If financial instruments are abused to exert geopolitical influence, they lose their value in national reserves. But what could replace these classic instruments? We have an idea.

A critical situation was narrowly avoided. In early July, the global financial system faced another potential rupture.

The G7 countries discussed seizing frozen Russian „assets“ worth about $300 billion and transferring them to Ukraine. The proposal seemed to have originated from the United States, gained approval in the UK, but met with skepticism in other countries.

Among the least enthusiastic was Saudi Arabia. According to a Bloomberg report, the oil sheikhs issued a clear threat to dump European holdings if the G7 group indeed confiscated $300 billion of Russian assets.

Saudi Arabia’s reaction could be interpreted as a power play. The country holds European government bonds valued at tens of billions of dollars. While that’s too little to destabilize the euro, it could trigger a chain reaction, and no one wants to alienate a financial heavyweight like Saudi Arabia, whose sovereign wealth fund holds nearly a trillion dollars.

However, a showdown was avoided. The G7 countries agreed not to seize the Russian assets but to channel their interest into a fund aimed at supporting Ukraine with $50 billion.

As a result, Saudi Arabia no longer has any reason to follow through on its threat or even maintain it. Instead, Riyadh now denies ever making any threats at all.

What Alternatives Are There?

But let’s assume it had come to that. What alternatives would Saudi Arabia have had?

If the West abuses financial instruments to geopolitically blackmail other countries, and these countries want to divest from European and American government bonds and currency positions – what could fill the gap?

The most obvious answer would be Russian or Chinese government bonds. However, that would merely be swapping a stable instrument for a less stable one. Both the ruble and the yuan lose value against the dollar in the medium to long term. Furthermore, Riyadh is unlikely to believe for a moment that Russia or China would hesitate to use their papers to blackmail other countries.

Another alternative could be stocks or ETFs. But this almost inevitably leads back to the USA and the G7. Most ETFs are managed by Western financial service providers, and the most stable ones, like the MSCI World, consist almost exclusively of Western stocks. Thus, stocks are also likely to be ruled out as an option.

So what remains? Gold. Saudi Arabia currently holds around 323 tons of gold, which is significant but only about a tenth of Germany’s holdings and about a 25th of the United States‘. There is thus room to catch up here without risking over-investment. If Saudi Arabia were to hold physical gold, it would be an asset that is indeed non-confiscatable.

With about 2,300 tons each, China and Russia already hold substantial amounts of gold, likely for similar reasons. However, the largest reserves are still clearly in Western countries. If Saudi Arabia decided to buy a massive amount of gold, it would first make the reserves of the G7 more valuable. In a second step, Saudi Arabia would remain vulnerable, as major industrial nations could devalue the country’s reserves with gold sales.

One could also question whether gold is still a contemporary asset: Is transportation and storage not too cumbersome? Are the markets sufficiently liquid? Does gold have the potential to appreciate in value enough to offset other losses? And what if it becomes possible to manufacture gold cheaply? Or if new large deposits are discovered, perhaps when the Arctic and Antarctic thaw?

The Answer That Seems Obvious

Unlike stocks, bonds, or ETFs, gold might be part of the answer. However, if the geopolitical instrumentalization of financial instruments continues to widen the cracks in the global financial system, gold alone may not be a sufficient answer.

Something more is needed, and that „more“ – as should be clear to everyone, most from the very first line of this article – is Bitcoin.

As of 2024, the idea is no longer as absurd as it once sounded. El Salvador is already building a strategic reserve in Bitcoin. More and more companies are following suit, and more regions, cities, and even countries are beginning to consider it. Even in the United States, Donald Trump is advocating for confiscated Bitcoins from criminals to be added to a reserve instead of being auctioned off.

The idea has thus become legitimate. The more it spreads, the more people believe that Bitcoin would make an attractive reserve currency – the more attractive Bitcoin becomes as a reserve currency. For value has never been objectively measurable but rather a matter of collective subjective appreciation.