A new monetary system for emerging markets and the role gold could play
The emerging world looks increasingly set on a path away from the dollar and toward a separate monetary system; the question is what would such a system look like and where does gold fit in?
Posted: Thursday , 05 Apr 2012
JOHANNESBURG (Gold Forecaster) -
In our last two articles we discussed just how the U.S. dollar came to be the central part of the world's monetary system and held onto that position when its economy and balance of payments were structurally inadequate to do so. In the second article, we described how the U.S. was flexing its muscles in taking action to stop Iran from selling its oil and receiving payments for it.
The collateral damage from this exercise embraced China, India and other nations, who were the customers of Iran. It has become clear to these nations that the power in the hands of the U.S. in oil matters is far too great for their future, and that they should be making plans to remove the impact of that power. If they are (China in particular) to be able to make their own decisions in the future -particularly on oil and currencies-then they must develop a monetary system that is independent of the U.S.
However, this will mean that the world must move from a world united under the USD to one where there is a fragmented monetary system with at least two parts. This break demands a period where uncertainty, fear confrontation, and conditions generally detrimental to financial harmony must be endured until a new order is established. The potential for damage to the current monetary system is huge as it will be the one in decline while the new system is on the rise.
New Emerging World Monetary System
The key participants in these new developments are the emerging world's key players: Brazil, Russia, India, China and South Africa. Of these, the main drivers in order of power are China, Russia, Brazil and then India. South Africa will remain the road into Africa's commodity supplies. Of course they have a hard road to travel as they have to weather the storms that may attempt to derail their attempts. Because of this, the initial steps we are watching are cautious, steady and solidly made.
To date, we have seen the accumulation of $3.18 trillion in China's reserves as well as much smaller amounts accruing to the other BRIC nations. This week saw these nations in discussions, in which the formation of the equivalent of the World Bank, for these nations was discussed.
According to the departing head of the World Bank, Mr. Robert Zoellick, the objective for China in the formation of this bank is to assist in the internationalization of their currency, the Yuan. India's objective would be to facilitate the construction of its infrastructure. Russia's objective was still to be decided. To us, it is a step forward in the building of a financial system to care for the BRICS nations' needs outside the current World Bank and the I.M.F. and free from U.S. dominance.
How far will the development of this system go? As far as is necessary for financial independence to be achieved! The most dramatic consequence of these developments will be twofold:
1. The ability of these countries to access oil in their own currencies and not the dollar.
2. A large fall in the use of the dollar internationally, in line with the rise of the BRIC currencies, with the Yuan acting as the 'hub' of this new monetary world.
This will not mean that they will not use the dollar or any other of the developed world currencies in daily trades, but simply remove themselves from U.S. dollar dominance.
We are under no illusion that the emerging world governments will follow the same course as developed world economies in the management of their monetary system. The ailments of the present system may well attend the new one. After all, the overriding element of the developed world system that decided its shape was control by government institutions. The government of money is necessary for governmental control of the people as well as the other channels of government.
Having said that, both the transition to the new system and the following one, will see similar policies regarding money management. Both will demand an "anchor of value". And the uninterrupted presence of gold as a vital reserve asset in the developed world central banks -regardless of the words against gold spoken over those years-is sufficient evidence of the future vital role of gold in any monetary system.
Relevance of Gold
Since 2009 the emerging world has been accumulating gold for its reserves alongside the acquisition of surplus currency reserves. China has ensured it has access to the gold its citizens have also acquired in the retail market, by banning exports of gold. It's a small step from there to the confiscation of gold. India's citizens have approximately 20,000 tonnes of gold all over India. Russia has had a policy of increasing its gold reserves, supported by President Putin. He has stated that Russia should reach 10% of its reserves in gold. Russia has had a slow but persistent buying program for gold over the last few years. Several South American, central Asian and other nations have built gold reserves for themselves and continue to do so.
Why? It is to defend themselves against the falling value of all currencies (including their own) in times of crisis.
With the emerging world starting to build an alternative system to that of the western world, the times ahead are likely to be turbulent, uncertain and volatile. It's in this climate that gold acts as an anchor, a stabilizer and helps to keep the flow of international money going. The emerging world has to ensure that gold is a significant part of that new Yuan-based system.
We expect this system to develop over, approximately, the next five years before it is mature enough to stand on its own. Once there, it will not oppose the developed world system, it won't work against it, but it will walk its own road, refusing to kow-tow to the U.S. political and financial requirements. It will continue to suck wealth and power from the west. That's why it needs to stand alone. Once Chinese exporters quote prices in the Chinese Yuan, then the separation of the two systems will have been completed.