Monday 20 December 2010

Is the SDR a diversionary tactic to forestall financial Armageddon?

I was recently musing that I could perhaps see the SDR becoming the world’s trading numéraire, but that it felt likely that this would only come about after a global rebalancing of currencies. Looking into the SDR in more detail took me a way off track into the wilderness, where I had no idea I might find myself. I found myself all of a sudden staring at the Islamic Dinar!

The reason I ended up at this seemingly unlikely place was I stumbled into a site on the web which stated that 1 Islamic Dinar = 1 IMF SDR. This I found an intriguing detail, but since this site was just a blog I figured I should dig a little deeper and see if I could find an “official looking” source to back that claim up. At first, all of the sites I could find on Google were what I considered to be ”unofficial” sources. But then, eventually, I found what I considered to be an “official” source: the Islamic Trade Finance Corporation (a Member of Islamic Development Bank Group).[1]

Now, an Islamic Dinar is very clearly and specifically a coin of fixed gold content: 4.25g of 22 carat gold, to be exact. [2]

The composition and value of an IMF SDR is determined by consensus at five year intervals, and we can see that the Islamic Development Bank group must be agreeing with other Central Banks that 1 SDR shall be deemed equal in value to 1 Islamic Dinar, at the time of negotiation at least.

So, right now the thought I am brought to is... are SDRs being set up as the way the Islamic states who endorse the Islamic Dinar[3] can receive payments from other, non-Islamic states in SDR denomination, and redeem them for the equivalent weight of gold, perhaps through the Bank for International Settlements? 3.89725g of gold per SDR, according to the definition of an Islamic Dinar being 4.25g of 22 carat (91.7%) gold.

Is the SDR the way that The West will continue to get paid in paper, while The East get the gold that they really have wanted all along? Is it the way that the paper global currency system can be sustained a while longer, beyond the now very obviously flawed US$? With the world’s wealth continuing to drain away to The East but at a diminished pace than if nations the world over were to be paid in gold from tomorrow, or worse, the global economy were brought to a paralysed standstill in want of gold to settle all global trade imbalances?

This thought has now changed my opinion, to put the SDR ahead of global rebalancing, rather than after. In fact, I am now seeing it as perhaps the proposed means to defer that rebalancing a while longer, enabling business as usual for The West, and more time to accumulate gold for The East. But how long can this additional sticking plaster solution last? Another 40 year cycle? Is the Mahdi[4] due, but not until about 2050 or so..? That’s a lot longer than I was thinking to wait and tough it out...


[1] http://www.itfc-idb.org/content/islamic-trade-finance-terminology
[2] http://en.wikipedia.org/wiki/Islamic_gold_dinar
[3] http://www.idbgrouponline.com/WFE/Pages/MemCountries/AllCountries.aspx
[4] http://en.wikipedia.org/wiki/Mahdi

12 comments:

Dave Narby said...

Thanks for tracking down an reasonably 'official' source on that, it had been bugging me as well...

Only problem I can see is convertibility. SDRs are a basket of currencies and gold, so if the fiat gets overvalued relative to the gold, it would lead to a run on the Islamic bank's gold similar to what happened with the US.

Again, the problem comes with a fixed peg, which has ultimately proved impossible with a single currency, and IMO many times more so with a basket of currencies.

Dave Narby said...

(forgot to check the follow-up via email in previous comment)

DP said...

Hi Dave, nice to see you again.

I was checking over the latest and greatest from the IMF on the composition of the SDR, and it's actually still an all-paper construct; there is no gold in it at all!

It was "initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar" (back in 1969). Or in other words, it actually never had gold anywhere near it. Why drive around the thing in a little car and pretend there was ever really any gold? :-\ [ed: a word for you perhaps - "confidence"?]

I see from their website that today 1 SDR is equivalent value to US$1.53182. So about 1/900th of an ounce of gold, if we say the spot price for gold today is approx US$1380.

A pretty poor store of value! But I daresay the Central Banks of the world think it's an acceptable unit of account and medium of exchange since liquidity is a non-issue.

You are right to home in on the convertibility issue, I think. I am puzzled by this aspect too. If we ponder and dig more, I hope that we might ultimately stumble on the key to how the IDB can come up with a Dinar for each SDR someone earns... hmmm...

DP said...

So far, the sums are telling me the spot gold value of 1 Islamic Dinar should be giving a ratio to SDR of well over 100:1 -- not exactly a problem which would mean a run on IDB's Dinars to sell for SDRs!

If they are indeed somehow being given a sweet deal by the BIS whereby they get 1 Dinar's worth of gold per 1 SDR they cash in, this would indeed explain why gold is valued in the many $1000's!

DP said...

I really am spit-balling now, because I have been able to find nothing to backup the suggestion the BIS might exchange SDR/Dinar at 1:1. However...

1 Dinar = 4.25g * 91.7% fine.
(So that's 3.89725g fine gold.)

Spot gold per gram is say US$1380 / 31.1 (gram/ounce) = US$44.37

So a Dinar has a scrap value of US$172.92, but a face (forex at the BIS?) value of US$1.53 — a 113x undervaluation to intrinsic value.

113 x US$1380 = US$155940/oz?

DP said...

A further thought just came to me on this, namely the topic of much recent interest -- the Gold/Silver Ratio (GSR).

I haven't seen anything, anywhere, so far to indicate there might be a similarly sweet deal for Islamic Dirhams (standard silver coin). So I have to infer they are only valued at the spot paper price of silver content(?). Please let me know if you come across something stating an exchange rate for Dirham along the lines of the IDB's 1:1 Dinar:SDR anyone?

That being the case, with silver at US$29.27/oz right now, and let's say gold is effectively worth that US$155,940/oz per the earlier comment... this would give a GSR of 5327:1 - ouch.

DP said...

I really am spit-balling now, because I have been able to find nothing to backup the suggestion the BIS might exchange SDR/Dinar at 1:1. However...

1 Dinar = 4.25g * 91.7% fine.
(So that's 3.89725g fine gold.)

Spot gold per gram is say US$1380 / 31.1 (gram/ounce) = US$44.37

So a Dinar has a scrap value of US$172.92, but a face (forex at the BIS?) value of US$1.53 — a 113x undervaluation to intrinsic value.

113 x US$1380 = US$155940/oz?

DP said...

Hi Dave, nice to see you again.

I was checking over the latest and greatest from the IMF on the composition of the SDR, and it's actually still an all-paper construct; there is no gold in it at all!

It was "initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar" (back in 1969). Or in other words, it actually never had gold anywhere near it. Why drive around the thing in a little car and pretend there was ever really any gold? :-\ [ed: a word for you perhaps - "confidence"?]

I see from their website that today 1 SDR is equivalent value to US$1.53182. So about 1/900th of an ounce of gold, if we say the spot price for gold today is approx US$1380.

A pretty poor store of value! But I daresay the Central Banks of the world think it's an acceptable unit of account and medium of exchange since liquidity is a non-issue.

You are right to home in on the convertibility issue, I think. I am puzzled by this aspect too. If we ponder and dig more, I hope that we might ultimately stumble on the key to how the IDB can come up with a Dinar for each SDR someone earns... hmmm...

DP said...

1g fine gold at spot 5 months ago: $1380/31.1 = $44.370.197482g = $8.76 = 1 Riyal

1g fine gold at spot today: ~$1520/31.1 = $48.870.197482g = $9.65 = 1 Riyal

1g fine gold at US official: $42.22/31.1 = $1.350.197482g = $0.27
$9.65 / $0.27 = 35.74 times
$1520 x 35.74 = $54324  ?
So many numbers, so little time... do you think these ones are going anywhere, Mrt?

Mortymer said...

 Yes, all of them go to the same direction!

 - If you include the Dinar, Riyal, or latest RS comment
(http://www.usagold.com/cpmforum/2011/05/23/how-much-is-the-u-s-national-debt-in-gold/)
 - Or many others.

Take your pick, time will show.

Chris Foster said...

"Now, an Islamic Dinar is very clearly and specifically a coin of fixed gold content: 4.25g of 22 carat gold, to be exact. "

Islamic Dinars made from Uncle Sams Gold hoard?an extract from the article 'The Gold Basis Is Dead -- Long Live The Gold Basis!'...every time 22 carat gold pops up anywhere in the world, for example, as an offer to pacify angry possessors of expired gold futures contracts, it will be new evidence of the fact that Uncle Sam is cornered and tries to bribe his way out of the corner with looted gold. If Uncle Sam is trying to pay the blackmail on behalf of his cohorts the bullion banks, in offering 22 carat gold in settlement of contracts calling for 24 carat fineness, then the world will immediately know what's up, even if the substandard gold is offered through intermediaries. Everybody will know that Uncle Sam is trying to cover up, or fend off, backwardation to prevent the gold basis from going permanently negative. The telltale sign will haunt him and make the gold crisis worse, not better. Most of the possessors of expired gold futures contracts will refuse to take substandard gold for settlement, but neither will they keep Uncle Sam's secret. Apparently there are already two known instances where the looted gold turned up. Central banks, in coming to the rescue of their agent bullion banks that were caught red-handed in being naked short in gold, offered 22-carat gold to bail out their agents. This fact in itself makes the quantity of gold available for resolving the gold crisis smaller. Permanent backwardation in gold, the Nemesis of irredeemable currency, cannot be postponed much longer.

DP said...

Hi Chris.

Before the US Dollar was the world's primary currency, it was Ye Olde British Pound. A pound coin was better known as a sovereign, and it was a 22ct gold coin. Most eastern bullion jewellery is, as I understand it, also of 22ct fine. Lots of 22ct gold spread all around the world, and nobody's ever had much of a problem in accepting it.

As long as the weight is made up, I'll be happy with 9ct gold if necessary — it's still worth £11.00/g to me as I write.

From what I have read, seems like the Swiss consider 0.1g of gold per ~1oz coin, is an acceptable fineness too? That's a LOT less than 24ct -- but it's still 0.1g of gold, today worth apparently about £1 or so.

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