Gold Not Yet on Gulf Cooperation Council Single Currency Agenda

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.

Comments

[yellowhoard:]

Some country, or group of countries, is going to create and back a currency with gold.

They'd be crazy not to do it.

May 05 09:22 AM

[Vuke:]

Trouble is, if they do, their currency will become as stable as a rock. In a world that is competively devaluing their currencies in order to increase exports their economy would be toast. The Chinese, for one, are not yet ready for that.

Eventually it may come but right now it's a great time to hold bullion on an individual basis. As enough people convert gold will eventually emerge as the standard against which all currencies will be judged. You've got to feel some sympathy for central bankers now as they try to figure out what to do. Right now they seem content bury their heads in the sand.





On May 05 09:22 AM yellowhoard wrote:

> Some country, or group of countries, is going to create and back
> a currency with gold.
>
> They'd be crazy not to do it.

May 05 09:50 AM

[yellowhoard:]

Investment would flow like a river in springtime to a country with a gold backed currency. The boom in the country with a gold backed currency would more than offset the decrease in exports.

Switzerland has been a good example of this. A strong currency allows them to manufacture value added goods with inexpensive machinery.

May 05 10:00 AM

[Vuke:]

Agreed, but they'd probably be invaded! By both immigrants and armies.


On May 05 10:00 AM yellowhoard wrote:

> Investment would flow like a river in springtime to a country with
> a gold backed currency. The boom in the country with a gold backed
> currency would more than offset the decrease in exports.
>
> Switzerland has been a good example of this. A strong currency allows
> them to manufacture value added goods with inexpensive machinery.

May 05 10:06 AM

[one eye:]

The Auctions are oversubscribed, the 30 year sells on Thursday. For now, Nations are Voting for USD Debt.

The Swiss Franc hasn't been a pillar of strenght against the USD for months, notwithstanding the recent rise in tandem with the Canadian dollar.

May 07 01:54 AM

[a.shzad:]

why invest in that country why not invest directly in gold?


On May 05 10:00 AM yellowhoard wrote:

> Investment would flow like a river in springtime to a country with
> a gold backed currency. The boom in the country with a gold backed
> currency would more than offset the decrease in exports.
>
> Switzerland has been a good example of this. A strong currency allows
> them to manufacture value added goods with inexpensive machinery.

May 16 03:04 AM