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USD: 3 Years Of Decline, Followed By Huge Hossa? SDR Emissions As A Potential Hint For The Investor

Summary

SDR is an international unit of account.

Some experts believe that the SDR is a currency.

After two emissions of SDR at the early 70 's and 80 's there was a great bull market for the dollar.

Special drawing rights are supplementary foreign exchange reserve assets. They are defined and maintained by the International Monetary Fund. Their value is based on basket of key international currencies. The basket is reviewed by IMF every 5 years. Now SDR basket consists of:

  • U.S. dollars - 41.9% (compared with 44% in 2005);
  • euro - 37.4% (compared with 34% in 2005);
  • pounds sterling - 11.3% (compared with 11% in 2005);
  • Japanese yen - 9.4% (compared with 11% in 2005).

IMF financial statements are expressed in SDR's. The IMF calculate SDR on daily basis.

HISTORY

SDR's were born as a temporary remedy to the crisis of the dollar, which began in 1969 and continued with varying degrees of severity until 1981. In such circumstances, the IMF decided to create new world's reserve currency.

At the beginning, SDR's were equivalent to 0,888671 grams of pure gold. But IMF gave up on this method of valuation in 1973 shortly after the time when United States moved away from the gold standard.

NATURE OF SDR

James Rickards in his book "The Death of Money: The Coming Collapse of the International Monetary System" draws attention to the fact that the SDR is money. He wrote that some scientists - like Barry Eichengreen of the University of California at Berkeley - oppose using of the term "money" in relation to the SDR, arguing that they are only a tool for accountants.

However, according to one of IMF's reports (p. 31):

„The Special Drawing Right is an international interest-bearing reserve asset created by the IMF following the First Amendment of the Articles of Agreement in 1969. All transactions and operations involving SDRs are conducted through the SDR Department. The SDR may be allocated by the IMF, as a supplement to existing reserve assets, to members participating in the SDR Department. Its value as a reserve asset derives from the commitments of participants to hold and accept SDRs and to honor various obligations connected with the SDR's proper functioning as a reserve asset. […]The SDR is also used by a number of international and regional organizations as a unit of account or as the basis for their units of account. Several international conventions also use the SDR as a unit of account, notably those expressing liability limits for the international transport of goods and services. […] Participants and prescribed holders can use and receive SDRs in transactions and operations by agreement among themselves. Participants can also use SDRs in operations and transactions involving the General Resources Account, such as the payment of charges and repurchases. By designating participants to provide freely usable currency in exchange for SDRs, the IMF ensures that a participant can use its SDRs to obtain an equivalent amount of currency if it has a need because of its balance of payments, its reserve position, or developments in its reserves."

The number of SDR's in circulation is negligible in comparison with national currencies such as the dollar and the euro. According to Rickards, SDR's probably never will go into circulation in the form of banknotes, and will never be used by ordinary people.

IS SDR'S CREATION USEFUL FOR INVESTORS?

Since the creation of SDR, IMF launched three "quantitative easing" programs:

• The first issue (9.3 billion SDR) took place from 1970 to 1972.

• The second (12.1 billion SDR) took place from 1979 to 1981.

• The third took place in August (161,2 billion SDR) and September (21.5 billion SDR) of 2009.

The total amount of SDR's issued since their creation: 204,1 billion (ca. $300 billion). Note that 182,7 billion SDR were issued in 2009.

How SDR emissions can be useful signal for investors?

History teaches that there is a close relationship between emissions and declining of the dollar. The first issue of SDR's was associated with a 20-percent fall in the value of the dollar in relation to gold. The second issue (1979-1981) came after the collapse of the dollar index. The third issue (2009) was the consequence of a fall of the dollar in 2008.

Now let's take a look at the graph of the USD Index (below). In red frames You can see periods of SDR emissions. As you can see in the orange boxes, the behavior of the USD Index from the years 1973-77 is very similar to the behavior of the currency in the years 2009-2015.

USD Index

If history likes to repeat, the dollar should be overpriced by about 26% over the next 3 years, i.e. by the end of 2018. Then - after the next SDR's issue - we should see 5-year-long, huge hossa on the dollar, which will raise it's value by approximately 80%.

The difference between 80-ties and the present times is the fact that Paul Volcker did his best for American currency strengthening. Today, the Fed is doing everything to weaken it...

And at the end, important message: there are plans for the creation of SDR-denominated bond market and reducing the weight of the dollar in the SDR basket (with increasing the weights of other currencies, such as the Chinese Yuan).

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