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Comparing SDRs with the Dollar in gold, you can see what peeves the Chinese…

LAST WEEK, the head of the International Monetary Fund, Dominique Strauss-Kahn, suggested the global lending organization might be called upon to offer its 186-nation members an alternative to the US Dollar as a reserve currency, writes Brad Zigler at Hard Assets Investor.

In response to calls by China and Russia to supplant the greenback with special drawing rights – the IMF’s internal accounting unit – Strauss-Kahn said:

"That day has not yet come. But I think it is intellectually healthy to explore these kinds of ideas now."

Special drawing rights were devised by the IMF in 1969 to replace Gold Bullion in large international transactions and to serve as a supplement to central bank reserve positions.

Though freely convertible in IMF transactions, SDRs aren’t a currency. Instead, they’re credits that a nation with a trade deficit can use to settle balance-of-payment debts. Since SDRs are ledger entries, their use eliminates the logistics of shipping Gold Bullion back and forth to settle national accounts.

By value, SDRs represent a trade- and reserve-weighted basket of currencies, including the US Dollar, the Euro, the Japanese Yen and the Pound Sterling. The SDR basket’s makeup is determined every five years by the IMF executive board and is due for its next revamp later this year. Currently, the SDR basket is weighted as:

• US Dollar: 41.1%
• Euro: 36.1%
• Japanese Yen: 13.5%
• British Pound: 8.9%

The IMF recently increased the SDR float to 204.1 billion, now worth about $313.2 billion.

This year’s reset of SDRs is bound to reflect ongoing shifts in central bank reserves positions. In particular, the IMF executive board will consider rejiggering the SDR to reflect a diminution in the Dollar’s heft.

The US Dollar is the world’s most widely held reserve currency, making up just under two-thirds (10-year weighted average: 65.2%) of central bank holdings worldwide. The currency’s ubiquity, however, has been chipped away with increasing velocity over the past decade. As central banks have sought to diversify their reserve positions, Dollar concentrations have declined at an average annual rate of 92 basis points (0.92%) since 1999.

The primary beneficiary of world currency realignment has been the Euro, which now comprises a quarter (a weighted average of 25.3%) of global reserve allocations. Since the Euro’s introduction in 1999, allocations have grown at a 99 basis point compound annual rate.

At a distant third is the British Pound Sterling (weighted average: 3.8% of allocated reserves), once the world’s most heavily banked currency. Sterling allocations, though relatively small, have been growing along with the diversification trend. Central banks’ holdings of British currency have grown an average 14 basis points a year.

Commitments to the Japanese yen, however, have taken a downward trajectory. With allocations averaging 3.7%, the Yen’s reserve position has been falling at a 32 basis point annual rate.

One of the "intellectually healthy" notions for diversifying away from the greenback was floated last year by the governor of the People’s Bank of China, who argued for enlarging the SDR basket to include more currencies and establishing a settlement system that would make SDRs tradable outside of the IMF’s books.

Indeed, the trend among central banks is to hold increasingly large positions in currencies that the IMF currently buckets as "other". To be sure, some central bank holdings (weighted average: 18 basis points) are still maintained in Swiss Francs, but that position is shrinking by a basis point a year. Yet the "other" category is growing at virtually the same pace as the British Pound allocation, and now represents nearly 3% of global reserve commitments.

It’s easy to see why the Chinese have an axe to grind. The People’s Republic holds more than $2 trillion in Dollar assets accrued through years of Treasury purchases and exporting. The greenback’s hegemony as a reserve currency makes it easier for the US to run high trade deficits, a consequence of debt-financed consumerism and a low savings rate. American budget deficits put Chinese Dollar-based investments at risk.

But using the current iteration of SDRs as a substitute for Dollars really wouldn’t offer much risk reduction. Why? Reduce the SDR and the Dollar to Gold Bullion terms, and you’ll see they’re highly correlated with each other

For most of the five years since the last SDR reset, in fact, the IMF accounting unit was a virtual clone of the Dollar. Their rolling 30-day correlation (when priced in Gold Bullion) has averaged 98.6% since February 2005…as near to perfect as could possibly matter.

Clearly, a revision of the SDR basket is needed, but doing so raises new questions.

First of all, the Euro’s correlation to SDRs, though lower than the Dollar’s, isn’t small. The currency’s 30-day correlation to the IMF unit has averaged 93.4% over the past five years. Thus, pushing the Euro into a dominant position in the basket would run the risk of replacing one problem for another of virtually equal proportions.

One also has to consider the strains on the Euro as weaknesses in Irish and Greek economies threaten to scuttle the currency. So what about adding additional "other" currencies to the basket?

The truly representative choices are slim. The Chinese Yuan can’t be used until it becomes freely convertible on the world’s currency markets. And the Chinese currency’s value is only gradually – very gradually – being unwound from the Dollar. Full convertibility isn’t likely until trade barriers are lowered and access to Chinese markets is enhanced. That requires political change in Beijing, something not easily wrought.

Even if an optimal mix of other currencies could be found, attempting to float the SDR as a currency would introduce another set of risks and challenges. There’s no banking infrastructure in place for trading SDRs. Getting SDRs into worldwide circulation among private parties and businesses would be a headache exponentially more painful than the launch of the Euro.

More important, the use of SDRs would require management by a "super" central bank, a potential insult to national sovereignty. The Euro failed to establish hegemony in Great Britain over this very issue a decade ago. The hue and cry in the United States over "giving away" reserves to the IMF or another entity would likely be even louder.

While the IMF might find it intellectually stimulating to consider a top-down approach to finding an alternative to the Dollar as a reserve currency, changes are much more likely to come incrementally and be market driven.

That is, unless we convene another meeting at Bretton Woods to decide a new global currency order.

Looking to Buy Gold today? Make it simple, secure and cost-effective by using BullionVault…

Source:Gold & the World's No.1 Currency

Comparing SDRs with the Dollar in gold, you can see what peeves the Chinese…

LAST WEEK, the head of the International Monetary Fund, Dominique Strauss-Kahn, suggested the global lending organization might be called upon to offer its 186-nation members an alternative to the US Dollar as a reserve currency, writes Brad Zigler at Hard Assets Investor.

In response to calls by China and Russia to supplant the greenback with special drawing rights – the IMF’s internal accounting unit – Strauss-Kahn said:

"That day has not yet come. But I think it is intellectually healthy to explore these kinds of ideas now."

Special drawing rights were devised by the IMF in 1969 to replace Gold Bullion in large international transactions and to serve as a supplement to central bank reserve positions.

Though freely convertible in IMF transactions, SDRs aren’t a currency. Instead, they’re credits that a nation with a trade deficit can use to settle balance-of-payment debts. Since SDRs are ledger entries, their use eliminates the logistics of shipping Gold Bullion back and forth to settle national accounts.

By value, SDRs represent a trade- and reserve-weighted basket of currencies, including the US Dollar, the Euro, the Japanese Yen and the Pound Sterling. The SDR basket’s makeup is determined every five years by the IMF executive board and is due for its next revamp later this year. Currently, the SDR basket is weighted as:

• US Dollar: 41.1%
• Euro: 36.1%
• Japanese Yen: 13.5%
• British Pound: 8.9%

The IMF recently increased the SDR float to 204.1 billion, now worth about $313.2 billion.

This year’s reset of SDRs is bound to reflect ongoing shifts in central bank reserves positions. In particular, the IMF executive board will consider rejiggering the SDR to reflect a diminution in the Dollar’s heft.

The US Dollar is the world’s most widely held reserve currency, making up just under two-thirds (10-year weighted average: 65.2%) of central bank holdings worldwide. The currency’s ubiquity, however, has been chipped away with increasing velocity over the past decade. As central banks have sought to diversify their reserve positions, Dollar concentrations have declined at an average annual rate of 92 basis points (0.92%) since 1999.

The primary beneficiary of world currency realignment has been the Euro, which now comprises a quarter (a weighted average of 25.3%) of global reserve allocations. Since the Euro’s introduction in 1999, allocations have grown at a 99 basis point compound annual rate.

At a distant third is the British Pound Sterling (weighted average: 3.8% of allocated reserves), once the world’s most heavily banked currency. Sterling allocations, though relatively small, have been growing along with the diversification trend. Central banks’ holdings of British currency have grown an average 14 basis points a year.

Commitments to the Japanese yen, however, have taken a downward trajectory. With allocations averaging 3.7%, the Yen’s reserve position has been falling at a 32 basis point annual rate.

One of the "intellectually healthy" notions for diversifying away from the greenback was floated last year by the governor of the People’s Bank of China, who argued for enlarging the SDR basket to include more currencies and establishing a settlement system that would make SDRs tradable outside of the IMF’s books.

Indeed, the trend among central banks is to hold increasingly large positions in currencies that the IMF currently buckets as "other". To be sure, some central bank holdings (weighted average: 18 basis points) are still maintained in Swiss Francs, but that position is shrinking by a basis point a year. Yet the "other" category is growing at virtually the same pace as the British Pound allocation, and now represents nearly 3% of global reserve commitments.

It’s easy to see why the Chinese have an axe to grind. The People’s Republic holds more than $2 trillion in Dollar assets accrued through years of Treasury purchases and exporting. The greenback’s hegemony as a reserve currency makes it easier for the US to run high trade deficits, a consequence of debt-financed consumerism and a low savings rate. American budget deficits put Chinese Dollar-based investments at risk.

But using the current iteration of SDRs as a substitute for Dollars really wouldn’t offer much risk reduction. Why? Reduce the SDR and the Dollar to Gold Bullion terms, and you’ll see they’re highly correlated with each other

For most of the five years since the last SDR reset, in fact, the IMF accounting unit was a virtual clone of the Dollar. Their rolling 30-day correlation (when priced in Gold Bullion) has averaged 98.6% since February 2005…as near to perfect as could possibly matter.

Clearly, a revision of the SDR basket is needed, but doing so raises new questions.

First of all, the Euro’s correlation to SDRs, though lower than the Dollar’s, isn’t small. The currency’s 30-day correlation to the IMF unit has averaged 93.4% over the past five years. Thus, pushing the Euro into a dominant position in the basket would run the risk of replacing one problem for another of virtually equal proportions.

One also has to consider the strains on the Euro as weaknesses in Irish and Greek economies threaten to scuttle the currency. So what about adding additional "other" currencies to the basket?

The truly representative choices are slim. The Chinese Yuan can’t be used until it becomes freely convertible on the world’s currency markets. And the Chinese currency’s value is only gradually – very gradually – being unwound from the Dollar. Full convertibility isn’t likely until trade barriers are lowered and access to Chinese markets is enhanced. That requires political change in Beijing, something not easily wrought.

Even if an optimal mix of other currencies could be found, attempting to float the SDR as a currency would introduce another set of risks and challenges. There’s no banking infrastructure in place for trading SDRs. Getting SDRs into worldwide circulation among private parties and businesses would be a headache exponentially more painful than the launch of the Euro.

More important, the use of SDRs would require management by a "super" central bank, a potential insult to national sovereignty. The Euro failed to establish hegemony in Great Britain over this very issue a decade ago. The hue and cry in the United States over "giving away" reserves to the IMF or another entity would likely be even louder.

While the IMF might find it intellectually stimulating to consider a top-down approach to finding an alternative to the Dollar as a reserve currency, changes are much more likely to come incrementally and be market driven.

That is, unless we convene another meeting at Bretton Woods to decide a new global currency order.

Looking to Buy Gold today? Make it simple, secure and cost-effective by using BullionVault…

Source:Gold & the World's No.1 Currency

So there were no takers for the IMF’s latest gold sales…?

SO DID YOU NOTICE? asks Tex Norton at Whiskey & Gunpowder. The IMF didn’t get any bids for its latest offer to auction 191.3 tonnes of the remaining gold that it wants to sell.

Apparently the central banks of the world have shown a distinct lack of interest in the proposed bullion sale. So gold game-over, correct? Not exactly.

Recall that India bought 200 tonnes of gold from the International Monetary Fund late in 2009, along with Sri Lanka (10 tonnes) and Mauritius (two). The IMF gold sale is purportedly based on the IMF’s desire to raise funds to help poor countries. I’ll leave a discussion of that ill-conceived notion for discussion at another time. The fact remains that the gold is for sale and apparently no buyers are willing to step-up and be counted.

At least, not publicly counted. Wonder why?

There are probably as many excuses as there are potential buyers. Philip Klapwijk, executive chairman of GFMS, the London-based precious metals advisor, thinks the IMF’s decision underlines a general lack of buying interest now that gold exceeds $1100 per troy ounce. After noting the publicity that India, in particular, received as a result of their purchase last year, it’s quite possible that other potential buyers simply don’t want to risk any adverse publicity.

China has been reported to be Buying Gold for quite some time, as well as encouraging its citizens to also accumulate gold. It appears that China’s purchases thus far are from local mines within the country. One would think, therefore, that China would be a prime potential buyer for the IMF’s gold…but not the publicity. Could it be that China doesn’t want to rock the US Dollar? If China stepped up to the plate, the interpretation could be made that China had lost confidence in their US Treasury holdings.

It has been widely reported that Russia is also Buying Gold and, therefore, presents a likely IMF-sale buyer. Russia doesn’t have the same US Dollar exposure as does China, so their reluctance to step-forward is not immediately obvious.

Still another potential deal-killer is the outright disclosures themselves. Prior IMF sales have included specifics including the name of the buyer, the quantity purchased and the price paid. Gold Prices can be volatile. Should the price decrease after such a purchase, the buyer could then be ridiculed for having over-paid.

Recall the ridicule still being heaped (and rightly so) on UK prime minister Gordon Brown who, while still Chancellor of the Exchequer, managed to sell half Britain’s gold stash at the very bottom of the market? You have to admit it takes real talent to be that stupid.

For at least the last two decades, approximately 400 tonnes per year have been sold by European central banks in that way. But it important to acknowledge that European gold sales have recently diminished. If this trend continues, an additional 191.2 tonnes sold could be somewhat insignificant. The jury is still out.

Where does this put the investor considering a position in Gold Bullion. To answer that question, you need to go back to basics. The basic argument for owning gold is that it offers an inflation hedge. With world-wide fiat money in circulation being increased in volume at the whim of the respective issuing governments, anyone interested in preserving their accumulated wealth must take pro-active measures to protect their positions. One way has been to stash capital in assets that tend to maintain value regardless of debased currencies. Gold has met that need for thousands of years. It’s unlikely that anything will occur to change that protection in the near future. Is this not still the basic protection we seek?

And I’m always pleased when what passes for main-stream beliefs pokes fun at my investment portfolio. That tells me I’m still on the correct path to prosperity. I accumulated gold all through the 1970s as protection from the falling dollar. Recall that Nixon killed the dollar on August 15, 1971 when he closed the gold window. Anyone paying attention could then predict the outcome. Gold rose.

As gold rose in price, more and more folks became aware. In early January, 1980, several of us were having lunch at a restaurant when our waitress asked about our line of work. When we mentioned investment advisory, she volunteered as how she’d just taken a 2nd mortgage on her home and bought gold. After she left our table, I said "Guys, it’s time to sell!" I actually sold that afternoon – at $750 per ounce. That was $750 on the way up to the top at $850 before it crashed. Sold too soon, right? Wrong. Never be greedy. It was obvious by that time that the general public had become aware of gold and were now buying. In fact, it was a buying frenzy.

As Bernard Baruch was fond of saying, "When the shoe-shine boy starts touting stocks, it’s time to sell." We’re nowhere near that gold sell-point yet. Yes, you now see more and more commercials advertising Gold Investment. At the same time, you see more and more ads from folks who will buy your "junk" gold. There are even Tupper-ware-type parties where neighbors bring their "junk" gold to sell to a visiting buyer. Then the sellers brag how happy they are that they were able to get rid of their "junk" gold and get real cash they can now spend. No mention is ever made that the price they were paid was far below the prevailing spot price of the underlying gold. What a deal!

Is gold in a bubble? Possibly, but if so, it still has a long way to go before the top is reached. The top will make itself known if you simply watch the market actions. In the meantime, what else can you do, if not invest in gold, to help protect your accumulated wealth…?

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Source:Gold Bubble & the IMF Sales

India bought 200 tonnes of IMF gold. Now the Fund is selling another 191.3 tonnes…

WHEN INDIA announced its purchase of 200 tonnes of IMF gold in November, it added a statement that it might buy more of the International Monetary Fund’s gold as well, writes Julian Phillips at Gold Forecaster.

This implied that it was limited by the IMF to the 200 tonnes it bought. But the IMF never said that. Rather it said it would announce the sale of any other portion of their gold to the public.

It has been several months since another sale took place, leaving the IMF with 191.3 tonnes of the 403 tonnes slated for sale still up for grabs. Now with last week’s announcement, we are given the impression that central banks have not come forward to buy and are therefore not buyers.

Talk about "spin"!

China for sure would not buy if an announcement were to be made. It would rather Buy Gold once it had been sold in the open market, for it could then buy through its chosen bullion bank or bullion banks – and do so "under the radar". In fairness to the IMF, they have said they are open to central banks buying direct from them still, and will announce such sales. But you must realize that any further sales through the ‘open’ market will be done anonymously. This levels the playing field. However, all we will now hear is the completion of such sales.

If the IMF decides to sell 4 tonnes a week, we will hear about it through the ECB website in tonnage terms but with no further details. Will we hear of a 100 tonne sale done this way? Unlikely, but possible!

The gold market first reacted by fearing a dumping of this amount of gold, but once it gathered itself together, the market realized that the IMF’s open-market sales could be bullish for the Gold Price.

After all, 191 tonnes is an amount that the gold market does not see often, so a big buyer in the wings, finding that much gold for one price, might well come and bid for it. But will the IMF offer the amount to the market in one go or drip feed it? No one knows. They can now play the game as they choose.

If the IMF wants to sell its gold quickly, it is incumbent upon the Fund to accept a bid for the entire amount. But rarely is life so straightforward, these days. The reality is that there is the demand for such amounts in one sale. But the real question is, "Do the IMF want to sell it in one go?"

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Source:Spinning the IMF Gold Sales

Action in silver & Gold Futures positioning is the most favorable since July ‘09…

The LARGEST of the largest traders of Gold Futures on the Comex in New York continued to drastically reduce their net short exposure to both gold and silver last week, reports Gene Arensberg in his Got Gold Report for the Gold Newsletter.

A net short futures position – which is the sum difference between a particular group’s bullish and bearish bets – increases in value if prices of the commodity declines, and vice versa. Some veteran investors track this positioning amongst the very large actors, using it as a predictive gauge of future buying and selling pressure.

Others believe that positioning has no predictive value. But we believe that the commercial players’ "commitment of traders" data – reported by the Commodity Futures Trading Commission (CFTC) each week – is one of many important gold and silver indicators, and one that is moving into a more bullish than bearish structure right now.

In Gold Futures, the net short positioning of large commercial traders (LCNS) has not been this "small" since September of last year, with gold then trading in the $950s. For silver futures in New York, the always-short commercials haven’t held fewer net short silver positions since July of 2009, with silver then in the $13.70s.

That is only part of the story as we return to a bullish bias for gold, up from neutral. Those Got Gold subscribers who checked out latest technical charts at the start of last week saw we switched to "cautiously bullish" on Feb. 5th, with gold in the $1050s, immediately after Gold Futures traded harshly down – back to where India bought 200 tonnes of gold from the International Monetary Fund (IMF) in October.

We had been neutral on gold since our 2nd December 2009 report, as gold flirted with $1200 the ounce. But in our last full report two weeks ago we said "that may change very shortly, depending on how the gold market behaves over the next few trading days to two weeks."

So far so good, as gold has indeed bounced up off the implied support range indicated, slightly insulating our new positioning. We note several corroborating signs in a number of the indicators we rely on.

Unfortunately, however, as is nearly always the case at turning points – and also at false turning points – not all of our indicators are unanimous.

• We still note only minimal reductions of metal holdings in Gold ETFs, but we call attention to significant buying pressure for silver ETFs over the past week;
• Large Gold Mining shares are no longer underperforming gold and that is encouraging. The big miners held their ground despite gold and silver weakness over the past two weeks, but they do not seem robust enough for comfort. That is probably due to the very nervous and fearful tenor of most equity markets presently. Persistent mining share weakness was one of the main reasons we were reluctant to return to a bullish bias for gold;
• Despite even more troubling revelations and fearful news out of the Eurozone on Greece, the US Dollar index could not close higher on the week. Now commercial traders on the ICE exchange are record net short the US Dollar index as a percentage of the open interest – what we call a "Kamikaze Short";
• Meanwhile, Comex traders classed by the CFTC as commercial (i.e. industry, rather than speculative) are dumping their collective net short bets for gold and silver futures in a really big way.

The very large reductions in commercial net short positioning has to be the big news of this week’s report and that’s why it takes the lead.

Indeed, since gold challenged the $1200 level in early December, Comex Gold Futures commercial traders have now reduced their net short positioning by 31% as gold corrected a net 10% in price. The story is similar for silver.

Once again we reiterate our longer-term view that the world will most likely continue down a path of fiat currency debasement, weakening confidence in all fiat currencies. We see the setup as long-term very bullish for gold metal and extraordinarily bullish for silver looking well ahead – if the world "holds it more or less together."

Therefore, based on a preponderance of all the indicators we follow closely, we believe we have seen enough to return to a cautiously bullish bias for gold and we maintain our cautiously bullish bias for silver. With the Gold/Silver Ratio near 70 ounces, we believe silver is very strongly undervalued relative to gold.

Could we be wrong or early? Could we see further material declines in gold, silver and mining shares? Yep. But we are uncomfortable on the sidelines now, and no human can see the future. We certainly could be proven wrong, early or both. The best we have to work with are probabilities and our experience. Our trading stops take care of the rest.

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Source:Gold Shorts Drop 31%