In case you missed this story amidst the general horror of war, Iran built a toll booth for the Strait of Hormuz. You have a ship with oil or natural gas or urea or helium? Pay up. Oh, and by the way – “we don’t accept US dollars.” Payment is to be made in Chinese yuan.
Let me be clear: this is not yet a seismic shift like the slow-motion implosion of US participation in NATO. But it may be another tremor of one that could prove just as history-altering. With ripple effects through the US federal deficit, federal debt, inflation, and Treasury bonds, and ultimately gold. Please indulge me as this letter outlines a chain of logic that every serious investor needs to understand right now.
A Word on the Toll Booth Itself
The toll booth is, frankly, the insult-on-top-of-injury part of this story. Ships paying Iran’s Revolutionary Guard in yuan for safe passage through a critical global waterway is geopolitical theater – dramatic, alarming, and worth noting. But it is not the core argument.
The deeper shift – the one that has been building for years and that the Hormuz crisis has now dramatically accelerated – is this: oil is increasingly being bought and sold in Chinese yuan. Not just Iranian oil to Chinese refineries, which has been happening for years via shadow fleets moving outside of sanctions. We are talking about a broader, structural move by oil producers and buyers to settle energy transactions outside the dollar system.
That distinction matters enormously. The toll booth is a symptom. The petroyuan is the disease – or, depending on your vantage point, the cure. Either way, it changes everything downstream. Here is how the chain runs.
The Domino Chain
Step 1 → More oil priced in yuan means more demand for yuan, less for dollars
Since 1974, global oil has been priced in US dollars. This was not an accident. It was a deliberate arrangement between the United States and Saudi Arabia — military protection in exchange for dollar-denominated oil — and it created a structural, permanent source of global dollar demand. Every country that needed energy needed dollars first. Central banks accumulated dollars as reserves. The dollar became, in Giscard d’Estaing’s famous phrase, America’s “exorbitant privilege.”
Let me be precise about where the dollar stands today, because the argument is strongest when it is honest. The dollar is not in freefall — it remains the dominant currency in global trade and payments by a wide margin. SWIFT, the messaging network that handles the bulk of institutional cross-border transactions, shows the dollar at roughly 44% of global payments, with the euro at 24% and the yuan at 6%. Dollar dominance is real.
But the rate of erosion is now at a historic extreme. The dollar’s SWIFT share fell to that 44% figure in q1 2026 at the fastest rate in SWIFT’s reporting history. And SWIFT itself understates yuan usage, because China’s alternative settlement system – CIPS – has been built specifically to route transactions outside of SWIFT, making them invisible to Western monitoring.
The right frame is this: the dollar isn’t losing its throne – not yet. But for the first time in the post-war era, a credible alternative lane exists. And traffic in that lane is accelerating at a historically unprecedented rate. China is already the world’s largest oil importer. Iran sends over 80% of its seaborne exports to Chinese refineries, settled entirely outside the dollar system. Saudi Arabia has explored yuan pricing and joined China’s mBridge digital currency platform. Russia prices its eastward energy exports in rubles and yuan. The direction of travel is unmistakable, even if the destination is still years away.
“The conflict could be remembered as a key catalyst for erosion in petrodollar dominance, and the beginnings of the petroyuan.” — Deutsche Bank, March 2026
Step 2 → Less demand for dollars means the dollar weakens
This follows directly from supply and demand. The dollar’s strength has rested, in large part, on the fact that the world needed it — to buy oil, to settle trade, to hold as reserve assets. As that structural need softens, so does the currency. The dollar index has already fallen roughly 10% since the start of Trump’s second term, in sharp, episodic moves that are unusual for a currency this widely held. Brookings has noted that the “sudden and sharp nature of these falls is unusual” — a sign that confidence, not just flows, is shifting.
A weakening dollar, in turn, makes imports more expensive for American consumers and businesses. That is inflation by another name. The price of everything that crosses a US border – electronics, clothing, food, pharmaceuticals – rises when the dollar falls. The Fed cannot fully control this kind of inflation because it originates outside the domestic economy. It is structural, not cyclical.
Step 3 → A weaker dollar and retreating foreign buyers push Treasury yields up
Here is where it gets painful. Foreign central banks and sovereign wealth funds have historically been the largest buyers of US Treasury bonds, recycling their dollar reserves back into the safest dollar asset available. At peak, foreign investors owned more than 50% of the Treasury market. Today that figure has fallen to 30% – and it is still declining.
When the pool of natural buyers shrinks, the Treasury must offer higher yields to attract whoever remains. J.P. Morgan has quantified this with precision: every 1-percentage-point decline in foreign Treasury holdings relative to GDP pushes yields up by more than 33 basis points. Academic research finds that a 1% reduction in China’s dollar reserves alone could raise long-term yields by 20 basis points. These are not dramatic numbers individually. Accumulated over years of structural retreat, they are.
What makes the current dynamic particularly dangerous is the source of the pressure. When yields rise because the economy is strong, tax revenues rise with it – partially offsetting the cost. When yields rise because foreign buyers are leaving, there is no offsetting revenue gain. The government simply pays more to borrow from a smaller pool of lenders. That is a fundamentally different and more corrosive dynamic.
Step 4 → Higher yields compound the deficit
The US government currently holds approximately $36 trillion in debt and rolls over roughly $9–10 trillion of it each year. When yields rise, that refinancing happens at higher rates. Every 100 basis points of additional yield on $36 trillion costs roughly $360 billion more per year in interest – not from new spending, but simply from the cost of existing debt being repriced upward.
Net interest payments hit $1 trillion in fiscal year 2025 – the first time in American history — up from $352 billion just five years earlier. The Congressional Budget Office projects that number reaches $2.1 trillion annually by 2036. Interest on the national debt is already the third-largest line item in the federal budget, behind only Social Security and Medicare.
It took 200 years for the national debt to hit $1 trillion. That figure is now paid out annually in interest payments alone.
The self-reinforcing loop is the thing to watch. Higher yields mean a larger deficit. A larger deficit requires more borrowing. More borrowing means more Treasury supply hitting the market. More supply requires still higher yields to attract buyers. Round and round it goes – not because of anything Congress decides, but because the arithmetic of the debt itself becomes the engine of its own expansion.
Step 5 → A larger deficit means a larger federal debt — and fewer options
The CBO’s own long-term outlook makes the connection between these dynamics and reserve currency status explicit. Large and growing debt, it warns, could lead to “a gradual decline in the value of Treasury securities, heightened expectations of inflation, and a loss of confidence in the US dollar as the dominant international reserve currency” – all of which make it harder still to finance public and private activity.
This is the trap. The United States has been able to run deficits of this magnitude precisely because the dollar’s reserve status provided a captive global buyer for its debt. If that status erodes – even gradually – the financing terms on which those deficits depend become less favorable. The privilege funds the deficit. The deficit, managed poorly, erodes the privilege. Jerome Powell acknowledged as much recently, warning that the $39 trillion debt trajectory “will not end well.” Careful language for a Fed chair. Pointed, nonetheless.
And So We Arrive at Gold
Gold sits at the end of this chain – and benefits from every link in it.
When the dollar weakens, gold rises in dollar terms. When inflation returns, gold preserves purchasing power that fixed-income instruments cannot. When Treasury yields rise for the wrong reasons – retreating foreign buyers, not a strong economy – gold outperforms bonds, which lose principal as yields climb. And if confidence in the system itself wavers, gold is the one reserve asset that carries no counterparty risk, cannot be sanctioned, cannot be frozen, and cannot be printed into existence.
That last point has become the animating logic behind the most significant structural shift in the gold market in decades. Central banks purchased over 1,000 tonnes of gold annually for three consecutive years – a threefold increase from historical averages. The World Gold Council reports that 95% of central banks, the highest share ever recorded, expect their gold reserves to grow over the next twelve months. This is not tactical trading. It is policy. And policy-driven buying has no price sensitivity — it creates a floor, not a ceiling.
The catalytic moment was Russia in 2022, when $300 billion in Russian foreign exchange reserves were frozen as a geopolitical sanction. Every reserve manager on earth received the same message simultaneously: dollar-denominated assets held abroad can be switched off. Gold held in your own vault cannot.
The dollar’s share of global foreign exchange reserves has fallen from 71% in 2000 to under 57% today — a 31-year low. What is not flowing into the yuan is flowing into gold.
The institutional price forecasts reflect this shift in kind. J.P. Morgan’s year-end 2026 target is $6,300 per ounce – a figure revised sharply upward in February from an earlier base case of $5,055. More telling than the target, however, is what J.P. Morgan did simultaneously: it raised its long-term structural floor for gold by 15% to $4,500 per ounce. That figure is not a price target. It is the bank’s assessment of what gold is now worth in a steady state – the new baseline after a permanent repricing driven by central bank buying, reserve diversification, and dollar erosion. In plain terms: even if the current crisis subsides, J.P. Morgan believes gold has structurally repriced upward and will not return to where it was. Wells Fargo has set its year-end target at $6,100–$6,300. J.P. Morgan also models an upside scenario of $8,000–$8,500 if household gold allocations rise modestly from roughly 3% to 4.6% of assets – not their base case, but the willingness to publish that number marks how dramatically the institutional conversation has shifted.
The historically bearish case for gold – the one that dominated institutional thinking for two decades – assumed dollar stability, contained deficits, and a reliable US security umbrella for global energy infrastructure. All three of those assumptions are now in question simultaneously.
The one scenario in which gold underperforms is a strong dollar, restored fiscal discipline, and geopolitical calm. That is precisely the scenario that looks least likely given everything described above.
A Final Thought
I have spent enough years making the case for hard assets that I occasionally worry about sounding like a broken record. The themes – unsustainable debt, monetary policy under pressure, a dollar that has been living beyond its means – have been consistent for a long time.
What is different now is not the thesis. It is the velocity. The Strait of Hormuz toll booth, for all its theater, represents something real: a world that is actively building the infrastructure to transact without dollars. The plumbing has been laid. The Hormuz crisis provided the occasion to use it.
Just as the petrodollar established the dollar as the world’s indispensable currency, what we are watching – slowly, then perhaps all at once – is the re-establishment of gold as the world’s indispensable asset.
The signals are there. The question is whether you’re reading them.
Steven Feldman
Founder & CEO, GBI Direct