by Dorothy Kosich

January 15, 2013 (TSR) – A report by the Official Monetary and Financial Institutions Forum (OMFIF) suggests that demand for gold will increase as central banks of emerging market economies become increasingly interested in gold in the transition from one global reserve currency system to a greater number of other currencies.

In an international monetary system where the U.S. dollar is considered the only real reserve currency, the role of gold has been limited. However, the OMFIF report suggests, “The role of gold is likely to be bigger in the transition period to a multiple reserve currency system than when system is in existence.”

The report, which was commissioned by the World Gold Council, suggests central banks will trade gold more actively. Nonetheless, the OMFIF stressed repeatedly that “gold will not replace fiat currencies” and that “the Gold Standard will not return.”

The newspaper China Daily recently observed that China has almost doubled its gold reserves in the past five years and is now the sixth largest holder of monetary gold. China also holds the world’s largest forex reserves, which were worth more than US$3.31 trillion at the end of last year.

“Driven by China’s desire to increase its financial clout, the Chinese renminbi is likely to emerge gradually as a genuine international currency as the country has been easing restrictions on its use in transactions and investments abroad,” China Daily suggested.

Nevertheless, as China weighs its options for joining the dollar and the euro in the reserve asset game, “gold—the official asset that plays no formal part in the monetary system yet has never really gone away—is poised, once again, to play a pivotal role,” said OMFIF Advisory Board Chairman Meghnad Desai.

In his forward to the report, “Gold, the renminbi and the multi-currency reserve system,” Desai suggested, “If the spectre of collapse continues to haunt the main reserve assets, and on the expectation that the renminbi will take time to get into its stride, the world will rush to safe havens. Gold may be the only one with the requisite size, clout and—dare I say it—history to help ward off the strains that will beset the world monetary system.”

“It would be wise to draw up contingency plans for such eventualities,” he advised.

“Many dismiss gold as a relic of the past or as an inadequate hedge against inflation,” he noted. “But from an asset management point of view, as well as a basis of political analysis, gold has a lot going for it; it correlates negatively with the greenback, and no other reserve asset seems safe from the coming dollar shock.”

The report advises the concentration of gold’s ownership will move gradually from the central banks of the industrialized west towards the emerging market economies, especially in Asia. For instance, if Germany’s Bundesbank considered rebalancing its gold reserves through selling gold directly to the People’s Bank of China, the OMFIF suggests it would have “widespread repercussions.”

Desai observed, “The Chinese authorities’ own evident leaning towards building up stocks of monetary gold, reflecting a cultural attachment to precious metals that goes back millennia, is itself a powerful factor in the equation.”

Large Chinese banks, which are building vault space to accommodate private sector gold activities, “will increasingly offer storage facilities to central banks form developed and emerging market economies to offset the west’s traditional dominance in this field,” the report forecasts. “Issues of convenience, reliability and cost will generate greater interest in central banks holding gold away from the traditional centres, mainly the Federal Reserve Bank of New York and the Bank of England.”

Desai favors extending the IMF’s Special Drawing Right (SDR) to include the R-currencies—the renminbi, rupee, real, rand and ruble—with the addition of gold. “By moving counter-cyclically to the dollar, gold could improve the stabilizing properties of the SDR. Particularly if the threats to the dollar and the euro worsen, a large SDR issue improved by some gold content and the R-currencies may be urgently required.

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