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December 2023



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In a recent article, Jim Rickards, the author The Road to Ruin and the more recent book Aftermath: Seven Secrets of Wealth Preservation in the Coming Chaos, mentioned that someone appeared to be maintaining a peg between the IMF’s reserve currency the Special Drawing Right or SDR and gold. In Aftermath, he spells it out in much more detail. I quote:

Has a global monetary reset already happened? 

I was alerted to this possibility by a research report sent to my attention from a correspondent named D. H. Bauer based in Switzerland. An explanation of Bauer’s research begins with the dollar price of gold: $ 1,260 per ounce at the date of the report. Following the dollar price of gold, we consider that on a given day gold is “up” or “down” by, say $ 10 per ounce. When we make this observation, we effectively quote a cross rate between U.S. dollars (USD) and one ounce of gold (GOLD) or USD/ GOLD. 

Next, we observe the U.S. dollar value of the SDR. This cross rate, SDR/ USD, is calculated and published daily by the IMF. As of this writing, SDR1 = USD1.406570. That rate changes daily like any floating exchange rate. Bauer took the known rates of USD/ GOLD and SDR/ USD and applied the transitive law to calculate SDR/ GOLD, a price that is not actively followed on trading screens. He then graphed the time series of both prices with trend lines from December 31, 2014, to March 31, 2018. The graph includes a black vertical line corresponding to October 1, 2016. That is the date the Chinese yuan was officially included in the SDR basket of major currencies. The other currencies are sterling, yen, euro, and the dollar. The data and graph show that before China joined the SDR, the dollar price of gold and the SDR price of gold were volatile and highly correlated. After China joined the SDR, the dollar price of gold remained volatile, while the SDR price exhibited far less volatility. 

Importantly, the trend line of SDR/ GOLD is a nearly horizontal line. Gold denominated in SDRs has been trading in a narrow range of SDR850 to SDR950, an 11 percent band with fluctuations of 5.5 percent above and below the SDR900 central tendency. The price exhibits mean reversion. When gold rallies to SDR950, it quickly falls back toward SDR900. Likewise, when gold sinks to SDR850, it rallies back to SDR900. No prices appear outside the range after October 1, 2016. This price band narrowed in early 2017 and was contained in the SDR875 to SDR925 range, a 5.5 percent total band, 2.75 percent on either side of the target. This narrower band is indicative of a currency peg. A first approximation hints the SDR has been pegged to gold at a rate of SDR900 = 1 ounce of gold. This implies a new gold standard using not dollars, but the IMF’s world money. A global monetary reset may have occurred without a formal conference or declaration. SDR900 = 1 ounce of pure gold is the new monetary benchmark. 

The advent of low volatility in SDR/ GOLD (versus prior high volatility) occurred on October 1, 2016. The near straight-line trend of SDR/ GOLD after the Chinese yuan joined the SDR is practically impossible without an intervening factor or manipulation. The probability of this occurring randomly is infinitesimal. The SDR/ GOLD horizontal trend line after October 1, 2016, is an example of autoregression. This appears only if there’s a recursive function (a feedback loop) or manipulation. In the case of SDR/ GOLD, one can rule out a recursive function since gold trades in a relatively free market determined by supply and demand. One can also rule out randomness as statistically highly improbable. That leaves manipulation as the only explanation for the flat trend line in SDR/ GOLD. 

If the SDR price of gold falls below SDR900 (indicating a strong SDR and a weak gold price), the manipulator buys gold, sells dollars, and buys the non-dollar currencies behind the SDR. If the SDR price of gold rises above SDR900 (indicating a weak SDR and a strong gold price), the manipulator sells gold, buys dollars, and sells the non-dollar currencies behind the SDR. By monitoring markets and intervening continually with open-market operations in gold and currencies, the manipulator can maintain the peg. There are only four parties in the world with the resources to conduct this manipulation in an impactful way: the U.S. Treasury, the ECB, the Chinese State Administration of Foreign Exchange (SAFE), and the IMF. These are the only entities with enough gold and hard currency reserves (or SDRs) to conduct the large-scale open-market operations needed to peg the price. 

One can eliminate the U.S. Treasury and ECB as suspects. Both are relatively transparent about their total gold holdings, foreign exchange reserves, and the SDR component of their reserves. (For the ECB we look at the large members, including Germany and France, for this data.) If either the Treasury or ECB were conducting open-market operations of this kind, changes in holdings of gold and SDR component currencies would appear in official reports. No fluctuations of any magnitude appear. That leaves SAFE and the IMF. Both are non-transparent. China has about 2,000 tons of gold, probably more—they don’t disclose the excess. China has also acquired SDRs in the secondary market in addition to official allocations provided by the IMF to its members. The IMF owns 2,814.1 metric tonnes of gold and can print SDRs in unlimited quantities subject to executive board approval. The IMF makes loans and receives principal and interest in SDRs that are traded among IMF members through a secret trading desk. Gold is traded surreptitiously by major central banks through the Bank for International Settlements (which also traded Nazi gold in the Second World War). The BIS is furtive and controlled principally by the same nations who control the IMF. China can also conduct gold purchases and sales for yuan or dollars on the open market in Shanghai and London and separately buy or sell SDRs for dollars or yuan through the IMF. China can buy or sell the SDR basket currencies separately through bank foreign exchange trading desks. 

The targeted value of SDR900 per ounce of gold is intriguing, with dark implications for the future of the U.S. dollar. Currently a total of SDR204.2 billion are issued and held by IMF members. The IMF owns 2,814.1 metric tons of gold, equal to 90,475,284.87 troy ounces. If the IMF wished to make SDRs the sole global reserve currency backed by gold at a 40 percent ratio, the same gold cover as the U.S. dollar from 1913 to 1945, then the implied SDR price of gold would be equal to the quantity 0.40( 204,200,000,000/ 90,475,284.87), representing the amount of SDRs divided by the amount of IMF gold in troy ounces times 40 percent. This quantity equals SDR902.8 per ounce, almost exactly the pegged price of SDR900 per ounce.

There is no evidence the IMF is implementing an SDR/ GOLD peg. The IMF’s gold holdings have remained constant since 2010 and permission to launch the gold-peg operation is unlikely to have been granted by the United States or Germany. To the contrary, there is strong evidence to support the view that China is behind the peg. This is ironic; when the SDR was created in 1969 it was originally pegged to gold and defined as a weight in gold (SDR1 = 0.88867 grams of gold). That peg was soon abandoned even as the dollar peg (USD1 = 0.02857 ounces of gold) was also abandoned. Now the SDR/ GOLD peg has returned, albeit at a much higher price for gold. 

Since this SDR peg to gold is informal and unannounced it can be abandoned at will. The peg probably will be abandoned sooner than later because Chinese sponsors of the peg have ignored the lessons of 1925, when the United Kingdom returned sterling to the gold standard at a level that overvalued sterling. The result was a catastrophic deflation in the United Kingdom that presaged the Great Depression. Likewise, the Chinese peg of SDR900 per ounce of gold is too cheap to sustain, given the scarce supply of gold and the growing supply of SDRs. More to the point, the IMF will print trillions of SDRs in the next global financial crisis, which will prove highly inflationary unless the IMF conditions the distribution of SDRs on the receipt of gold. China would have to sell precious gold reserves to maintain an SDR900 price. This would reprise the U.S. depletion of its gold reserves by 11,000 tons from 1950 to 1970 to maintain the Bretton Woods gold peg to an overvalued dollar. Still, this is an historic development. Even if the peg is non-sustainable in the long run, it’s a clear short-run signal that China is betting on the SDR and gold, not the yuan or the dollar. An important pillar of a global monetary reset seems already in place.

End of quote.

Rickards is an extraordinary thinker and deeply entrenched in the US financial, business and government worlds. He brings extraordinary insight to his writing. I commend Aftermath to you.


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