Monday, April 27, 2015

Alasdair Macleod: Gold, the SDR, and BRICS

Here is a very good new article from Alasdair Macleod that talks about where things might be headed with the SDR at the IMF and also China's options if the US blocks the Yuan from inclusion in the SDR basket later this year.

All indications right now are that the Yuan will be included. There are also some hints that a small gold component might be added to the SDR basket at some point as well. But if the US holds firm by refusing to approve the 2010 IMF reforms and blocks the Yuan from SDR inclusion, China may be forced to move to Plan B. This is one of the better articles I have seen that talks about all this and also agrees with some comments I got from Jim Rickards by email for the most part. So I think this is an article well worth the time to read. Below are some quotes.


Last Monday there was a meeting in Washington hosted by the Official Monetary and Financial Institutions Forum (OMFIF) to discuss the future relationship, if any, of gold with the Special Drawing Rights1 (SDR).

Also on the agenda was the inclusion of the Chinese renminbi, which seems certain to be included in the SDR basket in this year's revision, assuming that the United States doesn't try to block it.
This is not the first time the subject has come up. OMFIF's chairman, Lord Desai wrote a paper about it after the last Washington meeting on gold and the SDR exactly four years ago. The inclusion of the renminbi in the SDR was rejected in 2010 because of inadequate liquidity and is due to be reconsidered this year.
Desai pointed out in his paper that there are difficulties when it comes to including gold, because (and I think this is what he was trying to say) none of the SDR's paper constituents are convertible into gold, but gold's inclusion in the SDR would make them convertible through the back door. However, Desai seemed keen to re-examine the case for gold.
It should be pointed out that if gold is included in SDRs the arrangement cannot be long-lasting so long as the major central banks insist on printing money as an economic cure-all. However, China's position with respect to gold and her own currency could be a different matter.                  . . . . 

 . . . China on the other hand still has some aces up her sleeve.
One of them is gold, and another is her role in a rival organisation established by the BRICS. The New Development Bank (NDB) is in the final stages of being set up, driven by frustration at America's attempts to protect the dollar's role and to keep the IMF as an exclusive club for advanced nations. Instead, the NDB could easily issue its own version of the SDR with the gold lining Desai referred to in his original paper.

My added comments:
This is a much better analysis of what may happen than most articles I see out there. Notice that Mr. Macleod makes it clear that China's first choice is to stay working within the IMF to get its currency moved up in global status. If that fails, then it makes sense for China to pursue other options. In either case, there is no evidence I can find that China intends to move to on its own to setup the Yuan as a gold backed currency. The available evidence suggests that China wants to stay engaged at the IMF if possible. But even if that fails, they would be more likely to move within the new BRICS Development Bank with other nations and perhaps setup an SDR like currency there (that could very well have some kind of gold backing). 

Recently Jim Rickards suggested in his latest webinar that the new China led AIIB might setup an SDR like currency. Here are those commments:

"Christine Lagarde was in Beijing a couple weeks ago, and we have the IMF spring meeting next week. There could be a lot of significant announcements there probably relating to the commencement of a process to include the Chinese yuan in the special drawing rights (SDRs). They haven’t announced it yet, but it will be very interesting to see how the AIIB keeps its books. It’s a bank, so they’re going to have books, assets and liabilities, loans, and profit and loss statements just like any bank. They have to pick a currency, but it wouldn’t really make sense to do dollars if they’re trying to break away from U.S. dollar hegemony and U.S. dominance of Bretton Woods. Why would they do it in dollars? It’s probably not going to be in yuan because that makes it China-centric. Even though China’s the dominant voice, they’re trying to make this multilateral. It could be euros, but why would they have euros for an Asian bank?
 I don’t know, but it seems likely they’ll keep their books in special drawing rights or SDRs. The IMF already does that, so have a look at IMF financial statements that are available online. They’re all in SDRs. When the IMF makes a loan such as they did to Ukraine recently, those were in SDRs. I talk about SDRs a lot and people laugh at me. They’re like, oh, what are you talking about? It’s just another fiat currency that will never work. My answer is it’s been working since 1969 so there’s nothing new. SDRs work fine; it’s just that no one really understands them. It will be interesting to see if they do keep their books in SDRs which they may very well. A possible scenario is that the AIIB keeps the books in SDRs and the IMF includes the yuan in the SDR, which they may do starting as early as next week (it won’t be official until January 1, 2016, but that process may start next week). It would get formally voted at the IMF annual meeting in Washington in early October (I think the annual meeting might be in Peru). This SDR train has left the station a long time ago."
In a recent email reply I got from Jim Rickards he indicated that everyone is waiting to see if the new China led AIIB will pressure the US to accept the IMF reforms and add the Yuan to the SDR basket. He indicated if the US rejects the IMF, it could lead to what he called parallel systems with the IMF trying to keep a foot in both camps. He added that he felt this would add to systemic instability. 
His comments seem to tie in well to Mr. Macleod's article as I understand it. Both are suggesting that China could end up trying to create an SDR like currency at one of the other new development banks if things don't work out at the IMF. Whether gold comes into play is also very interesting to follow.
The information on this topic seems to be getting better and more in line with the available evidence. I see more and more analysts starting to realize the the ball game right now is at the IMF and what happens to the reforms and SDR basket there. This has been our view here all along. So we have a lot to watch for coming up later this year. 

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