SDRs Should Be Poison to Gold. Think Again.

Warning: what follows could be construed as a bullish view on gold and could therefore make gold haters uncomfortable.

I'm sure I'm not the only blogger who noticed what gold did (or didn't do, I should say) when Tim Geithner committed his now infamous (for a few hours at least) faux pas. Mr. Geithner said he was "open to exploring a Chinese proposal to reduce reliance on the US dollar as the world’s reserve currency" which caused the dollar to crash. Not much, not for long, but still. Gold, on the other hand, went up. Not much, but still.

Why is this significant? Many people think gold's rise has much to do with all the currency debasement (quantitative easing anyone?) going on around the world and with the fact that gold has become, for some investors, if not the new reserve currency, some kind of default currency.

If that were the whole story then the news that the world at large is considering building a brand new reserve currency based on the International Monetary Fund's Special Drawing Rights (SDRs) should be poison to gold. Indeed, should this project come to fruition, gold would become just another precious metal and the sizable "currency premium" built in its price should evaporate. But that's not what happened. Gold went up. And that, my friends - gold haters have been warned - is very bullish for gold.

It might be a little too early to draw definitive conclusions and it may be that the market has not totally digested this new concept or that it doesn't believe it is going to be implemented anytime soon. But it's something to keep an eye on.

PS: Mischievous readers of my previous entry, which was dollar bearish, might surmise that Tim Geithner's supposed faux pas was no accident but a clever covert attempt to "talk down" the dollar. My only comment to those readers would be: stay mischievous.

Disclosure: Author holds a long position in GLD

Comments

[JudeJin]

more and more rich people have vested interest in gold now. they'll influence the politicians to make gold part of the anchors for the new reserve currency.

2009 Mar 26 03:35 AM

[yellowhoard]

When Geitner first spoke, gold took a nosedive. Then it rallied strongly. All of this happened in a matter of a few minutes. I'm not sure what to think of it, but it seems noteworthy.

2009 Mar 26 08:38 AM

[texpat]

An SDR represents a basket of currencies. In other words, various brands of toilet paper instead of one. In which case the widespread use of SDRs wouldn't hurt gold's currency premium. Only when currencies are once again linked to gold will its price stabilize. This would only happen at a much higher gold price, when (hyper)inflation has caused so much havoc that central bankers and politicians are willing to give up their counterfeiting privileges.

2009 Mar 26 09:41 AM

[optionsgirl]

If anything, a sinking basket of currencies where all of them are based on the same thing-a printing press- will help gold and the other precious metals keep that shine on!

2009 Mar 26 09:47 AM

[bearfund]

SDRs are definitely the global money of the future. They have to be hunted around the world by geologists with expensive equipment and prospectors willing to spend their entire lives in the search. They have to be dug out of the ground with yet more expensive equipment by men willing to risk their lives doing it. They have to be processed with toxic chemicals and in mills that cost millions to set up, taking in tonnes of ore just to obtain a single SDR. Once in your hand, the SDR depends on no one's obligation to you; it cannot default and it cannot be devalued because its supply is inherently limited.

Wait, actually none of those things are true of SDRs, which are just another kind of fiat money that can either be printed at will or printed based on a supply of other fiat money that is printed at will or both. I meant gold, which actually does have all those virtues and has as a result been the money of choice along with silver for the vast majority of humans over the last 5000 years. In fact, if the public were sufficiently educated to understand central banking and fiat money, they would still insist on it today and the central bankers' heads would be up on pikes.

2009 Mar 26 09:59 AM

[User 383463]

A kneejerk reaction to a headline is totally insignificant. Every piece of unexpected news causes completely incoherent moves in the markets, mostly due to quick position covering.

2009 Mar 26 10:46 AM

[Isam Laroui]

Great comments. So basically the market considered the idea for a few seconds, decided this SDR thing was yet another boneheaded financial engineering trick. Garbage in: fiat currencies, garbage out: SDRs. The rational behind being long gold is still there, only more so.

2009 Mar 26 10:49 AM

[silverwood]

All this talk of SDRs is laying the ground work for one world currency and world central bank. This will become a reality if the USD collapses. This has been the goal of the banksters to further consolidate the power in the hands of a few.

2009 Mar 26 12:47 PM

[pussum207]

I think the key point from a gold perspective was not the precise nature (SDR-based, whatever) of any future replacement for US dollars as the world's reserve currency but the very fact that China and others have been talking in public about it. It's no longer unthinkable. The thing about a reserve currency is that it is like a network - there is a bandwagon effect. A reserve currency is useful as a reserve currency, at least in part, because everyone collectively thinks it's useful as a reserve currency, i.e., its adoption by others as a reserve currency helps sustain its position.

The realization on the part of the world's central banks that other central banks are questioning the long term place of the US dollar as the world's reserve currency may encourage central bankers to gradually start to diversify their reserve holdings away from US dollars in advance of the emergence of any IMF-designed replacement. (No one wants to be the last out, for obvious reasons). This is likely to benefit gold.

If there is the possibility that the reserve status is potentially under threat due to inflation or whatever, things may start to unravel faster than a ponderous international bureaucracy can come up with SDR-based world currency. This is likely to benefit gold.

2009 Mar 26 12:49 PM

[Steve in Greensboro]

Politicians don't care about "rich people" or "poor people" or those in between. Politicians only care about accreting power and money to themselves and to government.

Politicians are never, ever willingly going to support a gold standard or any other restriction on their ability to debase currency, because that would tend to limit their power.

On Mar 26 03:35 AM JudeJin wrote:

> more and more rich people have vested interest in gold now. they'll
> influence the politicians to make gold part of the anchors for the
> new reserve currency.

2009 Mar 26 02:15 PM

[5142152-337]

bearfund: You say "if the public were sufficiently educated". My God man, that is how Obama got elected, how the likes of Barney Frank, Nancy Pelosi, Chris Dodd, and Harry Reid flourish in their wreaking havoc on this country.

This society we have now is interested in nothing but what they can get without earning it.

I would like to see the statistics on how many of those EDUCATED Americans that voted for Obama could find the Atlantic Ocean on a globe?

My guess: single digit!

2009 Mar 26 05:43 PM

[Hafidz I]

SDR possibly poisonous, but GOLD is and always will be immune to anykind of "fiat" poison.

2009 Mar 27 12:01 AM

[Conan the Barbarian]

I've seen a proposal for an SDR somewhere, don't know where: USD, Euro, Yen, Yuan and Gold.

What does this combo do to Gold?

Any opinions.

2009 Apr 09 02:59 AM

[Isam Laroui]

Each and everyone of the governments behind these currencies are trying to debase them right now. So presumably gold would go up against each one of them and thus against any combination. On the other hand, once there is some kind of global external reserve currency, competitive debasement won't be possible anymore. So in the very long run, gold would lose its potential role as reserve currency. I know I'm talking out of both sides of my mouth but we're dealing in hypotheticals here obviously.

2009 Apr 09 01:05 PM