A Truly Global Currency [with Gold included?]

By: Julian D. W. Phillips | Thu, Apr 9, 2009
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Russia has proposed that the I.M.F. created, synthetic currency [Special Drawing Rights], with changes [Gold backing], be adopted by the world to replace the U.S.$ as the world's prime reserve currency. Both China and Russia proposed new currencies, not so much in the hope that their proposals will be accepted, but bringing to the attention of the world that the $ is losing credibility and not serving the role is should as the world's reserve currency. At the same time the I.M.F. was boosted to a much stronger global role than ever before by the addition of nearly $1 trillion to its Balance Sheet. It seemed appropriate to Russia then to attempt to elevate the Special Drawing Right to a real global currency from the synthetic bookkeeping role it has at present. With the I.M.F. now placed in such an important role in the global monetary world and if such a proposal were adopted, would it work?

The I.M.F. established the Special Drawing Rights to serve as the reference point of the global monetary system. However, it never made it there and now serves solely as an accounting measure of value with little practical use. This was because the U.S. controls the I.M.F. through its voting power [17.3% with 85% needed for a resolution to pass], which are required before any motion can be passed. So the Special Drawing Right was seen as an extension of the $, but in a world run by the U.S. No nation will be happy with the States continuing to pull the strings on such a global currency. The need is now for a currency that is truly global currency above any local national interests.

It didn't before in the seventies, because there was insufficient political will for it to do so. For it to do so now there would have to be the global political will for it to do so and we are close to that now as the I.M.F. has been allowed to issue $250 billion in S.D.R.'s to stimulate the world economy.

If the measures proposed by the G-20 conference last week do not succeed in rectifying the global monetary system the currency world will begin to break down. As it is, once the $ retreat back to the States is complete, it looks like the € will rise strongly again against the $. For the currency world to remain stable the exchange rate between these two currencies must remain relatively stable. This stability remains under threat. With potential financial mayhem just being skirted, never has the time been as pressing as now for a global solution to the world's credit and associated crises. Without global unity on this, there will be no solution and then it will be every trading bloc for itself!

The I.M.F has the support of the world [provided China and Russia are given a greater say in that body and the U.S. stranglehold over it is removed by lowering its voting power below 15%] to 'manage' the global monetary system, as we mentioned above.

With this threatening situation hanging over us, it also looks like only the I.M.F. has the support of the world to adjust and agree any fundamental reforms to the monetary system. This is a view confirmed at the G-20 meeting where both China and Russia called for new global reserve currencies. While there is little chance that these proposals will be accepted, through it, China and Russia made their presence known and initiated the reformation of the monetary system. Certainly the time has come when China cannot be ignored on such matters. While the U.S. Treasury Secretary has said the U.S. $ will remain the global reserve currency, he was open to look at suggestions.

Now Russia has said it would favor the inclusion of gold bullion in the basket-weighting of a new world currency based on Special Drawing Rights issued by the International Monetary Fund. With the uncertainty affecting foreign exchanges and exchange rates, such a move could add increased credibility to the currency system. Bear in mind its price would be a reference point and the move would not involve buying gold on the open market. However, with Bankers so resistant to gold, its inclusion in the S.D.R. may be premature? If not, we would then expect to see central bankers remove their dislike of gold completely and let it find its own level.

Russia has been buying up gold for the last two years slowly but surely and intends to raise the gold content of its reserves to 10%. By doing so it adds action to intention on gold as part of their monetary system. The silent but difficult to ignore presence of gold in so many central bank vaults tells us that the return of gold in support of currencies may well be possible now?

With the U.S. still controlling the I.M.F. even the U.S. of A. may find such an additional reserve currency acceptable. This would certainly diminish, over time, the impact of the U.S. $'s swings on global foreign exchanges, on global trade. With the Obama administration trying to fortify the I.M.F. at the meeting of the Group of 20 now is a good time to launch the proposal and for adjustments to the I.M.F. and the S.D.R. to be made. The I.M.F.'s view of gold continues to be one of respect of a vital reserve asset, so there should be no barrier provided it supports currencies and does not compete against it.

The G-20 will only follow such a move if gold is needed to shore up confidence in currencies, which is becoming abundantly clear to all now. Certainly, we are not quite at that point at the moment. But how far away from that are we? Should major currency crises begin gold will quickly become a very visible anchor to investors be bought as such. This may force central banks to re-recognize it as a stable foundation in extreme times.

So if the U.S. is prepared to take a lesser role in the I.M.F. it should gain the support of the world and such structural changes to the global monetary system would follow. Sadly, as national interests, not global ones, govern international policies, we doubt whether the States would lessen its dominant role, just yet. A little more pain may be needed first?

"The times, they are a changing".

The present I.M.F. view of gold: -
"Gold is an undervalued asset held by the I.M.F., and provides a fundamental strength to its balance sheet. Gold holdings provide the I.M.F. with operational maneuverability both as regards the use of its resources and through adding credibility to its precautionary balances. In these respects, the benefits of the I.M.F. 's gold holdings are passed on to the membership at large, to both creditors and debtors. The I.M.F. should continue to hold a relatively large amount of gold among its assets, not only for prudential reasons, but also to meet unforeseen contingencies."

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Julian  D. W. Phillips

Author: Julian D. W. Phillips

Julian D. W. Phillips
Gold Forecaster

Julian D. W. Phillips

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price.
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