China’s push to Expand the Yuan
One of the more interesting stories that is starting to be reported by the media is the IMF currency basket known as Special Drawing Rights (SDR). This currency basket includes the Euro, Dollar, Yen and British Pound.
For some reason the SDR has been getting more publicity recently. There is some speculation the SDR could eventually be used as a reserve currency alongside the Dollar or even as a replacement to the Dollar.
According to an article in Bloomberg, policy makers are pressing to add the Chinese Yuan to the IMF’s SDR currency basket. (Source: Bloomberg 2015 April 20th) It is said that progress on this initiative could be made before October.
The story in Bloomberg reports that the IMF estimates that the US Dollar accounts for 63% of world Central Bank holdings, while the Euro, which is the number 2 currency accounts for 22%. Gaining entry into the SDR currency basket could be an important move to internationalize the Chinese Yuan.
It’s all About Gold.
The interesting aspect to this story is that China may have to reveal their official Gold holdings in order to gain acceptance into the SDR. Bloomberg intelligence suggests that China may have tripled its Bullion holdings to 3,510 metric tons since it last reported them in 2009. Some suggest its holdings are even larger than what Bloomberg estimates.
One of the reasons for China’s insatiable appetite for Gold over the last few years is because of their efforts to promote the Yuan as a potential reserve currency. In the Bloomberg article, Bart Melek, head of commodity strategy at TD Securities, said that “If you want to set yourself up as a reserve currency, you may want to have assets on your balance sheet other than other fiat currencies”.
Gold certainly is one of the best assets for Central Banks to use to diversify their currency reserves, and promote stability for a currency.
Changes are Coming to the Currency Markets
Regardless of how this all plays out with the Yuan, big changes are coming to the currency markets in the coming years. Having many currencies including that of Gold which share the reserve currency role could be the likely outcome.
To protect yourself from the future volatility of these changes consider doing what the Central Banks are doing; diversify some of your currency assets into Gold.
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