#10 SDRs, Increased IMF Quotas and Peak Gold !

 

In a previous post, back in 2010, I indicated that $US2000/ounce of gold is the minimum we can expect by 2012 assuming an orderly 3 year increase in the price based upon the huge number of SDRs created by the IMF in 2009 (or in IMF lingo “allocated” ).   Check out that post at

 http://overthepeak.com/wordpress/archives/2161

Hidden behind all this inflation (allocation of SDRs to nations)  is the fact that the IMF has also agreed to increase the SDR quota requirements of all nations.  

This means each nation has to make a delivery to the IMF of their new SDR quota.  The best terms offered include paying this quota in a combination of a minimum of 25%  in a SDR basket currency (US, Euro, UK and/or Japan) and 75% of your own currency.  

My guess is that China who will become the 3rd largest quota nation will pay up with 100% US dollars thus giving them a effective swap for some of their US$ reserves. 

Remember currently 1 SDR is equal to approx 1.6 $US and has been depreciating every year since 1969.

http://www.imf.org/external/np/fin/data/rms_sdrv.aspx

Doubling of quotas and major realignment of quota shares

Right from the mouth of the IMF it reads:

On December 15, 2010, the Board of Governors, the Fund’s highest decision-making body, approved a package of far-reaching reforms of the Fund’s quotas and governance, completing the 14th General Review of Quotas. Once the reform package is approved by member countries (it includes an amendment to the Articles of Agreement that requires acceptance by three-fifths of the members having 85 percent of the total voting power) and implemented, it will result in an unprecedented 100 percent increase in total quotas and a major realignment of quota shares to better reflect the changing relative weights of the IMF’s member countries in the global economy.” 

http://www.imf.org/external/np/exr/facts/quotas.htm

 AND …. in this article it states  that

 “It is proposed that best efforts be made for the quota increase and shift in shares to enter into force by the 2012 Annual Meetings. ” 

http://www.imf.org/external/np/pp/eng/2010/103110.pdf

This annual meeting will occur  in Tokyo, Japan, in October 2012.

Peak Gold – for this cycle ?
 
Of course this is all really strange, probably because I must be missing something!! 
 
First the IMF, in 2009,  allocates (creates out of nowhere ) some $US 250 billion or 10 times the previous number of SDRs and then plans to call in money from the real economy in the post 2012 timeframe via a 100%  increase in the reserve quota (approx $US 750 billion) !!  Not since 1998 have the reserve quotas been increased.  Remember what happened then ?  Gold hit a cycle bottom 3 years later !!
 
So…..  first push alot of inflation into the financial system, encourage the price of gold higher and then suck it back with a reserve quota increase !    Think about it ?  The perfect Paul Volcker moment is being set up but not via interest rate increases but increases in global reserve requirements.
 
Does this mean a gold cycle top in late 2012 ?   Well maybe.  It really all depends on when these quota increases get approved  by the US Congress.  If and when this occurs you can expect a major drain on international liquidity as governments will be required to deliver to the IMF these new reserve requirements in fiat currencies, not gold.  Since gold will have appreciated greatly up to that point all nations will be tempted to sell it and pay their increased quota. 
 
We can therefore expect the US to hold back their effective “veto” vote at the IMF until the Fed thinks it necessary to trigger this increased global reserve requirement.  Will it occur in Oct 2012 at the IMF meeting or be delayed ?  I think that will all depend upon how the economy is doing and it is looking doubtful that the economy will be out of it’s recession mode by then, as the Federal Reserve has itself indicated a willingness to keep interest rates low until 2013.
 
However when that approval happens there will be a giant global sucking sound and I expect alot of gold will get cashed in !  I think that means the gold price trend will then start to decline  !   But who knows how high gold will first go !

 

 

Tagged , , . Bookmark the permalink.
  • Motamouse

    Thanks for this Richard.

    De facto confiscation?

    • James

      Mota, you are seeking for a de facto confiscation i think…:)

      • Motamouse

        *o*  It could seem that way.  

        No i am viewing it from a historical perspective as history does tend to repeat itself. I am just thinking ahead. If we have a global systemic collapse and a new monetary system has to be formed i don’t see how this could be achieved with gold in the hands of the people. To my mind a system reset would have to equal confiscation. I think a true confiscation would be too problematic for the aurthorities, so another way is to make the people want their gold confiscated…..  but these are just my thoughts.

        The chart is good as it shows gold in a 11 year secular bull from 1969 -1980 and then a 21 year secular bear from 1980 -2001. We are now 10 years into a secular bull?

        • James

          form that view, everything is possible..but things are a lot different…

  • Stevo

    I can honestly say it’s the best recession I’ve ever experienced.  Even better than the early 90’s one.

  • CSArichardo

    You could look at this article from a MMT perspective too. 

    For example the SDR allocations could be viewed from the MMT perspective as a “global type government” spending money into existence to keep the economy with just the right amount of money from an inflationary perspective and the increased reserve requirements as a tax on those governments for from a deflationary perspective.   Of course the tax is also there to support the acceptance and use of the SDR fiat currency among nations !  I need to think about this alittle more.

  • http://overthepeak.com/wordpress/ Mystic

    Well……..
    I think the world depression should put this off……….but thanks….and again……keep us posted.