And Golds Role in the New Monetary Framework
By JC Collins
With the rise of a multilateral and multicurrency monetary framework the hegemonic position of the United States will be reduced and diversified. The geopolitical and socioeconomic challenges to this necessary transformation are apparent and have materialized in the ongoing Syrian crisis, as well in the financial pressure which has been caused by a strengthening US dollar.
The need to rebalance the international monetary system and reduce the large accumulation of USD in the foreign exchange reserve accounts has begun taking place. This draining of USD liquidity has caused varying degrees of volatility in all markets.
Eventually the framework will shift towards a more balanced footing based on the multicurrency regime of the dollar, the euro, and the Chinese renminbi. Systemic instability in the financial markets and banking sector will eventually be addressed and reduced by the dynamic joint-functions of the three currency reserve mechanics.
In the meantime gold is appearing to be absorbing some of the losses and fiscal fragmentation. It was my original conclusion that the internationalization of the RMB would have been effective within the first quarter of this year. Such a rise of the Chinese currency would have been capable of absorbing some of these losses. But unfortunately the effective date of the new SDR composition with the renminbi added to its weighting will not be until October.
So in the meantime gold may very well continue to climb. Its role in the new multilateral monetary framework is not known. There are a few different approaches which can be taken. One is to include gold within the SDR composition alongside the RMB, the USD, euro, pound, and yen. A strong case has been made for this, which has been previously reviewed here on POM.
Another scenario would involve gold being used as a pegging anchor for domestic currencies. I see this as being the least likely scenario. But time will tell.
What the value of gold will be in the coming months and years is extremely hard to calculate. The longer volatility continues without a proper solution the higher it may go. The sooner a viable multicurrency solution is enacted the lower gold could go. It will depend on the role which the precious metal plays.
The rise of the renminbi and its use within the BRICS New Development Bank and Silk Road Fund, as well as the coming Chinese crude benchmark, could see RMB demand explode, which would cause gold to once again trend downward. I still see this as being the more probable outcome throughout 2016.
However the multilateral and multicurrency framework is looking by the end of this year, the challenges facing the United States and its diminishing role as the world’s sole hegemonic power will continue. The emergence of a unified Eurasian continent dominated by Russia and China will force the United States to pursue a more sustainable strategy back home.
Deeper integration within the North American continent has been on the agenda for many decades. Around 2005 it appeared like the North American Union was fast approaching. But for reasons which I haven’t fully explored yet, the NAU drifted out of the headlines and policy papers and a more unipolar approach was taken by America.
Back in 2014 the Council on Foreign Relations published a task force study on such deeper integration within North America. Though it avoided using the term North American Union, the same framework and mandates were discussed regarding the integration of Canada, the United States, and Mexico.
This task force consisted of varying personalities from American Universities, the US Chamber of Commerce, Goldman Sachs, Caterpillar Inc., Exxon Mobile, and the CFR itself. The study broke the framework of “deeper North American integration into four main components.
One was focused on energy. This would entail a regional energy strategy which encompasses the full accessibility of resources and the transfer of those resources to market. It would be expected that this would include the recent lifting of the crude exporting band in America, as well as the Keystone XL Pipeline, which will see new life in the coming years.
The second point of integration surrounds economic competiveness. This would entail developing a common market similar to the European common market and the growing Asian common market, as manifested within the ASEAN group and the AEC (ASEAN Economic Community). Each region and common market will have to develop new methods and mandates directed at increasing competitiveness within the international framework.
The third point revolved around security, and would be focused on strategies to enhance regional protection and border control. The North American Union, or whatever it eventually ends up being called, will likely attempt to extend its reach into Central America and the Arctic. Ironically, a part of the integration surrounding security would involve stronger control at America’s southern border. Something which aligns with Trump’s proclamations of building a wall. This would potentially fit within the framework of this deeper integration, as contradictory as it may appear.
The fourth point from the task force study revolved around community. This aspect would be the promotion and socioeconomic engineering of a shared culture. Most readers will already understand that this aspect of regional integration has been happening for years and decades.
The only way for America to remain strong within the growing multilateral monetary framework is to promote this regional integration within North America. The loss of access to resources and control across the globe will force the development of a stronger, more dynamic, and more united North American base which can project power globally.
America is strategically positioning itself to be the dominant partner in this regional integration, which is to be expected, as the US dollar will remain as one of three core reserve currencies in the multicurrency system. This three multicurrency system will be temporary as additional SDR frameworks and machinations are developed.
In closing I’d like to add that both the North American common market and Asian common market will be developing common currency units. This will follow the path laid down by the European Union and the euro. First the European common market was defined which was followed by the European Currency Unit (ECU). The ECU basket of national currencies eventually transformed into the actual euro currency.
This same process will happen with North America and Asia. As the common markets are further defined each will begin to utilize an Asian Currency Unit (ACU) and North American Currency Unit (NACU). The weightings of the national (domestic) currencies in these baskets will eventually be locked in and actual currencies for each region will be established.
Further down the road the SDR basket of currencies will consist of these regional currencies, and potentially gold as well. Eventually the weights of these regional currencies will be locked and the SDR itself will transform into the long anticipated world currency called the bancor. This was the original plan back at Bretton Woods in 1944. – JC