SDR Basket vs. Gold Standard

Speculation has arisen that the next monetary order will be in the form of an SDR basket becoming in effect the world reserve currency, replacing the United States dollar. Economist Jim Rickards in particular leans to this view, though he suggests that gold will play a greater role in the next monetary system than it currently does.

The IMF created Special Drawing Rights (SDR).
IMF headquarters in Washington D.C.

What Is the SDR?

The SDR stands for “Special Drawing Rights,” and was created by the International Monetary Fund (IMF) in 1969 to supplement national currency reserves and to encourage trade. Initially, the currencies comprising the SDR were the U.S. dollar, the Japanese yen, the British pound, the Deutsch mark, and the French franc. Today, it consists of the U.S. dollar, the euro, the yen, the pound, and the newly introduced Chinese renminbi (effective October 1, 2016). The SDR is not a currency and has no physical form, but can be exchanged for the currencies of member nations.

Member nations are allocated a percentage of SDRs based on their economic influence. If their SDR holdings rise above the amount allocated, they are paid interest on the difference. Conversely, if they fall below the allocated amount, they must pay interest on the difference.

Why Gold Will Remain King

Initially, the SDR was pegged to the value of the U.S. dollar, which was convertible to gold among sovereign nations, but today the entire monetary system is a free-floating system with currencies fluctuating in value based on many factors. Thus, the SDR is unbacked by gold or any commodities. This means, while the SDR may become the next global reserve currency should the dollar fall by the wayside due to economic turmoil, it would be vulnerable to the same plight of previous fiat currencies if it remains unbacked by gold. Simply creating a basket of fiat currencies, as the euro has shown, is no guarantee for the stability of a unit of money.

More than likely, gold will come to the fore of international trade once again, as central banks around the world cooperate to bring stability and confidence to global markets. Currencies are likely to be completely or partially backed by gold, which, given the massive money printing in recent years, may require a gold price multiples higher than it is today. Already we are seeing major central banks, such as in Russia and China, buying gold at a feverish pace, as if they are anticipating a monetary reset or preparing for massive devaluations of fiat currencies.

Conclusion

As nations around the world continue to print fiat paper money, given the lack of restraints to doing so, especially to combat deflationary trends among developed nations, gold will continue to rise in value over the long term. As debts become too great to repay and too burdensome for sustainable economic recovery, and as debt monetization — the printing of money to pay sovereign debts — becomes more pronounced, a catastrophic collapse of confidence in paper currencies may take place, including the U.S. dollar. In any case, calls for returning to the sanity of a gold standard are going to be more common, as concerns mount over the fragility of our current dysfunctional monetary system.