UN to produce bullion coins as world currency

The announcement by the United Nations this week that it will license the minting of silver and gold bullion coins bearing the UN logo may be the button that launches metal prices into orbit.

In its wide-ranging report this fall, the UN Conference on Trade and Development (UNCTAD) stated that the system of currencies and international banking practices within today’s economies were inadequate, and responsible for the present economic crisis. The report advocates that the present monetary system, wherein the dollar acts as the global reserve currency be re-examined “with urgency”.



The UNCTAD Report was the first time a major multinational institution had forwarded such a suggestion or measure, although a number of countries, including Russia and Brazil have supported replacing the dollar as the world's reserve currency. China's central bank chief Zhou Xiaochuan has mentioned that the dollar could become a basket of currencies instead.

The UN commission dismissed such a widening, saying a multiple-country system "may be equally unstable, and not transparent."

The panel is seeking more monetary balance for developing countries, and a means for them to retain their reserves and domestic savings independent of foreign agencies and arrangements.

Panel Chair US economist Joseph Stiglitz, a Nobel economics laureate, has made plain that there was "a growing consensus that there are problems with the dollar reserve system. Developing countries are lending the United States trillions dollars at almost zero interest rates when they have huge needs themselves," Stiglitz stated.

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Jim Rogers: Gold Price to Double in Coming Months

The rally in gold prices has driven several bullion analysts to frenzied forecasts. Some say gold prices will reach $2,000 per ounce soon. Others are predicting big boom for the yellow metal, saying gold prices will zoom to $5,000 and eventually to even $15,000 per ounce in the years to come.
What is happening in bullion market these days? Yes, agreed that weakening dollar, global economic meltdown, shrinking gold supply and increasing cost of mining gold from the earth are all making gold the most-sought after investment these days. That is also driving the yellow metal prices to record highs.
These days, the biggest gold buyers are not individual customers or families, but global central bankers that are vying with each other to accumulate gold reserves in an attempt to get out of their decades-old dependence on the US dollar as the best asset class. India jumped into the bullion fray to buy 200 tonnes of gold from the

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International Monetary Fund (IMF) early this month. Other countries like China, Russia, Brazil and Sri Lanka are frantically trying to accumulate gold reserves.

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India could buy rest of IMF gold on offer

India is open to buying more gold from the International Monetary Fund following its purchase of 200 tonnes earlier this month, the Financial Chronicle newspaper said on Wednesday, helping to drive gold prices to an all-time high.

But India’s central bank governor, Duvvuri Subbarao, declined to comment on whether the bank would buy more gold from overseas, however.

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The paper said that subject to acceptable conditions, India’s central bank could well buy the balance of the initial 403.3 tonnes, or one-eighth of the IMF’s total gold holdings, that the Fund had planned to sell.

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Central Banks Join a New Gold Rush

The world's central banks are likely to be net buyers of gold in 2009 after two decades of selling, sparking a race among analysts to figure out which country will step in with the next big purchase. Gold Fever

Since 1991, central banks have reduced their gold holdings by 10%. It is a trend that has long been cited as keeping an overhang on gold prices. Developed countries like Switzerland, the U.K. and the Netherlands all sold significant amounts of gold to diversify into other assets in pursuit of higher returns.

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India's $6.7 billion purchase of 200 metric tons of gold from the International Monetary Fund last month, absorbing half the amount the IMF put up for sale, was the largest purchase by a central bank in 30 years. Now the market is engaged in a guessing game about which central bank may buy the rest.

Eugen Weinberg, an analyst with Commerzbank AG, is looking to China. Jeff Christian, managing director of CPM Group, a New York-based precious-metal research firm, says other Asian and Middle East countries may be likely candidates.

Wei Benhua, a former Chinese official, was cited by Chinese-language magazine Caijing on Monday as saying China, Brazil or Russia may follow India in buying IMF gold.

India's purchase has thrown central banks back into the spotlight as a potentially powerful force behind gold. Even relatively small changes in the balance of a central bank's reserves could have a drastic impact on gold prices because of the relatively small size of the market.
[Gold Moves Slightly Higher ] Bloomberg News

Gold ingots await shipping at the Argor-Heraeus gold producing and refining plant in Switzerland.

This year could mark a "watershed year," Barclays Capital analyst Suki Cooper said in a note to clients. And, even though central banks mightn't be big buyers of the precious metal, the prospect of added demand may provide key support to the market, they say.

China, Russia and Brazil have tiny holdings of gold relative to their overall foreign reserves, placing them among more likely buyers. China, for example, has just 2% of its reserves in gold, compared with the world average of 10.3%., according to the World Gold Council; and Russia is at 4% and Brazil 0.5%.

The most logical buyers are countries that are running current-account surpluses and that don't have their own domestic gold production, Mr. Christian said.

With a net inflow of dollars and euros every month, central bankers in these countries are worried about the growing exposure to these currencies and have the most desire to diversify into other assets. According to the IMF's International Financial Statistics, Malaysia, Singapore, Kuwait, Saudi Arabia and Venezuela are among other biggest surplus countries behind China and Russia.

Typically, central banks hold a basket of foreign currencies, bonds and precious metals in reserve, using it to make international payments or adjust the value of their domestic currency. The U.S. dollar was considered the preferred reserve currency for decades. But the greenback's recent decline has spooked many countries sitting on big dollar assets.

While China has become an obvious buyer, some analysts say the country is likely to buy production from Chinese mines rather than buy from the IMF. China, the world's largest gold producer, has $2.3 trillion in foreign reserve, with the majority in U.S. Treasury securities.

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Gold hits a record near $1,100

The precious metal continues to push higher one day after India makes a major purchase, raising bets that demand from central banks will rise.

Gold rose to an all-time high Wednesday amid a weaker dollar and speculation that foreign central banks would increase their purchases of the precious metal.

December gold jumped $10.10 to $1,095 an ounce, after hitting an all-time trading high of $1,096.20 an ounce earlier in the session. On Tuesday, gold closed at a record $1,084.90 an ounce.

Gold, which is up 23% this year, surged on Tuesday after the International Monetary Fund said it sold 200 metric tons of the precious metal to India's central bank.

That sale heightened expectations that more overseas central banks will move to increase their gold holdings.


"To have India step in and buy half of the IMF gold was a big surprise," said Joe Foster, a precious metals analyst at Van Eck Global. "It shows that other central banks are looking to buy gold."




Analysts say many monetary policy makers are looking for ways to reduce their exposure to the U.S. dollar, which is the traditional reserve currency of choice for many foreign central banks.

The dollar, which is down 6% this year, has been pressured by concerns about the growing U.S. budget deficit and rock bottom interest rates.

Traders say gold could emerge as the "new dollar" when it comes to reserve currencies.

Ben Rooney CNN Money

Why the price of gold is rising

Gold prices have been rising for eight years. The price of gold has hit a new all-time high.

The precious metal reached a record high of $1,048.4 an ounce on Wednesday.

This came a day after having pushed past the previous peak of $1,033.9, which was set in March last year.

WHY HAVE GOLD PRICES REACHED SUCH HIGHS?

There are several factors at play which are leading to demand for gold rising, pushing up the price:

Weakness of the dollar: The greenback is commonly seen as the World's reserve currency. Low interest rates and the US government's massive economic support package have weakened the dollar.

Those who would typically have invested in that currency are looking for other places to put their money where it will, they hope, gain value.

Speculation: A lot of the investment into gold is coming from institutions such as hedge funds - whose money needs to go somewhere.

When banks are offering very low rates of interest on savings - and money can be borrowed extremely cheaply - gold becomes attractive, observers say.

Inflation risk: Gold is seen as a hedge against inflation. Right now, inflation is pretty low, but mounting worries about potential inflation in 2010 may be enticing more investors to the precious metal.

Psychological: Gold has a "primeval" quality argues Adrian Ash of UK online gold exchange, BullionVault.com (which makes money by encouraging people to buy into gold).

He says that while it is essentially a "lump of metal with little purpose", gold tends to hold its value over the long term and is not anchored to the value of cash.

This means that people are drawn to it in uncertain times, Mr Ash adds, though he cautions the price can be volatile.

Seasonal: In Western cultures, individuals buying into gold as an investment remains relatively rare. It is not the kind of advice you are likely to get from a financial adviser, for example.

However, in countries such as China and India, buying gold as in investment is more common. And at this time of year, in the run-up to the Diwali festival, there is a seasonal increase in gold purchases because the metal is traditionally given as a gift.

Indian farmers are also big gold customers at this time of year - seeing it as a way of keep their profits safe after harvest - free from threat of currency fluctuations. DOES THE PRICE OF GOLD REALLY MATTER? The reality for most people is that their main contact with Gold is when Spandau Ballet gets played on the radio. Arguably its biggest role is as a sentiment barometer. A high gold price is an indicator that all is not well with the global economy. It could be bad news if you are looking for an engagement ring or another piece of jewellery. Higher prices are likely to be passed on to shoppers. On the other hand, it could be good news if you have gold that you no longer want and could do with making some money. The rising price has seen an explosion in "scrap gold dealing" - where High Street shops and postal companies will offer to turn the gold into cash. Read entire article

New world currency order starts to unfold

The US dollar still retains a disproportionately large representation in international trade transactions, official reserves and exchange rate regimes.

This is largely due to the many institutional arrangements and incumbencies which remain from the Bretton Woods era of 1944 to 1971 when the gold-linked dollar provided the formal anchor for the world monetary system.

Now, though, this privileged, inherited status of the paper dollar is under threat from the falling relative economic size of the US and its cyclical influence and the scale of the excesses that very privilege has allowed.

Appropriately straddling the turn of the 21st century, the “borrowed” consumer decade of 1997–2007 may come to be regarded as the fin de siecle, marking a critical juncture in the drift away from the US dollar hegemony that has dominated the international financial system since the Bretton Woods regime ended in 1971.

An employee of the Korea Exchange Bank counts parcels of $100 notes for foreign bonds redemption in Seoul. Jo Yong-Hak / Reuters

Instead, we are on the road to a new, multilateral currency order.

As far back as the 1970s, in the earliest years of the floating rate regime when the US dollar declined rapidly in value after its link with gold was formally broken, its hegemony was under threat. But, back then, the US was still a net creditor nation and there was no obvious liquid alternative.

Today, after almost 25 years of deficits, the US is the world’s largest debtor with little chance of shrinking that debt without significant further real depreciation of its currency.

Moreover, while the US financial system is in crisis with increasing public intervention in the system, liquidity and transparency in both industrialised and emerging currency and financial markets, while still imperfect, has greatly increased.

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Finally, there is a credible, liquid alternative currency which can at least share the role of global numeraire; the euro.

This backdrop of cyclical and structural pressures presents a challenging environment for even the most established and rigid dollar-peggers such as Hong Kong and the Gulf states. Their pegs have resulted in unprecedented foreign currency reserve accumulation, as warranted exchange rate adjustments are prevented via intervention and capital control.

Before the crisis in the US financial system, higher inflation was also a natural consequence of having to keep monetary policy linked to the US Federal Reserve.

The credit crisis has distracted attention from the disequilibrium of many dollar-pegged currencies around the world, not least as the dollar has recovered significantly in value over the past year. But, as the world emerges from the crisis, US monetary policy may stay expansive for a prolonged period and the dollar may become significantly weakened again.

This could drive a new wedge between the appropriate monetary policy of the dollar-pegged states and the policy of the US, especially as expansive monetary policy may eventually drive up global commodity prices upon which the economic performance of many dollar-pegged states depends.

Domestic price adjustments, in imports, housing, wages and ultimately all goods and services, will be part of the equilibrating costs of a currency peg during such phases as long as the peg is maintained.

If the currency cannot adjust, then prices must do so. Is the cost of ever-increasing phases of inflation or, in other circumstances, potential deflation, worth sustaining unilateral pegs?

In a world of more diversified trade, fading US dominance and ever-larger capital flows, the answer is, increasingly, no.

Boom-bust cycles, redistributions and inequalities of income and purchasing power, damage to non-US export markets and disincentives for investment are all likely to be prevalent.

Economic considerations would thus argue that adjustment of these regimes is justified, not just cyclically but structurally, too.

But what is the alternative? Given the typically high trade dependence and relatively low liquidity of the currencies in question and the ever greater scale of international capital flows it is unlikely the volatility of a perfectly free float, or “benign neglect” of the exchange rate, will be desirable.

Political considerations may dictate simple revaluation of the dollar peg rate as the only viable option to regain control of inflation in the short to medium term.

However, this may invite yet larger scale speculation because any change in these long-established regimes would be likely to weaken their credibility.

A switch to a peg with the only liquid alternative to the dollar – the euro – may be more inappropriate unless the country in question has highly concentrated trade with Europe alone. The appealing alternative in a more diversified world economy is a multilateral currency regime consisting of a blend of major currencies such as the euro and dollar or a much broader trade-weighted basket. This approach is already favoured by several countries which have moved away recently from unilateral pegs including Russia and Kuwait and, with great success, Singapore since 1981. While China has maintained tight control of the yuan’s exchange rate versus the dollar since the unilateral peg was abandoned in 2005, it is ostensibly managed with reference to an unpublished, broader exchange rate basket. Such a multilateral currency world should be a natural consequence of economic growth over time.

But the pace at which the shift takes place will depend, critically, upon the stability of the US and its economic policies. For the first time in modern history, many of today’s largest foreign currency reserve holders are not part of the Group of Seven (G7) industrialised countries. This is important because the G7 has traditionally acted as a co-operative stabilising influence dampening major currency swings with intervention at times of greatest stress and illiquidity and maintaining confidence in the dollar. Today’s largest currency reserve holders may act as stabilisers to preserve their own self interest but no more than that.

As almost 100 countries still use currency pegs in varying forms, mainly versus the US dollar, the procession to a more multilateral exchange rate regime is expected to continue. With increasing diversity of central bank reserve assets and an increasingly diverse range of reserve holders themselves, a tri-polar world with shared primary reserve status between the principal currencies of the Americas, Asia and Europe is likely to take shape.

The euro is increasingly posing that challenge and can expect to see further increases in its global currency reserve share from about 30 per cent now.

And, in the much longer run, China’s yuan may well be both liquid and flexible enough to represent Asia’s primary role in the multilateral system.

Joe Prendergast is the chief currency strategist at Credit Suisse Private Banking

* Last Updated: September 21. 2009 7:17PM UAE / September 21. 2009 3:17PM GMT