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Special Drawing Rights Emerge in European Bailout

Currencies / Fiat Currency Jun 02, 2010 - 02:55 AM GMT

By: Dr_Jeff_Lewis

Currencies

SDRs, or special drawing rights, are a type of off-the-wall currency floated around the International Monetary Fund.  In order to keep everything clean, orderly and honest, (as much as it can be with an institution more powerful than most national governments), the IMF created the SDR to easily exchange a country’s reserves for individual currencies.  When a country possesses 1 SDR, they actually own a basket of world currencies, and many suspect SDRs could soon become the world's reserve currency.


What Makes up a SDR?

A special drawing right is made up 44% of the US Dollar, 34% of Euros, 11% of Japanese Yen and 11% of the Great British Pound.  These figures change every five years as a matter of a vote, and a reallocation is made in part by calculating the change in influence each nation has in international trade. 

By allocating the value of the SDR to multiple currencies, nations can easily exchange their currency for the basket and make loans to one another in a system that is generally safe due to diversification.  Of course, since all the currencies in the basket are fiat, there is inflation risk.

The SDRs’ Power

The use of the Special Drawing Right was greatly expanded during the financial crisis, as small countries needed financial support, and there were not enough appropriated SDRs to serve all the demand.  As of today, the total allocation of SDRs rests at just 204.1 billion SDRs, though many expect it to continue to grow.  The equivalent worth in US dollars is $324 billion, hardly enough to fund future financial bailouts.

As a Reserve Currency

Since the SDR is diversified in only the major economies of the world, the SDR does not serve as a perfect reserve currency; however, most expect its role will soon grow and the number of currencies included in the basket will too. 

Since the US dollar is now the supreme reserve currency, with China and Japan owning most of the US debt and US dollars, the SDR could easily strip away its reserve currency status and supremacy in international trade.

Why it Matters to Metals

Precious metals aren't priced in special drawing rights, which are priced in US dollars.  Of course, the US dollar's value is dependent not on gold, silver or precious metals, or anything of value, but rather the confidence one entity has in that another will accept it. 

Since US dollars now function as the reserve currency of the world, it should be expected that a further dilution of the dollar in the SDR, coupled with the implementation of the SDR as a world currency, will only decrease demand, as well as the value of the USD.  Should this change occur, precious metals prices should only rise, as the dollar devalues itself and the world finally assumes a reserve currency dependent on every other currency of the world. 

The SDR could replace metals, but unlike fiat, the amount of metals will never ever be determined by the number printed on them.

    By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

    Copyright © 2010 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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