Gold and silver rose ($939.80 up $4.40 - Silver $13.65 up 18 cents) Thursday on deepening concerns about the dollar and fears that its reserve currency status is threatened.
This week could see sharp moves in financial markets as the dollar’s dominance in the international monetary system is set to be questioned at the G20 Summit (Thursday, April 2nd). The US creditors in China and Russia are proposing creating a new supra-national reserve currency, thereby lessening dependence on the dollar. Treasury Secretary Tim Geithner let slip on Wednesday that Washington was “open” to the idea.
It is not just large holders of US debt who have voiced concerns about US economic, monetary and fiscal policies. The holder of the EU presidency, the Czech Republic’s prime minister, Mirek Topolanek, condemned American remedies for the global recession as “the road to hell”.
And importantly, a distinguished and respected UN panel has urged a reform of the international monetary system. The United Nations General Assembly was told on Thursday, that world leaders should give urgent attention to reaching consensus on creating a global reserve system that would replace the US dollar as the main international currency.
The unprecedented debasement of the US dollar and of currencies internationally is leading to a debasement of the international monetary system which could potentially lead to an international currency crisis.
Understandably, the central banks of Brazil, Russia, India and those in the Middle East have all stated a policy of increasing their gold reserves. Russia added 90 metric tons to their reserves in December and January. Ecuador added 28 metric tons in January. Other third tier central banks are doing likewise and it looks as if European banks could be net buyers this year as well.
China is also increasing its gold reserves (from a very small some 1% of overall currency reserves) and the Director of the People’s Bank of China recently stated:
Reducing reliance on the dollar and maintaining greater diversification in foreign exchange reserves is the only way to reduce the risk. As a result, an increase in our country’s gold reserves is necessary.
Added to this significant currency and monetary risk, is the deepening global recession and a banking system teetering on the brink of collapse which will lead to continuing volatility and uncertainty in currency, bond, commodity and equity markets. The bear market in stocks looks set to continue for the foreseeable future, while being interrupted intermittently by some sharp bear market rallies. This will lead to continuing safe haven demand for gold. Especially as it is a currency and monetary asset that cannot be debased and one of the few assets that does not have counterparty risk.