The Golden SDR Agenda

Economics, Premium POM

Additional Information on the Nanjing II Conference

By JC Collins

On September 30, 2014 I published an article titled The Coming SDR Gold Standard.  It became one of the most read POM posts and was one of only a few that was republished on such sites as Zero Hedge. In April of 2015, seven months later, Lord Meghnad Desai, chairman of Official Monetary and Financial Institutions Forum stated the following in reference to gold being used to help stabilize the SDR:

“We could ask that gold be nominated as part of the SDR. That is one thing I think is quite likely to happen.”

To their credit the folks over at Zero Hedge published a piece on this information and referenced Philosophy of Metrics as a previous source of the gold backed SDR topic.  Since that time there has been very little information.

In the POM post on the SDR gold standard I wrote the following:

Sometimes what at first appears to be conflicting information is anything but, and what was originally considered to be opposing forces or ideals can quickly become unified for the greater good.

There has been much discussion and division over whether the world was moving towards a multilateral super-sovereign reserve currency by way of the Special Drawing Right of the International Monetary Fund or towards a new gold standard by which all currencies would be valued once again on gold.

Positions have taken up defense on both sides and all waited to see which side was going to be right.  Were the BRICS countries going to overthrow the western banking cabal?  Was the US dollar going to inflate into oblivion?  Was the SDR going to become the new reserve currency?  Was a new gold standard going to be implemented instead?

So many questions with no clear outline or determinations on what exactly was going to happen.

I have contested all along that the SDR was going to become the super-sovereign reserve currency of the emerging multilateral financial system.  The supporters of a new gold standard have found this idea unworkable because gold is considered to be the only method of creating stability within the larger architecture of the global financial system.

But what if everyone is right?  Or more correctly, what if all the obvious points and leverage of each potential system can be utilized to create the larger macro stability from which the multilateral will inevitably emerge?

In the post Renminbi is Already a De Facto Reserve Currency, I discussed how the Chinese currency was being internationalized and would be added to the SDR basket valuation.

This basket is currently made up of four currencies, being the US dollar, the Japanese yen, the Euro, and the British pound.  Adding the renminbi to the basket is both important and necessary for any changes to the global financial architecture.

But this theory has never accounted for the importance obviously placed on gold and the manipulation and mass movement of the precious metal which has taken place over the last few years.

No doubt the gold moving east has a lot to do with balancing old sovereign bond debts and building up reserves to support the renminbi denominated contracts which have just begun at the Shanghai Gold Exchange.

But this doesn’t fully explain the demand by other countries for gold, such as Russia and India, or even Germany demanding its gold back from the United States.

But neither does a gold standard fit the facts as all participating countries and economies have stated in official publications and speeches that a new gold standard is unworkable and the SDR provided the best opportunity moving forward to balance the financial structure of the world.

A few days ago F. William Engdahl published a piece in the New Eastern Outlook titled China Quietly Prepares Golden Alternative to Dollar System, which sheds some additional light on this topic.  From that article:

“On March 31 in Paris a special meeting, named “Nanjing II,” was held. People’s Bank of China Governor, Zhou Xiaochuan, was there and made a major presentation on, among other points, broader use of the IMF special basket of five major world currencies, the Special Drawing Rights or SDR’s. The invited were a very select few. The list included German Finance Minister Wolfgang Schaeuble, UK Chancellor of the Exchequer George Osborne, IMF Managing Director Christine Lagarde discussed the world’s financial architecture together with China. Apparently and significantly, there was no senior US official present.”

The article went on to explain:

“If we look more closely at all the steps of the Beijing government since the global financial crisis of 2008 and especially since their creation of the Asian Infrastructure Investment Bank, the BRICS New Development Bank, the bilateral national currency energy agreements with Russia bypassing the dollar, it becomes clear that Zhou and the Beijing leadership have a long-term strategy.”

“As British economist David Marsh pointed out in reference to the recent Paris Nanjing II remarks of Zhou, “China is embarking, pragmatically but steadily, towards enshrining a multi-currency reserve system at the heart of the world’s financial order.”

“Since China’s admission into the IMF select group of SDR currencies last November, the multi-currency system, which China calls “4+1,” would consist of the euro, sterling, yen and renminbi (the 4), co-existing with the dollar. These are the five constituents of the SDR.”

“To strengthen the recognition of the SDR, Zhou’s Peoples’ Bank of China has begun to publish its foreign reserves total–the world’s biggest–in SDRs as well as dollars.”

Most POM readers will recognize the familiar material as trending with what we have been discussing here for many years.  That fact that such material is being openly discussed now should be a further sign and confirmation of what is happening and what is to come.

In reference to gold, Engdahl went on to state:

“Yet the Chinese alternative to the domination of the US dollar is about far more than paper SDR currency basket promotion. China is clearly aiming at the re-establishment of an international gold standard, presumably one not based on the bankrupt Bretton Woods Dollar-Gold exchange that President Richard Nixon unilaterally ended in August, 1971 when he told the world they would have to swallow paper dollars in the future and could no longer redeem them for gold. At that point global inflation, measured in dollar terms, began to soar in what future economic historians will no doubt dub The Greatest Inflation.”

How quick this plays out is open to debate.  I still do not see big moves in gold for some time, but an additional adjustment to the SDR weighting could theoretically take place before the next review in 4 years.

A liquidity crisis could very well call into question the existing path forward and force all parties, including the US, to shift timeframes and make concessions where concessions were previously not considered.  At some point gold will have to be added to the SDR.  That has never been contested here.  But let’s see what happens in the coming months and how that may affect timelines for the reform of the international monetary framework.  – JC