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The SDR’s, yet another reason to Own Gold!

Blog May 10, 2010

The SDR (Special Drawing Rights), created by the IMF in 1969 is a non-convertible reserve asset distributed by the IMF. Let’s back up before we move forward. Any currency is simply a tool of barter that enables a population to specialize because it can be converted into the goods and services needed. For example, if you want an apple, you do not need to own an apple tree. If you have US dollars you can go to the grocery store and convert them into an apple. The US dollar is a convertible reserve asset, and as “The” world’s convertible reserve currency, it was the only currency that could be used globally to settle debts, therefore it could be used to convert (buy) to oil, steel etc. between countries.

The SDR, as a non-convertible reserve asset, acted more like an ice cube in a glass of water. You have a glass of water half full, you throw a bunch of ice in and now it looks full, but when you drink the water, you’re left with the ice cubes. So the IMF would give the SDR’s primarily to third world nations and that would make their reserves look full and then they could take the limited amount of US Dollars they held in reserves and convert them into oil, steel etc. In addition it was used to increase a particular country’s foreign exchange reserves so that their books looked stronger making it easier to borrow money on a global basis.  Originally the SDR’s value was based upon gold, but now its value is based on a basket of four of the top trade weighted currencies. This basket reweights every 5 years and according to the IMF website, the next scheduled reweighting is the end of 2010.

About a year ago it seemed as if everybody was calling for a new world reserve currency to supplant the US Dollar.  China and the UN happened to mention the SDR. This made the most sense because of the SDR’s long history and significant infiltration throughout the global postal services, the travel industry, not to mention that all governments now hold them in their reserves, so governments and central bankers are used to them.

In August of 2009 the members of the IMF met and passed the fourth amendment, which went into effect on September 9, 2009. With regards to the SDR, the IMF allocated $250 billion worth of SDR’s in order to increase global liquidity (inflate the world’s monetary system).  There have been two other SDR distributions; the first was between 1970 and 1972 and the second time was between 1979 and 1981. Can you remember the bouts of inflation experienced during these time frames? But those SDR amounts were miniscule compared with the current allocation. This allocation increased the amount of SDR’s in existence from $4.3 billion to $254.3 billion.  Quite a significant jump, but here is the kicker.  The SDR prior to September 9th 2009 was a non-convertible reserve asset.  On September 9th 2009 the SDR became convertible.  That means that whoever holds SDR’s can now convert them into oil, steel etc. and is in direct competition with the US dollar.  What’s more, as of February the SDR was listed on the Forex currency exchange under the symbol of XDR, making the conversion to a full official currency complete.

The dollar’s dominance is being eroded in a world of debt based currencies. No currency’s purchasing power is safe as long as it remains under the control of governments out of control spending, and central banks unlimited ability to create more debt and stick the citizens with the bill.  Everyone who owns dollars needs to start buying gold coins.  Build your position before it is too late.

Thumbnail Photo We believe that everyone deserves a properly developed strategy for financial safety.

Lynette Zang

Chief Market Analyst, ITM Trading

Sources & References In This Article

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