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The intention of The Golden Chalkboard is to feature a focused selection of data or rare commentary that I think will be useful to enhance your insights into the gold market and the monetary system.

RossL (5/10/2000; 10:39:03MT - usagold.com msg#: 30260)
SDR chart
I updated my SDR chart this morning.

TownCrier (5/10/2000; 11:28:33MT - usagold.com msg#: 30262)
Sir RossL (and Gandalf the White)
Nice Chart! Might it be more appropriate to label the veritical axes as "SDR currency equivalents" rather than "SDR/currency" as you have them? Meaning specifically, the values on your chart are equivalent are the prices of a single Special Drawing Right as represented by the four basket currencies...whereas your labels would lead us to think that the lines are tracing out the "amount" of SDR's per each currency unit. Follow me?

Again, this is a great graph! It really shows how the situation with the dollar has become an abomination.

Gandalf, since you are looking at this, too, and wanting more information, just keep in mind that the dollar is the official "king of the world" if that green line can climb to 0.58 (meaning the SDR is equal to $0.58) at any point within the next year. (We aren't exactly holding our breath here in The Tower waiting for that to happen.) If the yen is truly a subsidiary of the dollar franchise (and if it is held in the neighborhood of 100 yen per dollar), then the the green dollar line would only have to climb to 0.85 within the next year to represent the dollar becoming "king of the world."
Again, we aren't holding our breath.

RossL (5/10/2000; 14:57:39MT - usagold.com msg#: 30273)
SDR chart
TC: you are correct, I had it backwards. I updated the chart with today's info also. Sorry to take so long to get back to you, but I had some real work to do ths afternoon. <grin>

Chart provided by RossL (5/10/2000)

BTD (5/10/2000; 15:10:29MT - usagold.com msg#: 30274)
What is the significance of the SDR?
http://www.imf.org/external/map.htm
RossL has given us a nice chart of the relationship of the SDR to the main currencies. Could someone briefly review the theories surrounding the SDR? I know it has been discussed on the forum before, but I've only picked up bits and pieces. What is the relationship of SDR to currencies showing us? Is there supposed to be a fixed ratio with the dollar? TownCrier, what is the significance of the 0.58 level you mentioned in your message #30262? What are special drawing rights, anyway? What relationship does the SDR have to the price of gold? What impact does its movements have on the price of gold?

TownCrier (5/10/2000; 17:30:16MT - usagold.com msg#: 30281)
Revisiting an old Golden Chalkboard
http://www.usagold.com/goldenchalkboard/gc_turkey.html
The page has been updated to include the pertinent commentary that acted as the germ for the graphic.

In time, I hope to establish a series of such lessons, and create a directory index for these similar to the Gilded Opinion index.

Sir RossL, seeing your SDR chart (nice modifications, by the way) and the discussion surrounding it made me remember that I had this unfinished business in regard to this Golden Chalkboard. If the discussion of your chart (and SDR's in general) shapes up to have lasting educational merit (as opposed to being a one-off event to satisfy immediate curiosities, then perhaps you might be willing to let me use your chart in conjuction with a similar Golden Chalkboard page?

RossL (5/10/2000; 18:41:37MT - usagold.com msg#: 30284)
Sir TownCrier
Feel free to use the chart. I created it to use as a tool for the discussion!

TownCrier (05/11/00; 09:18:38MT - usagold.com msg#: 30344)
Sir BTD and the SDR
Sorry I didn't get back to you yesterday in regard to your question. I hope to answer more thoroughly later in the day, but for the moment am trying to wrap up a certain project for MK regarding those gold German marks I mentioned earlier.

The "significance" of the $0.58 equivalence for the SDR is that that level would represent every other currency falling to zero against the dollar. This is the lowest theoretical price the SDR could reach when priced in dollars. This value of dollar-weighting within the SDR gets reevaluated this year, with the new weighting to take effect next year to "fix" the formula for the next 5-year span of time.

The last formula was established in 1995 to be effective 1996 - 2000, and effectively created the SDR as the sum total of 0.3519 euros (through a combination of German marks and French francs), 27.2 yen, 0.105 pound sterling, and $0.5821 of the U.S. currency, all based upon factors of the top five countries value of trade exports (goods and services) along with the IMF member countries' reserve balances denominated in these currencies.

The SDR was established to serve as a form of "paper gold" benchmark, although it may itself devalue against gold in the real market...as you can see that its value is derived from forex rates among the four currencies as mentioned above. It was originally fixed to gold at a rate of 35 special drawing rights against each ounce...the equivalent to the dollar while we yet remained on the international gold standard prior to August, 1971. Because its creation was stricltly controlled by the IMF, they felt that creating these SDRs would serve as a reasonable reserve asset during the time when the gold standard, coupled with the lending practices of banks, revealed there to be not enough gold to go around for the swelling account numbers. The last new allocation of SDRs among Fund members occurred in 1981, at which point the outstanding total of SDRs became 21.43 billion.

Although the international gold standard became unglued, the IMF maintained its SDR-gold link in this fashion: they chose to keep their gold fixed on their books at that same SDR 35 value per ounce, however they let the SDR itself "float" in the sea of paper, marking it to market values based on the 5-year changing formula and the daily forex market changes among the basket currencies. Essentially, the amendments to the IMF Articles that were arranged in Jamaica in 1976 ended any IMF sanctioned tie between gold and the now floating exchange rates among currencies which are what provide for the basis of the SDR.

And as you know if you have been following this forum, the IMF has recently found it to be expedient to end their fiction of low gold book values (SDR 35 is about $46 per ounce these days), and to remark some of their gold to market values via a complex operation that also involves an account at the BIS.

I hope this is helpful.

site steward [aka TownCrier] (8/17/01; 12:52:48MT - usagold.com msg#: 59809)
Highgrading the data
I can recall a telephone conversation I had with MK a little over two weeks ago in which we discussed extensively the Certificate accounts at the Fed as they relate to America's primary reserve assets as held by the Treasury.

Aside from the mechanics of the monetization of these assets via the certificates (and how changes in market value of the assets could play out), the primary item I stressed with MK was that a drawdown in the Fed's Certificate accounts (to unencumber the underlying assets) would be the easiest thing a person could watch for as a tip-off, in theory, that the government was preparing for a SERIOUS international defense of the dollar. Yet, after telling MK how easy it would be to keep an eye on these numbers, not once did I take a look at the present or near-historical values. Frankly, I simply didn't expect to see anything developing quite THIS SOON; and I was busy with other activities. A look at the numbers could wait. Or so I thought.

I was probably more surprised than anyone when I saw the excellent summary table that James Turk assembled, pointing out the decline in SDR Certificates that has already been occurring over the last two years.

As I see it, if the point is reached where the dollar must be defended *in earnest* on the international scene (a task which falls to the Treasury, not the Fed, though it uses the Fed as its agent), then any attempt to use U.S. Treasury bills, notes, and bonds for that purpose would be like fending off a grease fire with more grease. In times such as that, only primary international reserve assets (i.e., gold and SDRs) will be up to the task. And in the spirit of "Gresham's Law", for any two assets of equal market value today, a nation would want to use up the more dubious asset first, saving back the asset that will likely be the stronger of the two in future days. Thus, it makes perfect sense that the SDRs are the first primary asset to be made ready for action, unencumbered through withdrawals from the Fed's SDR Certificate account.

I shouldn't use the privilege of this posting code to express my personal view here, but I feel the following is warranted by its importance. As I see this, PERSONALLY speaking only, the significance to be seen in this drawdown activity as keenly noticed by Mr. Turk (a BIG thanks, James!) is that this action corresponds with what WOULD be expected in preparation for a SERIOUS defense of the currency. "The troops are being mobilized," so to speak. Ignore this element at your peril.

Granted, the market value of the Treasury's SDR holdings is equivalent only to ten billion dollars and nothing more -- not much to make a difference in sopping up the vast international overhang of dollar reserves; however, any weakening of the dollar exchange rate will translate into greater "purchasing power" of the SDRs to absorb a greater amount dollars. At any rate, it would be a START. This is significant.

Gold is THE primary asset, the big gun in any such serious international currency defense as may be looming in our future. We must remember that SDRs are only paper, and only have value according to the international rules of the game as bodged together through the IMF. Gold answers to a more fundamental and lasting power, and can rise to any necessary price to accomplish the job at hand. As I, personally, see it, he drawdown of the SDR Certificate Account serves as an advance warning that serious events are at hand. Any subsequent unencumbering of our gold reserves (via a similar withdrawal from the Gold Certificate Account at the Fed) would be a signal of utmost significance.

In reference to my subject line of "highgrading", this is what I had in mind. As I see it, this is the one passage from James Turk's article that everyone should read with an eye toward full comprehension of the possible implications as I've tried to share with you above.

------- "Why are the SDR Certificates declining? The basic answer is quite simple. The SDR Certificates MUST BE reduced if the ESF intends to use its SDR's for any purpose, such as market intervention or swaps. In other words, the SDR Certificates are a claim against the SDR's, so the SDR Certificate must be cancelled to remove any claims on the SDR before the SDR can be used by the ESF." --J.Turk -----

I hope this is helpful to someone, anyone out there. If not, I offer apologies in advance.

Randy

site steward [aka TownCrier] (08/17/01; 21:39:22MT - usagold.com msg#: 59845)
Important(?) context on SDRs for CoBra and any others having an interest.

To my mind, this historical perspective from the time of the SDR creation sets the stage for understanding much that follows, providing insight for understanding the events of today.

This element is of utmost importance to understand SDRs: Special Drawing Rights emerged in concept in the mid-1960's in reaction to the same forces that gave rise to the establishment and the eventual demise of the London Gold Pool.

Please review that once again before moving on.

The SDR program was ratified in Rio at the annual conference of the IMF in 1967 to take effect in 1969. This is also an important factor: the political thought of the day was that this creation and implementation of "paper gold" was preferred to the alternative which was increasing the price of gold -- something which was felt would have yielded unacceptable benefits to the big gold producers South Africa and the Soviet Union. (Remember, this was the mid-60's, Cold War, etc.) This, too, is a helpful point to bear in mind.

As alluded to above, the SDR was to function as a supplemental reserve asset under the auspices of the IMF, an organization that originated in function as the nursemaid of the Bretton Woods agreement that established an international banking reserve system built upon the dollar (and other currencies through the dollar) being pegged to gold at $35 per ounce.

SDRs were therefore initially created in imitation of the key currency, the dollar, with a book value equivalent to the Bretton Woods dollar at $35 per ounce. Or put another way, initially one SDR was equal to one dollar, with SDR 35 serving as the paper equivalent reserve value of one ounce of gold. However, as this system was meant to relieve the gold-conversion pressures evident during the London Gold Pool, the SDR was to behave as "paper gold" without title to any real gold.

As we know from history, the failing confidence over the inflationary ways of Vietnam-era U.S. inflation promoted international pressure to redeem dollars for gold, that resulted in a U.S. default -- closing the gold redemption window in 1971, despite the first allocations of SDRs in 1970.

When this gold default broke the key structure of the Bretton Woods agreement, the IMF was quick to adjust to the new reality by first switching the value of the SDR to something based on the floating average value of a basket of 16 primary trading currencies instead of the dollar alone. This later gave way to a value based on a basket of five currencies, which is now down to four with the dissolution of the Dmark and French franc into the common euro. (Others in the basket are the dollar, the pound, and the yen. Forty-five percent of the value of the SDR is based on the value of the dollar relative to the others. This may seem difficult to grasp at first, but if the dollar weakens, the SDR would likely also weaken in real terms, although it would in fact gain strength (price) relative to the dollar.)

To address the remaining issue of the international overhang of U.S. dollars in 1975 Fed Chairman Arthur Burns floated the idea that foreigners might exchange some of their unwanted dollars for SDRs as coordinated through the IMF.

Then, as international confidence in the dollar (i.e., U.S. fiscal and monetary management) was plummeting accompanied by a soaring gold price, it is almost remarkable that there were no notable decisions to come out of the September/October 1979 annual meeting of the IMF in Belgrade during this troublesome time. However, for the purposes of our present dialogue (as follow up to my other post), it is worthwhile to note that the IMF for the first time officially discussed at this annual conference a version of the old Burns scheme to allow central banks to swap out of their burgeoning dollar accounts for positions in SDRs.

Two-month veteran Fed Chairman Paul Volcker recognized the dire situation for what it was and left Belgrade early to tackle immediately the problem of arresting the rampant dollar inflation, and the plan was never subsequently implemented. However, the IMF did consequently liberalize the use of SDRs as stated in the IMF's own words, for "certain operations that were not otherwise expressly authorized by the Articles. These include the use of SDRs in forward purchases or sales, in swaps, to settle financial obligations, to make loans, to make donations (grants), and as security for the performance of financial obligations."

So where are we now? After their first allocation in 1970, SDRs have not been allocated since 1981, although a proposal has been pending since 1997 to double the amount outstanding. If the U.S. gives the go-ahead, it will happen. Perhaps that is yet another thing we can add to our list of telltale signs to watch for, signaling an official preparation and acknowledgement that defense of the dollar is imminent.

OK, now here's the answer to your question, CoBra, about the distinction between SDRs (a "paper" item) and SDR Certificates (also a paper item).

Mechanically, IMF allocations of SDRs are received by the Treasury and placed into the Exchange Stabilization Fund were they are simply held according to their monetary value according to the going exchange rate formulas. The allocated SDRs are represented equally on the Treasury balance sheet as both assets AND liabilities. Additional holdings of SDRs acquired outside of the IMF allocation quotas are added only to the asset side of the ledger. This asset side is adjusted downward according to any SDR Certificates that have been issued. Think of these Certificates as the title to an equivalent value of SDRs, similar to the title you provide to a bank to represent your car if you are using it for collateral on a loan.

That is precisely how the Treasury uses SDR Certificates. As part of overall fiscal strategy, the Treasury can raise funds (dollars) through several methods. I can collect taxes from the citizens of the nation, and it can sell bonds to these same citizens. It can also sell bonds directly to the Fed, which holds the bond as an asset and issued dollar currency as a balancing liability on the central bank books. The Treasury can also issue Certificates (as title) valued at $42.22 per ounce against its gold holdings, which the Fed holds as an asset against the issue of currency to the Treasury as a balancing liability. The Treasury can buy back its gold Certificates at this $42.22 per ounce rate.

In a similar fashion, if the Treasury feels it is fiscally expedient to do so, it may issue Certificates against the value of its holdings of SDRs, which the Fed then holds as a collateral asset and must monetize against currency as a balancing liability on the central bank books. The Fed must accept or remit these Certificates according to the will of the Treasury. This applies equally to the gold Certificates and to the SDR Certificates. Other than similar treatment in the monetization process, there is no connection between the two.

Any look at the Treasury balance sheet (if one is inclined to believe the numbers) will confirm that the balance of SDR assets matches precisely as it should in accord with the Fed returning the Certificates to the Treasury, to the exclusion of any other party or usage directed by the Fed. Similarly, the Treasury's balance sheet reveals that the Treasury's SDR holdings are encumbered only by the $2.2 billion value in Certificates -- the same value in Certificates that are visibly held by the Fed in the SDR Certificate Account. There are no other encumbrances that can be attributed to a third party as directed by the Treasury itself. That's where this all ends until new developments surface to change our management of existing reserves.

Again, the final analysis comes down to each person's decision to accept or reject the balance sheets as honest instruments, and I am, or else there is no end to the wild speculation which becomes possible. I see no point picking and choosing part of a balance sheet to believe or ignore so as to use it as justification for activities which may or may not be at odds with another part. It is better to either accept the whole thing up front or else reject the whole thing in its entirety. A question of official integrity that each of us must decide for ourselves whether or not to accept, however, I think either choice leads one to a conclusion that personal gold ownership is a must. Either our spreadsheets are honest and our currency is doomed, or else our government is corrupt beyond salvage in which case we are doomed even more so!

Sorry for this SDR dissertation. The simple difference between SDRs and Certs is that SDRs are the paper IMF-sanctioned assets that are allocated according to membership quotas among the the nations belonging to the IMF's SDR department. The Certificates are simply the title instruments used by the Treasury to represent the transfer of SDRs as assets to the Fed for purposes of monetization.

And to reiterate, speaking personally, this looks to me like prep work for the day the world turns its back on U.S. Govt debt securities, insisting on other forms of primary international reserve assets. The pathetic SDRs are the first items we'll throw into the whirlwind, and anchor our position with gold that SHALL rise in value in the course of events to come.

And if you don't like this view of mine, feel free to let me know where and how you disagree, but please don't hold the Company responsible in any way for my personal lack of comprehension on these esoteric international monetary matters.

OK? Did I cover all the bases, like it or not? I tried to give the complete picture of this IMF-legacy reserve structure, so for that, please forgive the length and any educational tone.

Respectfully submitted,
Randy

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