GCC May Include Gold in Its Single Currency Union

April 07, 2009 | By: Peter Cooper

At the 48th meeting of the governors of GCC Monetary Agencies yesterday officials said that the six nations had yet to agree on either a location for a single central bank, or how it would be linked to the US dollar or a basket of currencies and possibly gold.

Russia has openly called for the inclusion of gold in a new global currency based on Special Drawing Rights issued by the IMF. Saudi Arabia has huge gold reserves which it might be keen to use to back the new Gulf single currency basket, but the UAE has no gold reserves.

The Gold Standard was once the anchor of world finance but lost its role in the First World War as government spending spiralled. It was briefly revived and then collapsed in the 1930s economic crisis when the UK, US and France dropped it.

After the Second World War gold became a part of the fixed dollar system until the US abandoned it finally in 1971, again due to the pressure of rising expenditure on the dollar.

It is arguable that the world could not have become so extremely over leveraged in recent years with gold as a market discipline. Both Russia and China are major gold producers so that is an additional reason for them to favor gold.

In the GCC officials said national leaders will meet next month to decide the location of the new combined central bank, with Abu Dhabi thought to be the front runner. Only then will proposals be forthcoming about how the currency union is to be formed.

However, GCC leaders are keen to find a way to avoid the exaggerated swings in the business cycle that come with the existing dollar peg, and Kuwait has already had some success with its currency basket - all the other GCC national currencies are pegged to the US dollar.

The inclusion of gold and even silver into a currency basket is bound to be taken more seriously in view of the Russian and Chinese initiatives. The Kremlin has already told the central bank to slowly raise gold to a 10 per cent share of its foreign reserves.

In a world of inflation and competitive devaluations the role of gold as honest money that can not be printed is obvious enough.

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