Dollar Versus Gold, Central Banks Weigh In

The Financial Times reports this morning that a survey of central bank managers shows a consensus that the USD (United States Dollar) will lose reserve status and is expected to be replaced by a basket of currencies in the years ahead. While this isn’t news to many people, it is significant that it is being openly discussed by the central bankers themselves.

The dollar continues to suffer hit after hit but struggles to hold on. This is due to the overwhelming amount of established trade already occurring in dollars.

Recent high points in the dollar’s decline include:

  • For more than a decade OPEC nations most significantly added to the woes of the USD with their open discussions of moving to a basket of currencies for future petroleum trading.
  • In response to the re-election of George Bush in 2004, private Middle Eastern investors sold off their dollars as fast as they could in hopes of escaping the actions eventually justified by the Patriot Act.
  • Last year, Russia and China formally announced bilateral trade would no longer be done in USD.
  • Recent reports by the IMF (International Monetary Fund) call for a new reserve currency built on SDRs (Special Drawing Rights) which are composed of a basket of currencies. The lion’s share of that basket is currently held in US dollars.
  • International leaders including, Russian President Medvedev, have recently openly called for those SDRs to include the currencies of Russia, China, Brazil, and India. This would necessitate the dollar occupying a smaller percentage of that lot.
  • Some countries, including Libya, have recently introduced sovereign currencies made exclusively of gold and silver and threatened to accept only such hard commodities in exchange for their oil and other resources.

    As the dollar buffets these hits, the door is opened wider to the common sense that has prevailed on this planet for eons: commodities such as silver and gold are the safest route out of the morass that is un-backed fiat currencies. More than a dozen states here in the US have already moved in the direction of insuring a degree of economic stability through the introduction of legislation that would legitimize the use of silver and gold in the satisfaction of contracts. Sources indicate that a dozen more states are following their lead.

    Right on cue, The Financial Times goes on to report,

    Central banks have bought about 151 tonnes of gold so far this year, led by Russia and Mexico, according to the World Gold Council, and are on track to make their largest annual purchases of bullion since the collapse in 1971 of the Bretton Woods system, which pegged the value of the dollar to gold.

    Yesterday’s London second day fix had gold at just under $1500/oz and today sees the soft metal up about $5 already. Economic protests in Greece and the dollar hitting record lows versus the Swiss Franc are leading today’s headlines.