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Tuesday, March 17, 2015

Koos Jansen: China, Gold, SDR's and the Future of the International Monetary System

With a title like this, we have to cover this new article by Dutch gold researcher Koos Jansen. Somehow he managed to put a lot of what we cover here all in one title.


Koos Jansen is viewed as a leading global expert on gold movement in China. In this new article, he talks about something we have covered here quite a bit. That being the potential of adding the Chinese Yuan to the SDR currency basket later this year. However, he adds some interesting additional research tidbits he found suggesting that perhaps gold might come into play as part of the process. Below a few quotes from the article and then a comment. Please read the full article to get all the facts presented.

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"Possibly China’s national currency will be part of the IMF’s Special Drawing Rights (SDR) this year. If so, this would have substantial implications for the international monetary system.
Currently the SDR, which was invented in 1969 right after the London Gold Pool collapsed, consists of US dollars (41.9 %), Euros (37.4 %), Pound sterling (11.3 %) and the Japanese yen (9.4%). The weights assigned to each currency in the SDR are adjusted to take into account their prominence in terms of international trade and national foreign exchange reserves.
China has been interested in SDRs at least since the seventies, but became more outspoken in 2009, when Zhou Xiaochuan, Governor of the People’s Bank of China (PBOC), called for replacement of the US dollar as the world reserve currency by the SDR as to achieve the objective of safeguarding global economic and financial stability. China is currently the second largest economy in the world and its wishes can ultimately not be denied by other major economies."
 . . . . . .
"It’s likely that if the renminbi were to be adopted into the SDR, China would have to show the composition of reserves by groups of currencies (item IV.(2)(a) of the Reserves Data Template). If we head over to the IMF webpage of the Data Template on International Reserves and Foreign Currency Liquidity, we can see many countries listed, but not China."
. . . . . . .
"The IMF may require China to furnish information about its official gold holdings, as well as gold holdings by banks and financial agencies. If China would disclose all this information this would be a huge revelation, as China has net imported thousands of tonnes of gold in recent years that have not been officially assigned to any lawful owner."
. . . . . 
"But there is more…
OMFIF, a well-connected economic think tank, in conjunction with the World Gold Council has released a report in January 2013 titled, Gold, the renminbi and the multi-currency reserve system. One of the writers of the report was Chairman Meghnad Desai, Emeritus Professor, London School of Economics:
When it comes to international monetary reform, well before the renminbi advances to fully-fledged reserve currency status, gold might stand to reclaim a right to which it has long aspired by returning to the heart of the system. Rebuilding and reinforcing the Special Drawing Right (SDR), the IMF’s composite currency spawned in the 1960s, have been much mooted, but nothing has been done to realize this aim.
I favor extending the SDR to include the R-currencies – the renminbi, rupee, real, rand and ruble – with the addition of gold. This would be a form of indexation to add to the SDR’s attractiveness. Gold would not need to be paid out, but its dollar or renminbi or ruble equivalent would be if the SDR had a gold content. By moving counter-cyclically to the dollar, gold could improve the stabilizing properties of the SDR. Particularly if the threats to the dollar and the euro worsen, a large SDR issue improved by some gold content and the R-currencies may be urgently required.
In its absence, we may face a huge liquidity crunch if a combination of US and European shortcomings and the natural ambitions of Asia produce an attack on the major currencies – and open up a further hole in the framework of the world’s reserve currency arrangements.
As the international community attempts to take on these challenges, gold waits in the wings. For the first time in many years, gold stands well prepared to move once more towards the centre-stage. This could be the start of an immensely important phase in the history of world money. "
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My added comments:


We have noted here that inclusion of the Yuan in the SDR basket this year would be a key signal for coming monetary system change. Koos Jansen adds an interesting twist to this by suggesting he finds evidence that gold might come back into the system in some way (perhaps partially backing the new SDR basket as noted in the quote above). If that does happen, we will truly have some monetary system change on our hands (that's what we watch for here). 


At this point, we have Jim Rickards theory that China is buying gold not to back its own currency independently, but to have more "chips" at the table at a future global monetary reset conference. Jim does not suggest that gold would come back into the system at that time. However, he has also said he does not rule it at some point in the future if the financial authorities feel they need to do it.

This fall should be interesting. The prospects for some kind of signifigant change involving the SDR currency basket look pretty good.

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