The IMF’s Special Drawing Rights, the RMB and gold

Gold Money's picture

The IMF’s Special Drawing Rights, the RMB and gold 

 

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On April 1, 2016, China’s central bank Governor Zhou Xiaochuan announced that the Chinese government will take actions to promote the use of SDRs in its do-mestic economy. The announcement was made at the end of a meeting of the G20 in Paris, which is hosted by China this year. China will start to use both the USD and SDRs when reporting its foreign reserves. In addition, the country will also consider issuing bonds denominated in SDRs. This comes five month after the International Monetary Fund (IMF) decided to include the Chinese Renminbi as a fifth currency to the basket of Special Drawing Rights (SDR) along with the U.S. dollar, the Euro, the Japanese yen and the British pound. The change takes effect on October 1, 2016. This marks the first major change of the constituents of the basket since 1981 when the IMF dropped 11 out of 16 currencies in the orig-inal basket. However, when the SDR was introduced in 1969, it was not based on a basket of currencies but linked to gold, 0.888671 grams to be precise, which, at the time, equaled exactly 1 US dollar. The SDR basket based on the original weighting of 16 currencies declined around 87.7% in value vs gold until today. Similarly, the basket introduced in 1978 has lost 84.4%. The smaller 5 currency basket introduced in 1981 is down 55.5% and the current basket is down 77.0% since its intro-duction in 2001. 

SDR basket performance vs gold

Taking interest payments into account hardly changes the outcome. It is obvious today that for net holders of SDRs, breaking the link to gold had a negative impact on their reserve value. This is hardly surprising as any currency has under-performed gold over the past 10 years and any timeframe beyond that. Hence, it’s not that the currencies in the basket were Summary poorly chosen or poorly weighted, no combination would have managed to do better than gold, whether the RMB would have been part of the basket all along or not. While it is far too early to conclude that China is challenging the dollar's dominant reserve position, RMB inclusion in the SDR will nevertheless have a profound impact on percep-tions not only of China's growing economic power generally but monetary power specifically. But while the impact of the inclusion of the RMB should not be underestimated, it is unlikely that this will change the trend that gold outperforms any fiat currency.

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World-Signals's picture

EURUSD changes the upward movement with downward correction.
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In the last day of the business week the key events are from Germany, Markit PMI Composite, Markit Services PMI, Markit Manufacturing PMI at 7:30 GMT and IFO data at 8:00 GMT.
Last week EURUSD breaks below a key support at 1.1320 and cut the strong upward trend that continue since the beginning of March. The key support is at 1.1143 while the resistance is at 1.1460. World-Signals.com trading strategy for the week is to open short positions using good tops for bigger profits. The investors will focus over ECB Interest rates politic and the pressconference on Thursday.

the grateful unemployed's picture

i don't believe anyone will see SDR at the retail level, you may be able to buy bonds, but imagine the confusion, you go the grocery store and give the clerk a couple twenties and an SDR? SDRs are for global financial transactions, currency without borders and it allows THEM to inflate the global monetary base a whole bunch because the dollars and yuan do not go away. its kicking the biggest can down the longest road ever. what it does to sweat dollars remains unclear, it could act to firewall off the money supply from macro events. i said once before i thought there should be two dollar bills, one in cash, and the other notional or investment dollars because the fed can inflate those dollars much easier than cash dollars. and then the cash dollar would trade against the investment dollar so you would know exactly how much funny money the fed had put into their system. SDRs might be good assuming they trade on an exchange relative to other currencies. and it might end this endless carrytrade, my QE is good for you, quid pro quo, so Yellen doesnt have to call Draghi and say lets do this thing. but there is one problem with all this, China is going down sucker. they can't keep a lid on those people for much longer, running everything like a puppet show, it defies gravity and its no moonrocket its girls on trampolines. its massive fraud. it will end badly and drag down this SDR plan with it,a nd that ducklings is G Depression Number Two

falak pema's picture

get ready for the IMF to print TRILLIONS of SDRs when everything else fails...

Huh Reeeally's picture

'...when the SDR was introduced in 1969, it was not based on a basket of currencies but linked to gold, 0.888671 grams to be precise, which, at the time, equaled exactly 1 US dollar.'

With gold at $39.56/gram today that makes the USD worth a whopping $0.02, and people say the CAD is worthless! Well, ok, it is, but that's not the point. In 47 years the currency has depreciated 98%. I must have missed the economics class where inflation was defined as good.

lasvegaspersona's picture

Only a fool would hold currency long term. It works OK as a medium of exchange but not as a store of value. Lots of items function in that capacity but none as well as gold.

newworldorder's picture

You missed nothing. The rest of society has missed everything.

Gold is no longer understood or needed by the populations of most countries in the world. We might as well all be trading pet rocks or beanie babies instread of gold. The public is clueless about almost everything except their daily pleasures, - earned or otherwise.

bluskyes's picture

I would hazard a guess that the populations of countries that produce goods, understand gold just fine.

lasvegaspersona's picture

The public is irrelevant in deciding the value of god. It's value is decided by savers only. The masses who live paycheck to paycheck can't save so in the gold equation their understanding and opinion does not count.

JIMSJOE2's picture

The author misses the main point. It has already ben agreed that the SDR will replace the dollar to settle trade come October. Most countries want a  trade settlement unti that is not tied to any one country as it is currently. Later this year countries will be able to exchange their dollars and treasuries for SDRs from the IMF. This will be a very slow process as no none wants the dollar or treasuries to collapse as this would have a very negative impact on all entities holding those assets. The actual day to day management of trade conversion for the SDR will not be the IMF but the BIS in Basel. All this has been and is continuing to be implemented! It is about moving from a dollar uni-polar world to a multipolar one.

Huh Reeeally's picture

A cynic might note that giving control of world currency to a very small group of unelected bureaucrats gives them control of countries and people. That means you and me. Control resource distribution and call it sustainability. Outlaw cash because it's dirty so your digital currency can be abused at the whim of a banker. Surely this is globalist's wet dream.

Davidduke2000's picture

When I was a kid I used to cheat at Monopoly with my siblings, once I run out of money, I used to sign a paper taking new money from the bank or one of my simblings who had the most and called SPECIAL LOAN. 

That  is what SDR are, a cheating papers printed out of nothing. 

IMF is not a country and can't print money as it has zero assets. 

Bopper09's picture

Like every other country right now.  We let private banks print our money out of nothing, then pay them a percentage to do it.  This only last until we cannot pay the interest on the debt.

Okienomics's picture

You see that stretch from 1979-2005?  Maybe it's gold to the moon from here, but then again, we still might have to wait another decade or two to see the next significant appreciation in gold.  Don't put all your eggs in one basket.

Latitude25's picture

DB has melted down.  JPM soon to follow.

 

 

Darth Rayne's picture

Once you lose belief in any fiat currency, you lose belief in them all.

Dollars, pounds, euros and SDR's are all paper promises made by politicians, bankers and central planners.

Which is unfortunate as we all know politicians lie.

Many bankers are greedy.

All central planners believe that any problem can be solved with more central planning and more of our wealth.

 

What could possibly go wrong? Reality and what we call reality are not necessarily the same.

Many ZH'ers understand this, so how do we get the 'others' onboard?

ramgold2206's picture

@Darth I have been beating this drum for almost 3 years now - trying to get ordinary people to understand the fiat con. often misunderstood, but slowly the asleep are beginning to wake.... its a long road, and my biggest fear is we haven't the time to make a big enough impact.

http://ramgold.ilp24.com/20249

Okienomics's picture

Ron Paul's brain in Rick Perry's body is what it's going to take.  We need someone on the national stage who has verbal command of the issue but a strong appearance and speaking voice.  Seriously, every economic issue is tied into this one and "monetary policy" was once a major political issue in the U.S. (1890s) - suggesting the people can be brought around to paying attention to this fundamental issue.  It's possible to fight and win against the private control of currency and fractional reserves, but the honest money crowd needs a champion.  Rand Paul doesn't have the charisma.

Flankspeed60's picture

I'm thinking Ron Paul's brain in KATY Perry's body. Much better chance...............

Pliskin's picture

I'm just thinking Katy Perry's body ... not EVERYTHING has to be about politics!

sleigher's picture

That would never work.  I know when I am looking at Katy Perry, the last thing on my mind is monetary policy.  I really don't care what she is saying ;)

Pliskin's picture

Put Katy Perry's body into the 'Basket of Special Drawing Rights' then we've got ourselves a REAL asset.

Theonewhoknows's picture
Theonewhoknows (not verified) Apr 15, 2016 6:34 AM

no news here... Gold still will be gaining on all fronts as the QE train is being continued (after FED, BOJ and ECB) - the war on cash will send gold up and up. http://independenttrader.org/war-on-cash-a-piece-of-a-bigger-puzzle.html

The Saint's picture
The Saint (not verified) Theonewhoknows Apr 15, 2016 1:20 PM

It works out better for the borrower if SDR's aren't pegged to gold while their currency is fiat.  Otherwise, their indebitedness would grow as their currency fell vs a gold backed SDR.

If you are a lender - lend in a gold backed asset or in gold.

If you are a borrower - borrow in fiat.

stacking12321's picture

sdr?

let me tell you about sdr.

a guy smells his shit, and thinks it smells bad

his solution? shit in a bucket and get 4 other guys to shit in the same bucket, because then it's guaranteed to smell nice.