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    A Single Currency for the GCC

    Posted by Ivo Cerckel on May 13th, 2008

    FREEGOLD IN ACTION

    Starting with the question “What is the rationale for the proposed unified currency within the Gulf Cooperation Council(GCC)?”,
    the Dubai, June 15, GCC Currency Forum 2008 (1) will discuss what lessons from the European Union’s currency union can be applied in the move towards a single currency for the GCC, hereafter the GCC-Single-Currency.

    The Brussels Economics Forum 2008 “Economic and Monetary Union in Europe – 10 years on” aims at gaining insight into the euro-area’s first decade of development and the single currency’s ongoing and future roles in the evolution of an integrated market.
    That Forum is being held this year on May 15 and 16.
    On the agenda of that Forum are the need for global policy coordination, the way the euro area is coping with financial market distress, and the question whether the European Monetary Union has lived up to expectations. (2) (3)

    The Brussels Economics Forum 2008 will not deal with the question how the euro is evolving to the GOLD EURO.

    It is therefore up to the GCC Currency Forum 2008 to explain it.

    This goes to the heart of the question “Will the banks buy or sell Gold in an unstable market?” which the GCC Currency Forum 2008 is going to discuss. (4)

    The explanation goes something like this:

    As a consequence of the currency crisis in Asia, in the first part of 1997, then Prime Minister of Malaysia Mahathir bin Mohamad proposed introduction of Islamic gold dinar as currency for international trade in the Muslim world. It was intended to replace the American dollar and, as a gold-based currency, provide a medium of exchange more stable than the dollar. Mahathir announced that Malaysia was to start using the dinar in mid-2003, but when in 2003 Abdullah Ahmad Badawi replaced him as Prime Minister of Malaysia, this idea was halted. (5)

    By introducing the Islamic Gold Dinar in 2003, Malaysia has shown the world what is the natural vehicle to temporarily or eternally store one’s wealth in, in order to be able to later convert it into tangible wealth. This is the first function of gold.

    Freegold, a freely floating price of gold, as an alternative to the dollar regime, has however a second function also. In the central banks’ strong-rooms, it has the same role to fulfill as the Mona Lisa in the Louvre-museum in Paris. A wealth reserve which would now be in the strong room (the Louvre) of a monetary union.

    By not defining the GCC-Single-Currency, like the old gold standard, as a certain quantity of gold, but by using gold in reserve as a freely-trading financial reserve, the GCC Central Banks will achieve for the GCC-Single-Currency what the European Central has achieved for the euro, that is, that each increase in the price of gold will bring about an increase in the value of the reserves of the GCC-Single-Currency and thus an increase in the value of the GCC-Single-Currency itself.

    SAMA

    The past three and a half decades of cheap Arabian oil have been made possible by the flow of cheap gold to the Saudi Arabian Central Bank, the Saudi Arabian Monetary Agency, SAMA.

    Still, at a certain moment, some people will be exasperated by the currently rising price of oil.

    At that or another moment, others will be exasperated by the falling price of the dollar because it imports inflation.

    At that latter moment, it will be the Middle Eastern countries which peg their currencies to the dollar which will call the shots on the ailing dollar’s future, said Liam Halligan in the 11 May 2008 Sunday Telegraph under the title “Beijing and Riyadh will call the shots on ailing dollar’s future”. (6)

    The lesson from the European Union’s currency union which can be applied in the move towards a GCC-Single-Currency is that
    oil is being traded on this planet for gold,
    that the sellers of oil have only the real value of gold in mind, not the present US dollar-denominated value of gold,
    and that the euro is evolving to the GOLD EURO,
    which euro has already established itself as a pegging currency,
    wrote Wolfgang Münchau in the May 12, 2008, Financial Times. (7)

    SAMA has now had enough time to cheaply accumulate gold.

    Now, Saudi Arabia can let gold and oil rise in tandem and price oil in GOLD EURO.

    As the GCC Central Bankers argue, there are no technical hurdles which cannot be overcome by 2010. (8)

    Time is up for those interventionists who think that by calling for intervention in the currency markets, if the dollar continues to drop, it, the dollar, could recover.

    The May 02, 2008 joint intervention by the US Federal Reserve and the European Central Bank to pump an extra $82bn into the banking system (9) shows that some Europeans don’t understand that oil is being traded for gold and that they are still prepared to support the dollar-regime.

    Even Mr Euro, Jean-Claude Juncker, (10) and the Financial Times (11), belong to this camp.

    It is therefore up to the GCC, and thus its Currency Forum 2008, and more particularly to Erwin Nierop, Senior Official at the European Central Bank, who will be speaking in Dubai, to explain that the euro is evolving to the GOLD EURO. Jean-Claude Trichet, President of the European Central Bank, cannot be expected to raise that issue before his European audience at the Brussels Economics Forum 2008.

    Or will King Abdullah bin Abdul Aziz Al Saud of Saudi Arabia, Custodian of the Two Holy Mosques and Prime Minister, raise this issue later this week when His Majesty meets US President Bush? (12)

    Ivo Cerckel
    ivocerckel AT siquijor DOT ws

    NOTES

    (1)
    http://www.itp.net/events/gcccurrency08/

    (2)
    The Brussels Economic Forum
    http://cordis.europa.eu/fetch?CALLER=EN_NEWS&ACTION=D&SESSION=&RCN=29374

    (3)
    Brussels Economics Forum 2008 – 15 and 16 May – Economic and Monetary Union in Europe – 10 years on
    http://ec.europa.eu/economy_finance/bef2008/eteaser_c.html

    (4)
    Reason to Attend
    http://www.itp.net/events/gcccurrency08/reasonsattend.php
    SNIP
    GCC Currency Forum 2008 is going to discuss:
    SNIP
    Will the banks buy or sell Gold in an unstable market?

    (5)
    http://en.wikipedia.org/wiki/Islamic_gold_dinar

    (6)
    Beijing and Riyadh will call the shots on ailing dollar’s future”
    Liam Halligan
    The Sunday Telegraph 11 May 2008
    http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/11/ccecon111.xml
    SNIPS
    It’s instructive that the main reason for the dollar’s “recovery” has little to do with the US economy. The greenback’s relative strength is less about the robustness of America, than the weakness of the eurozone.
    +
    And, anyway, the biggest problem for the US isn’t the eurozone: it’s the rest of the world – in particular China, the other emerging giants and the Middle Eastern countries which peg their currencies to the dollar.

    (7)
    The global euro needs a stronger apparatus
    By Wolfgang Münchau
    Published: May 11 2008 18:44 | Last updated: May 11 2008 18:44
    http://www.ft.com/cms/s/0/cf6b6448-1f56-11dd-9216-000077b07658.html
    SNIP
    The euro has already established itself as the world’s second most important currency – in terms of foreign exchange reserves, as a pegging currency, as a global invoicing currency and as a currency of denomination for financial instruments. There is a chance that the euro’s global role will increase significantly in the years to come.

    (8)
    GCC defends dollar peg, single currency deadline
    by Mohammed Abbas on Sunday, 11 May 2008
    http://www.arabianbusiness.com/518871-gulf-to-keep-dollar-pegs-2010-single-currency-plan?ln=en
    SNIPS
    Gulf states plan to stick with their dollar pegs and the 2010 deadline for establishing a currency union, Kamal said. (Getty Images)
    Gulf Arab states will not revalue their currency pegs to the weak dollar despite soaring inflation, and plan to stick to a deadline for currency union by 2010, the chairman of a meeting of finance ministers said.
    +
    Gulf policymakers said last year the 2010 deadline would be hard to meet as consensus crumbled on how to deal with spiralling inflation and the weak dollar.

    (9)
    From The Times
    May 3, 2008
    US Federal Reserve and European Central Bank pump an extra $82bn into banking system
    Gary Duncan, Economics Editor
    http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3864287.ece?Submitted=true
    SNIP
    The US Federal Reserve and the European Central Bank united yesterday to open a new front in their battle to quell the persistent money market strains that are fuelling the global credit crunch.

    (10)
    Authorities lose patience with collapsing dollar
    By Ambrose Evans-Pritchard
    The Daily Telegraph, 1:44am BST 19/04/2008
    http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/04/18/cneuro118.xml
    SNIP
    Jean-Claude Juncker, the EU’s ‘Mr Euro’, has given the clearest warning to date that the world authorities may take action to halt the collapse of the dollar and undercut commodity speculation by hedge funds.

    (11)
    The dollar danger is not over yet, Financial Times, May 9, 2008
    http://www.ft.com/cms/s/0/41afd266-1d2a-11dd-82ae-000077b07658.html
    SNIPS
    When a currency rises after government officials say that it should, you learn one thing: that the fundamentals were pushing it up anyway. It makes sense for senior US and European officials to talk up the dollar against the euro – as they did this week in the Financial Times – especially now that optimism about the US economy makes their arguments plausible. In the long run, however, the real risk of a dollar crisis is against the managed currencies of Asia and the Middle East.
    +
    Through good judgment, as well as a little good luck, policymakers have so far avoided turning a credit crisis into a currency crisis. Without a run of fresh bad news on the US economy there is little reason for the dollar to fall further.

    (12)
    Bush to discuss oil prices with Saudi king
    Monday, May 12, 2008
    (05-12) 14:48 PDT WASHINGTON, (AP)
    http://www.sfgate.com/cgi-bin/article.cgi?f=/n/a/2008/05/12/national/w134301D68.DTL
    SNIP
    White House spokeswoman Dana Perino also said Bush would raise the topic.
    “Will he ask the Saudis to consider the drain on the world economy because of high gas prices? Yes, of course. He raises it every time that he can,” Perino said.—