Matthew Lynn: What will replace dollar as global currency?


By Matthew Lynn
Thursday, July 7, 2011

LONDON -- In London last week some smart businessmen launched the country’s first gold ATM. Stick in your credit card or some cash, and the machine will swap your plastic or paper money for a small bar of the real stuff.

That may well tell us that London remains, as it always has been, a place where monetary entrepreneurs flourish.

But it tells us something else as well. The role of money in the global economy is one of the big themes of this decade. Gold is on the up. The euro is falling apart. And, perhaps most importantly of all, the dollar is in long-term decline.

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Sona Drills 85.4g Gold/Ton Over 4 Metres at Elizabeth Gold Deposit,
Extending the Mineralization of the Southwest Vein on the Property

Company Press Release, October 27, 2010

VANCOUVER, British Columbia -- Sona Resources Corp. reports on five drillling holes in the third round of assay results from the recently completed drill program at its 100 percent-owned Elizabeth Gold Deposit Property in the Lillooet Mining District of southern British Columbia. Highlights from the diamond drilling include:

-- Hole E10-66 intersected 17.4g gold/ton over 1.54 metres.

-- Hole E10-67 intersected 96.4g gold/ton over 2.5 metres, including one assay interval of 383g of gold/ton over 0.5 metres.

-- Hole E10-69 intersected 85.4g gold/ton over 4.03 metres, including one assay interval of 230g gold/ton over 1 metre.

Four drill holes, E10-66 to E10-69, targeted the southwestern end of the Southwest Vein, and three of the holes have expanded the mineralized zone in that direction. The Southwest Vein gold mineralization has now been intersected over a strike length of 325 metres, with the deepest hole drilled less than 200 metres from surface.

"The assay results from the Southwest Zone quartz vein continue to be extremely positive," says John P. Thompson, Sona's president and CEO. "We are expanding the Southwest Vein, and this high-grade gold mineralization remains wide open down dip and along strike to the southwest."

For the company's full press release, please visit:

The crisis in the euro zone may have distracted our attention from it for a while, but the relentless dethroning of U.S. currency the dollar as a global reserves currency is proceeding apace.

There were two further pieces of evidence in the last few days. Data released by the International Monetary Fund showed the percentage of dollars held by central banks in their reserves is still declining year on year. And a UBS survey of investment institutions with $8 trillion under management showed a majority no longer think the dollar will be the reserve currency in 25 years time.

There cannot be much dispute that the dollar is losing its central role. And yet there is still very little agreement on what will replace it. Gold? The Chinese renminbi? The IMF's quasi-money, the special drawing right? Or something no one has thought of yet? No one really knows.

If there is one big call investors need to get right over the next few years, it is surely answering that question.

The figures make it clear enough that the dollar is not the force it once was. The proportion of dollars held by central banks around the world had fallen to 60.7% by the end of the first quarter of this year. That compares with 61.8% at the same point last year. That may not sound much, but as Stephen Lewis of London-based Monument Securities points out, that amounts to $58 billion fewer dollars held than if the percentages had stayed the same. Not exactly loose change, even among central bankers.

Measured over a decade, the trend is clear enough. Go back to 2001, and the proportion of central bank reserves held in dollars was 71%. It only goes down a bit every year. But over time, that starts to add up. Once the dollar drops below 50% of central bank holdings, we can officially declare that its days as the reserve currency are done. It looks like that will happen some time between 2015 and 2020 -- but it could well be sooner.

Most big asset managers now agree. A UBS survey of investment institutions showed a majority no longer think the dollar will be the reserve currency in 25 years time -- the first time the investment bank had reported a clear majority reaching that conclusion. The euro has lost support as well: only about 5% of fund managers think it will be the world reserve currency in a quarter of a century, down from around 20% five years ago. The Asian currencies are not making much headway, nor, rather surprisingly is gold. The big winner is the SDR. A majority now reckon it is the most likely candidate, compared with roughly 10% last year.

In some senses, that is reasonable enough. A basket of the world’s biggest currencies would seem to offer a more solid store of value than just one. It diversifies your risk. And it recognizes that the U.S. is just one major economy among several, not the dominant player as it was in the years immediately after World War Two.

And yet the SDR is, in fact, a poor contender. It is just made up of a bunch of other currencies -- right now, the dollar, the euro, the pound, and the yen -- none of which look very strong. If you get into a fight, having four hundred-pound weaklings on your side isn't much better than having one. It doesn’t really have any advantages over the dollar by itself as a store of value. And it has all the same weakness. If the Federal Reserve or the Bank of Japan starts printing money like crazy, your SDR goes down in value the same way your dollar would. You've gained nothing.

In reality, there are two real candidates to replace the dollar.

One is the renminbi. The world's reserve currency is usually the money that circulates in the world's biggest economy. That was true of the pound in the 19th century, and the dollar in the 20th. And if the Chinese economy is the world's biggest, as it soon will be, that is going to be the currency that really counts.

Another possibility is a currency unit based on a basket of commodities. After all, raw materials are the one thing that every country absolutely has to have access to. And every form of money is a proxy for real stuff in one way or another. A unit that was one part gold, one part oil, one part iron ore, and one part rice, would look like something that was going to hold its value for a long period of time.

What will it be? It makes a huge difference. If it is the renminbi, you need to buy into Chinese assets, regardless of the fact they may look over-valued right now. If it becomes a reserve currency, everyone in the world will have to hold it. The Chinese will get a lot of very cheap capital, just as the U.S. did when the dollar was dominant.

But if it is a commodity-based currency unit -- and that would be this columnist's bet -- then the one big call you need to make for the next decade is to keep buying raw materials even when they do look overpriced. Either way, the euro looks finished, and the dollar is heading for a more minor role in the world economy.

And whatever else is happening in the global markets, that is one trend that trumps everything else.


Matthew Lynn is a financial journalist based in London. He is the author of "Bust: Greece, the Euro and the Sovereign Debt Crisis," and he writes adventure thrillers under the name Matt Lynn.

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Lewis E. Lehrman on How to Solve the U.S. Debt Problem

Lewis E. Lehrman, chairman of the Lehrman Institute, sponsor of The Gold Standard Now project, advises that to reduce the $1 1/2 trillion U.S. deficit, the Republican Party must initiate an investment program.

Working Americans are not saving, which enables the banks to lead the country into a cycle of debt, leverage, boom, panic, and bust.

Lehrman says: "Eliminating the budget deficit of a trillion and a half dollars cannot be done overnight. The proposal by U.S. Rep. Paul Ryan was very dramatic -- one Republican called it radical -- but it was not happily received. The solution, of course, is to design an American program for prosperity, because you can solve these entitlement problems with a growing economy. We need a tremendous program of investment, and investment comes from savings. When you pay savers, middle-income professionals, and working people 0 percent at the bank, you are not going to encourage them to save. Then we are left with a bank cycle of debt, leverage, boom, panic, and bust."

To read more and to sign up for The Gold Standard Now's free, noncommercial, weekly report, "Prosperity through Gold," please visit: