Following on from our previous question to ChatGPT 4.0 – where we asked what could occur if a major oil producer such as Saudi Arabia mandated gold to be used to purchase oil rather than the dollar.
Building on that scenario – we then asked what could occur if Saudi Arabic also replaced its current fiat based currency, the riyal, with a new gold back dinar.
- Revaluation of the Saudi Currency: Introducing a gold-backed dinar would require a revaluation of the Saudi currency based on the country’s gold reserves. This could potentially make the new dinar one of the most stable and valued currencies globally, depending on the gold price and reserves.
- Increased Confidence in Saudi Economy: A gold-backed currency could increase confidence in the Saudi economy, as it would be perceived as more stable and less susceptible to inflation compared to fiat currencies.
- Implications for Saudi Monetary Policy: The ability of Saudi Arabia to control its monetary policy would be constrained. Unlike fiat currencies, the supply of a gold-backed currency is limited by the amount of gold a country possesses, which could limit Saudi Arabia’s ability to respond to economic crises.
- Global Rush for Gold Reserves: This move could trigger a global rush towards increasing gold reserves, as other countries might feel compelled to secure more gold to engage in trade with Saudi Arabia, especially for oil.
- Challenge to the Petrodollar System: Such a move would be a direct challenge to the petrodollar system, where oil is traded in US dollars. It could lead to a reconfiguration of global financial systems and power dynamics, particularly affecting countries heavily reliant on the US dollar.
- Potential Economic Isolation: Saudi Arabia could face economic isolation or sanctions from countries that view this move as a threat to their economic interests, especially those heavily invested in fiat currencies like the US dollar.
- Impact on International Debt and Investments: Saudi investments and debt holdings, which are currently denominated in various fiat currencies, would need to be re-evaluated or converted into the new gold-backed currency, potentially creating turbulence in international financial markets.
- Trade Adjustments: Both Saudi Arabia and its trade partners would need to adjust to the new currency system. This could involve complex conversions and pricing adjustments, especially in the initial transition period.
- Encouragement of Similar Moves by Other Countries: Other countries, especially those with significant gold reserves or those skeptical of fiat currencies, might be encouraged to consider similar moves, potentially leading to a larger shift back towards gold-backed currencies globally.
- Potential for Economic Instability: While a gold-backed currency offers stability against inflation, it also ties the country’s economic health closely to the fluctuating price of gold, which can be volatile based on global market and geopolitical dynamics.
This scenario represents a significant departure from current global financial norms. The full impact would depend on factors such as the size of Saudi Arabia’s gold reserves, the global gold market’s reaction, and the responses of major economic powers and international financial institutions. The transition to a gold-backed currency and the tying of oil to gold would likely be complex and fraught with both economic and political challenges.