VanEck aimed to provide a "precise number" based on econometric methodology rather than sentiment. The calculation mimics a global gold standard or a currency board arrangement.

The Methodology

The formula is straightforward: Take the global money supply and divide it by the global gold reserves. However, to make the calculation practical and relevant to the question of the dollar losing status, Fine’s team made specific adjustments:

1. They calculated the "gold-equalizing price" for individual central banks (US, China, Japan, UK).
2. They excluded foreign exchange reserves (like Treasuries) from the asset side, assuming the hypothetical scenario where fiat reserves are no longer trusted.
3. They weighted the final global price based on global FX turnover. Since the US dollar accounts for roughly 50% of global turnover, the US calculation carries the most weight.

The Price Targets

The resulting numbers highlight the extreme leverage currently embedded in the fiat system:

• M0 Backing (Base Money): If gold backed the monetary base (cash and reserves), the implied price is $34,000 per ounce.
• M2 Backing (Broader Money): If gold backed the broader money supply (including deposits), the implied price skyrockets to $189,000 per ounce.

These figures are not short-term price targets but rather measurements of monetary dilution. They illustrate how much paper currency exists relative to the finite hard assets held by central banks.

The Great Reversal: Emerging Markets vs. Developed Markets

One of the most counter-intuitive findings in Fine’s analysis is the relative health of Emerging Markets (EM) compared to Developed Markets (DM). Historically, investors viewed EM countries as risky and prone to currency collapse, while looking to the US, UK, and Japan for safety. VanEck’s data suggests this dynamic has flipped.

Fine uses the analogy of a "trust fund kid" versus a kid who grew up struggling. Developed markets, like the trust fund kid, have never faced consequences for overspending because they could always print more of the world's reserve currency. Emerging markets, having suffered through crises like the 1997 Asian Financial Crisis, were forced to learn hard lessons.

The Discipline of Orthodoxy

Many emerging nations now run orthodox monetary policies: they maintain positive real interest rates, control fiscal deficits, and refuse to bail out failing banks with public money. In contrast, developed nations have engaged in "endless monetary forbearance."

"The central banks that look the most levered are UK and Japan which rhymes completely with the original spirit of the question... South Africa has 60% of its M0 rand money supply backed by gold and the yields on their bonds are 8%. Whereas Japan has under 3% of its yen M0 backed by gold and the bonds pay under 2%."

This discrepancy implies that if a global currency reset occurs, currencies like the South African Rand or the Thai Baht might be structurally sounder than the British Pound or the Japanese Yen, based on the tangible assets backing them.

Geopolitics and the Future of Currency Blocks

The potential loss of the dollar's reserve status is unlikely to happen overnight. Instead, Fine envisions a transition toward "regional blocks." As globalization fractures due to sanctions and trade wars, the world may split into distinct economic zones.

We are already seeing the formation of non-dollar trading corridors, such as India purchasing oil from the UAE in local currencies or Russia and China settling trade in Yuan. This "regionalism" forces asset prices to converge. If the Americas form a block, or if Europe solidifies its zone, capital will flow based on the structural soundness of those specific regions.

The Role of Bitcoin

While the analysis focused on gold due to its presence on central bank balance sheets, the implications for Bitcoin are similar. If one were to apply the M0 or M2 methodology to Bitcoin’s fixed supply of 21 million coins, the implied prices would likely range between $250,000 and over $1,000,000. While central banks are not yet adopting Bitcoin as a reserve asset, the logic of seeking a neutral, finite asset applies to both gold and digital currencies in an environment of fiscal dominance.

Conclusion

VanEck’s analysis serves as a sobering reminder that the stability of the developed world's currencies is not guaranteed. The extreme leverage ratios in the US, UK, and Japan suggest that the current monetary path is unsustainable without significant devaluation. Whether the dollar loses its status entirely or simply has to share the stage with other assets, the mathematical floor provided by gold suggests the metal is drastically undervalued in real terms.

As Eric Fine notes, asking "Is gold going up?" is the wrong question. The right question is, "Is the currency I am holding going down?" When viewing the global financial system through the lens of central bank reserves and money supply, the elevator appears to be descending rapidly.