SDRs Should Be Poison to Gold. Think Again

March 26, 2009 | By: Isam Laroui

Warning: what follows could be construed as a bullish view on gold and could therefore make gold haters uncomfortable.

I'm sure I'm not the only blogger who noticed what gold did (or didn't do, I should say) when Tim Geithner committed his now infamous (for a few hours at least) faux pas. Mr. Geithner said he was "open to exploring a Chinese proposal to reduce reliance on the US dollar as the world’s reserve currency" which caused the dollar to crash. Not much, not for long, but still. Gold, on the other hand, went up. Not much, but still.

Why is this significant? Many people think gold's rise has much to do with all the currency debasement (quantitative easing anyone?) going on around the world and with the fact that gold has become, for some investors, if not the new reserve currency, some kind of default currency.

If that were the whole story then the news that the world at large is considering building a brand new reserve currency based on the International Monetary Fund's Special Drawing Rights (SDRs) should be poison to gold. Indeed, should this project come to fruition, gold would become just another precious metal and the sizable "currency premium" built in its price should evaporate. But that's not what happened. Gold went up. And that, my friends - gold haters have been warned - is very bullish for gold.

It might be a little too early to draw definitive conclusions and it may be that the market has not totally digested this new concept or that it doesn't believe it is going to be implemented anytime soon. But it's something to keep an eye on.

PS: Mischievous readers of my previous entry, which was dollar bearish, might surmise that Tim Geithner's supposed faux pas was no accident but a clever covert attempt to "talk down" the dollar. My only comment to those readers would be: stay mischievous.

Disclosure: Author holds a long position in GLD

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