Another Snub Against the Buck

The Latest Way the World Is Dissing the Dollar and Why You Should Too

Woohoo! I wanted to stand on rooftops and scream in delight when I heard the latest news from India last week.

In case you missed it, the Reserve Bank of India decided to pass over the dollar and buy gold for their international reserves instead. Even better, India did NOT pay for their new gold in dollars either! (More on that in a moment…)

“Right On India!”

Finally a central bank has decided to stand up and announce to the world that they have had enough of the U.S. dollar. They’ve had their fill of the Fed running the global printing presses on high and flooding the market with dollars for the better part of two years now.

At last, they’ve said, “Enough already!”

By this bold and very public action, the RBI has decided to put their money where their mouth is, not unlike several other international dollar critics this year…

Talk Is Cheap, Unless It Helps Devalue the Dollar

Now, the Reserve Bank of India may be one of the few central banks to publicly dis the dollar this year. But the world’s leaders have been doing that more and more lately.

Here’s a quick recap of what’s been happening this year…

  • In March, China’s central bank head Zhou Xiaochuan posted an essay on the web that displayed his discontent with the world’s reserve currency. “An international reserve currency should not be tied to the interests and economic conditions of any one country.”
  • In July, Russian President Dmitry Medvedev pulled out a sample coin for the new “united future world currency” from his pocket at the G-8 meeting, to show his support for a new reserve currency.
  • In September, the UN wrote a report that called to replace the U.S. dollar with an artificial currency in global trading. They wrote, “Replacing the dollar with an artificial currency would solve some of the problems related to the potential of countries running large deficits and would help stability.”
  • Just this week, World Bank President, Robert Zoellick said that with China’s growth trend, the Chinese yuan could develop as an alternative to the U.S. dollar as a global reserve currency in 15 years.

All these comments have helped push the dollar lower this year on various occasions.

Now it’s India’s turn to make a public announcement against the dollar.

Up until now, the India’s government has only been somewhat critical of the U.S. dollar. Then last week, India’s central bank decided to take this public step of announcing its purchase of gold for its reserve.

But the story does not end here folks. Its gets much more interesting…

The Plot Against the Dollar Thickens

The RBI decided to buy the block of gold (200 Tons) from the International Monetary Fund (IMF). Now I could write an entire article on how crazy and short-sighted the IMF is for selling gold right now. But let’s stay focused on the story at hand…

When the IMF put this gold up for sale, the RBI were the first to raise their hands to buy. And they grabbed plenty.

But here’s where it gets interesting… The RBI did NOT pay for this gold with U.S. dollars, which is traditionally how gold is priced. Instead, the RBI decided to pay for the gold in SDRs.

For those who are new to the class, let me explain what a SDR is. SDR stands for Special Drawing Rights. It’s an artificial currency that the IMF created to transact its business. When the IMF lends money or gets paid back, the IMF guys do the math in SDR’s. And the SDR is a basket of currency.

It’s technically a basket of currencies that changes every five years. Here is the current composition of the SDR, which changes every five years.

Pretty dramatic snub against the dollar huh?

Now in practice, using SDRs to purchase gold doesn’t have that large a consequence. But it’s what this purchase means to the world that is more important.

What Paying in SDRs Really Means

Gold has been traditionally priced for international trade in U.S. dollars. Just like oil. Each country converts the price to local currency for local trade. But the bulk purchase of gold sales is always denominated in U.S. dollars. The U.S. has a nice monopoly on international trade-in that way.

But by paying in SDR, the RBI made the first foray in breaking that mold. The SDR is only 44% U.S. dollars. This is the first time such a large government purchase is made in non-USD terms.

What’s next? China buying Oil from Brazil in non-U.S. dollar prices?

Wait! That has already been done. If you remember we had mentioned that in several of our reports that China has negotiated a non-U.S. dollar bi-lateral trade line with several countries including Brazil.

So, China is buying oil and other commodities from various countries in non-U.S. dollar terms. Now India is buying gold from the IMF in non-U.S. dollar terms. It could follow that soon enough no one will want to trade anything in U.S. dollars.

When that happens, soon after that no one will want the U.S. dollar anymore!

Don’t Believe the Dolts When They Say This is GOOD for the Dollar!

I love it when my favorite dolts (I lovingly refer to the herd minded FX Traders as dolts) try to spin this story in positive light. They have mentioned that RBI has actually helped the U.S. dollar by not buying gold in dollars.


They claim the RBI is actually making a statement here. According to the dolts, “The RBI believes the U.S. dollar is no better or worse than other paper currencies…and the RBI thinks the dollar will decline, so they’re saving their dollars for a rainy day.”

Yeah right. Sure, you go ahead and believe that dolts.

Now, if the RBI had a mandate to be a currency trader and profit off the short-side of the dollar, then I may (mind you I still say “may’) give their views a bit more authority. But come on!

Central banks do NOT have to make money trading currencies. Their mandate is to control inflation, encourage growth and safeguard the nation’s reserves. And right now, that means dumping the dollar. Period.

Clearly this is NOT a vote of confidence in the dollar. It’s the exact opposite. The world’s leaders are shooting warning arrows across the U.S. dollar’s bows, but the dolts are too thick to realize it.

In my mind, I’m celebrating because my home country is acting so prudently with their reserves. But for everyone else, this is BAD news for the dollar.

Bottom line: Stay strong India, and short the dollar my friends!

Yours in FX Profits,
Ashish Advani

P.S. For these reasons and plenty of others, all my currency colleagues and I are urging readers to store some long-term wealth outside of the U.S. dollar as soon as possible. To learn more about how to do that, read my buddy Chuck’s report here.

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