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Commodity Reserves are New Forex Reserve

Two worlds coexist in today's modern society. One is the financial world that has a dominance of the dollar and Euro. The other world is a commodity world dominated by non-dollar and non-euro countries.

A crisis is mainly defined as a period having high volatility in all elements of the world such as demand, and supply that impacts the price eventually.

The financial world can avoid or repair a crisis by various tools provided to central banks that act in a more coordinated fashion than in current times. But a crisis in the commodity world is longer than anyone anticipates with less chance of quick repair or recovery.

The current scenario is a pure commodity world crisis leading to high prices for the same unit of product that is required on daily basis. This drives the price higher at an accelerated rate as the stock available for use depletes quickly. Such a crisis shifts the wealth to the nation that holds more of these commodities. Thus, shifting the proportion of trade in their favor during the duration.

Though it is not easy in midst of such a crisis occurring, if a commodity dominant country shifts preference from the dollar or euro dominant trade to other currencies then there is a big impact on the financial world as well. Though it would not be a big impact in the short term as a similar policy is accepted by large trading nations then it would be a larger shift that will have an impact on the long-term trajectory of the dollar or euro.

This scenario is taking place currently, post-sanctions being applied to Russia there has been a quick movement between Russia, India, and China to give preference to local currencies for trade. And even some central banks have started accelerated increasing non-dollar reserves.

These are early days to conclude but for years ahead commodity world will dominate the financial world and such a scenario has not occurred since the 1970s.

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