GCC May Include Gold in Its Single Currency Union

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"GCC leaders are keen to find a way to avoid the exaggerated swings in the business cycle that come with the existing dollar peg. . ."

Chinese and Russian leaders put an SDR-based reserve currency on the agenda of the G20 summit last week, while Gulf central banks have announced a delay to the 2010 launch of the GCC single currency. Both new currency units could include gold in their currency baskets.

At the 48th meeting of the governors of GCC Monetary Agencies yesterday officials said that the six nations had yet to agree on either a location for a single central bank, or how it would be linked to the U.S. dollar or a basket of currencies and possibly gold.

Russia has openly called for the inclusion of gold in a new global currency based on Special Drawing Rights issued by the IMF. Saudi Arabia has huge gold reserves which it might be keen to use to back the new Gulf single currency basket, but the UAE has no gold reserves.

It is arguable that the world could not have become so extremely over leveraged in recent years with gold as a market discipline. Both Russia and China are major gold producers so that is an additional reason for them to favor gold.

In the GCC officials said national leaders will meet next month to decide the location of the new combined central bank, with Abu Dhabi thought to be the front runner. Only then will proposals be forthcoming about how the currency union is to be formed.

However, GCC leaders are keen to find a way to avoid the exaggerated swings in the business cycle that come with the existing dollar peg, and Kuwait has already had some success with its currency basket - all the other GCC national currencies are pegged to the U.S. dollar.

The inclusion of gold and even silver into a currency basket is bound to be taken more seriously in view of the Russian and Chinese initiatives. The Kremlin has already told the central bank to slowly raise gold to a 10% share of its foreign reserves.

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