Friday, August 7, 2015

OMFIF Report: Gold, the Renminbi, and the Multi Currency Reserve System

In April of this year, we noted here on the blog that an interesting meeting was held in Washington DC co-sponsored by The World Gold Council and the Official Monetary and Financial Institutions Forum (OMFIF). The meeting was held at the time of the IMF and World Bank spring meetings. The title of the meeting was 'Gold, the Renminbi, and the Multi Currency Reserve System.

Because this meeting was held under 'Chatham House Rules' many alternative media sites speculated that something important related to coming monetary system change was discussed. While the topic does suggest that might be the case, there is more detailed information available about what was likely talked about in this meeting. 

In January 2013, the OMFIF released a report with the same title. This report likely contains the framework for what was discussed at the meeting in April. It is a long report so we have selected a few summary highlights below to give you a flavor of the report. After that are a few added comments.


The international monetary system is on the brink of change. The role of the US dollar as the primary reserve currency is being challenged in multiple ways. These points find unequivocal agreement. However, there is a great debate on the system’s future shape. 

Will the dollar be replaced by another reserve currency? Will we enter a new multicurrency system? What will be the place of China as the world’s No. 2 economy? Is there a role for gold in the new system and, if so, what will it be? These are the questions academics, central banks and policy-makers are considering around the world. In this paper, we point the way towards some answers. 

The Official Monetary and Financial Institutions Forum was created during the financial crisis in large part to explore fundamental questions about the international monetary system. These are the big issues that central banks, finance ministries and capital market practitioners must address. 

Through rigorous historical and contemporary analysis and discussions with policymakers and financial experts around the world, OMFIF concludes that: 

1. The world is headed towards the uncharted waters of a durable multi-currency reserve system, where the dollar will share its pivotal role with a range of other currencies, including the renminbi. Historical precedent and the underlying principles behind asset diversification indicate that the coming time of flux and uncertainty for worldwide reserve management will be a period when reserve holders spread their investments into a relatively wide range of assets and sectors. 

2. Amid the new interplay of forces impinging on worldwide official investment, gold seems likely to play an important role. In particular, OMFIF believes that the role of gold in the international monetary system will be further enhanced in the coming 10 years as a result of basic uncertainties over the dollar and the euro, and over whether the renminbi can emerge as a robust international currency without encountering fundamental setbacks. 

3. China will rise as the US wanes, but this rebalancing will occur gradually rather than abruptly and setbacks and perturbations are likely along the way. China’s rise will inevitably be riddled with political and economic challenges that lead to a long period of transition.  


My added comments:

Reading through this report I noticed how it ties in very well with the blog articles we have posted here regarding China and its future plans for the Yuan/Renminbi. The report points out how China is on a slow and steady path to increase the global use of their currency. It talks about how China is moving forward on several fronts (including setting up exchanges to price gold and other commodities in their currency) to get broader adoption of the Yuan.

The report also talks about how gold is likely to return to favor globally as this process of moving towards a multi currency reserve system unfolds over time. Again, the information in the report ties very well to what we have said on this topic here on the blog. We will not see a return to a gold standard, but gold may play a greater role one way or another in a future global reserve currency.

Those who have been expecting China to make some kind of sudden, dramatic move to displace the US dollar as global reserve currency will probably be disappointed in this report though. The report talks about all this happening over the next 10 years and how China likes to move very slowly and cautiously (something else we have emphasized here).

This difference in perception does illustrate very well however that there is a big information gap between those inside the system making real decisions on how to move forward and those on the outside who can only speculate using somewhat limited information.

For example, many alternative media sites and analysts are claiming that China is about to back the Yuan with gold and essentially overthrow the US dollar in some kind of sudden move. Others claim China plans to usurp the US and western control of the IMF and the World Bank. Most of these sources predict this will happen very soon (usually sometime this fall of 2015).

When you get a glimpse of real information from those inside the system (like this OMFIF report), you see a very different picture. That picture is one of a slow and steady conversion to a multi currency reserve system over many years or even decades. The IMF decision to delay a decision on adding the Yuan into the SDR basket is another example of how slowly things tend to move under normal conditions.

This is why the number one question we are following here on this blog is whether or not we get another major global financial crisis worse than 2008. If we don't, the information we can see from inside the system suggests change is likely to unfold slowly over time. If we get a crisis, it would probably speed up the timetable a lot. We will follow it here to see what actually does happen. 

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