Sunday, October 11, 2015

Jim Rickards: Gold, SDR's and Crying Wolf

In a recent new article for Daily Reckoning, Jim Rickards touches on gold and the future for the SDR used by the IMF. He also calls out some blogs and financial newsletters for "dire predictions about how the SDR is poised to replace the dollar as the global reserve currency." Below are some quotes from this new article and then a few added comments.

. . . . .

"My class (at Johns Hopkins SAIS) marked a turning point. Many observers believe the gold standard of Bretton Woods ended on Aug. 15, 1971, when President Nixon gave his surprise speech shutting the gold window.
That is not quite correct. Nixon ordered the conversion of dollars into gold to be “temporarily” suspended. It was expected that the world might be able to return to some kind of gold standard once new parities of paper money to gold were established. Of course, that never happened.
In 1975, the IMF declared that gold was dead as a form of money. Yet from 1971-74, the world of international finance still considered gold to be money. That’s when I received my technical graduate training. Mine was the last class to study gold as a form of money in international finance.
Today, for the first time in decades, gold is once again being discussed as an international reserve asset. This is because Russia, China, Iran and other nations have been acquiring thousands of tons of gold to add to their reserves.
Equally important, other central banks that already have gold, such as Germany, France, Italy and the U.S., have completely stopped selling. It looks like the scramble for gold is back after decades of official dumping by the central banks.
Another topic that is in the news is the role of the SDR. Financial blogs and newsletters are filled with dire prognostications about how the SDR is poised to replace the dollar as the global reserve currency.
Even more digital ink has been spilled on the topic of including the Chinese yuan in the so-called “basket” of currencies that make up the SDR.
The technical nature of SDRs has led to ill-informed speculation, hysteria and dire forecasts that have no basis in reality.
This is not surprising. Most of the people who are expert on SDRs actually work at the IMF or finance ministries of IMF member nations.
They have no interest in commenting publicly about what is really going on. Most of those who are commenting lack the expertise to know what they are talking about. This is why the blogs are filled with misinformation and hyperbole that only serves to alarm and confuse investors."
. . . . . 
"SDRs are the coming reserve currency of the world. Massive issuance of SDRs in a future liquidity panic will be highly inflationary. These outcomes have enormous implications for investors with assets in U.S. dollars. Yet the process will be gradual and proceed in ways that markets barely notice, at least at first.
Commentators who “cry wolf” about SDRs are doing a disservice to investors because markets may be complacent by the time the wolf actually arrives."
My added comments:
This is an interesting article for several reasons. Jim clearly continues to view gold as an important part of the future. He talks about it in this article and recently announced he will have a new book out on gold next April
He repeats his statement that "SDRs are the coming reserve currency of the world" while at the same time chastising some blogs and newsletters for issuing "dire predictions about how the SDR is poised to replace the dollar as the global reserve currency." You may ask, doesn't he contradict himself with these statements? My answer would be no. 
If you listen carefully to Jim Rickards when he talks about the SDR becoming a kind of world money and the "coming reserve currency of the world", he does not say the US dollar will be done away with or will not still be a part of the monetary system. I think the blogs and newsletters he mentions probably present this idea differently than Jim has in mind. Notice how Jim says, "the process will be gradual and proceed in ways the markets will barely notice, at least at first."
Some of the blogs and newsletters I see when doing research for this blog talk in terms of some kind of sudden overthrow of the US dollar (either with the SDR at the IMF or with the Chinese yuan replacing the dollar very rapidly). I think the key Jim is trying to emphasize is that the transition process for the monetary system is more likely to be a gradual process that will make it less noticeable to the average person. The constant hyperbole you do see out on the internet calling for some kind of dramatic virtually overnight change in the system tends to come across to many people as "crying wolf" when they don't see these changes taking place at various predicted points in time.
For what its worth, on this blog we make no predictions regarding the timing of any coming future changes. Instead, we attempt to try and educate readers about SDR's in case they do take a more prominent place in a future monetary system. We make no claim here to be an expert on the subject, but we do have a page of articles about SDR's here on the blog for anyone interested in them. They are mostly just basic facts about SDR's with some added speculation about how they could be used some day in the future. As regards timing of the SDR becoming a reserve currency, this is what we said months ago on our blog page with articles about the SDR (linked above):
"Right now, I don't know of anything that would suggest the SDR is about to become a global reserve currency any time soon. However, over time, I do think it becomes more likely that this will be possible."
I will add that other sources I hear from agree that the changes we have discussed here on this blog are more likely to take place in a gradual way in steps. We have said this many times. Of course, if a major global crisis does erupt, that could always speed up the pace for transition and change. But absent such a crisis, we have repeatedly said here that the best information we can find suggests the pace of change will most likely be gradual and also likely to happen in steps on a regional basis instead of suddenly on a global basis. So Jim's comments in this article about this being a gradual process agree with the other sources I mentioned that work inside the system. We plead "not guilty" here to making dire predictions or crying wolf on this topic. 

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