Gold Not Yet on Gulf Cooperation Council Single Currency Agenda

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Gulf leaders meet tomorrow in Riyadh to choose the location of a new Gulf Cooperation Council [GCC] central bank that will pilot the creation of a single currency for the oil states of the Middle East, but it is not clear whether a role for gold is being seriously considered by the six nations.

The heads of state have first to settle the thorny issue of the home for the newest global central bank. Riyadh and Abu Dhabi are the front runners, although Bahrain or Qatar could emerge as a surprise compromise.

Central bank options

The UAE is the region's most open and globalized economy, but Saudi Arabia is the economic super-power. Last September the region’s central banks confirmed a previous agreement to proceed with the currency union by 2010, a date now widely seen as impractical.

Since then there has been some discussion internally about a possible role for gold within a basket of currencies and commodities. Saudi Arabia is believed to have among the world’s largest gold reserves, although the UAE has publicly stated that it holds no gold.

Indeed, Saudi Arabia has always maintained its support for a dollar linked currency, and this could well still emerge as the basis of the new single currency. Oil and gas are priced in dollars so this makes some sense, although the majority of imports to the GCC are from Europe which opens up a currency problem.

The International Monetary Fund has also suggested a managed float, basket peg and an oil-peg as alternatives for the new single currency. However, the Middle East has a traditional preference for gold as a stable store of value and its inclusion would help to underpin the new money as a possible future world reserve currency.

Business cycles

Gulf economies have had to accept an exaggerated boom to bust business cycle as a result of the dollar peg. Most recently low interest rates fueled up a real estate boom during high oil prices, and that has now come crashing down leaving huge debts and equity destruction.

At the same time, local investment interest in gold and silver has soared with investors searching for a safe store of value amid crashing global financial markets.

But contracts to buy currency forward indicate that local financial markets do not expect any move towards a single currency in the next year. Choosing the location for its central bank will, however, give this process new momentum and a sense of inevitability.