Just before the Organisation of Islamic Conference which is due to take place in Kuala Lumpur in October 2003 a number of Muslim countries, led by Malaysia, propose to introduce an electronic unit of value called a gold dinar to settle bilateral trade among themselves. The plan will be rubbished by members of the Bush administration who were brought up from birth to believe in the power of the almighty dollar, but the White House should reflect on the fact that there are 1.3 billion Muslims in the world and very few of them share America’s view of the dollar. Moreover Asia was developing as an economic power house in its own right until the financial crisis of 1997/8 and many leaders in these countries believe that they were destabilised by an overly strong dollar.
Nor Mohamed Yakcop, the economic adviser to Malaysia’s Prime Minister Mahathir Mohamad, announced the plan to an international conference in the last few days and the intention is to introduce it half way through next year. The idea may be in its infancy at the moment, but as Mao Tse Tung said, “A long journey starts with a single step.” The great appeal, not only in Asia but in the Middle East as well, is that it would offer Islamic countries a means of by- passing western currencies by using gold to settle bilateral trade. All these countries still retain the concept of gold as a store of value as evidenced by Indian wedding rites, purchases of gold by Thai farmers after good harvests and the number of shops selling bullion in Dubai.
America finds it hard to comprehend the resentment in these countries against the sheer power it wields in the world and this is exemplified in the dollar. If the conspiracy theorists are to be believed immense efforts have been made during the 90s by US banks and other institutions to detach gold from the global financial system and spin it off as a barbaric relic. Now the dollar is under pressure and the scales are falling from the eyes of those who put total faith in the paper IOUs of governments. Islam could not have chosen a better moment to offer an alternative currency.
The Malaysian Prime Minister views matters in a fairly simplistic way. Currently most world trade is settled using major currencies. The dollar has predominated and it has been followed by the pound sterling, yen and euro. The economies of the countries of the Middle East and Asia have been vulnerable to the exchange rate between their local currencies and these majors. “The gold dinar could be an important facilitating mechanism to help the smaller countries of the world move away from an inherently unstable and ultimately unjust global monetary system,” he said.
Central to the proposed plan is the requirement that central banks in member countries would settle dinar trade balances every three months by transferring the beneficial ownership of gold held in a custodian bank, such as the Bank of England. These central banks would then settle with exporters and importers in the local currency. According to Islamic law, the dinar is a specific weight of gold equivalent to 4.22 grams of pure gold (0.135 ounces) and its value is based on world demand for gold which would give it a value of US$42 at the moment..
Prime Minister Mahathir’s plan coincided with an announcement from the World Gold Council that Asia’s reserve-rich central banks are potential buyers of gold to diversify their reserve assets. At the moment , according to Ralston Thiedeman, head of the WGC’s Asia Pacific sector, Asia holds over half of the world’s near US$2.0 trillion of foreign exchange reserves and it is mostly held in low-yield U.S. dollar assets, and generally less than five percent in gold. Thiedeman said volatility in global financial markets, a weakening U.S. dollar and low U.S. interest rates were reasons for Asian central banks to diversify their portfolios. He might almost have been reading from the same hymn sheet as Mahathir Mohamad and it might therefore be realistic to suppose that these countries might be gearing up their gold reserves to support the dinar.
One can see the world weary veterans of the derivative markets who thought the bear market in gold would go on for ever shrugging their shoulders at such an idea, but they forget the wild card – China. Its basic industries such as steel are going gangbusters while the western world is in recession and the Bank of China is steadily increasing its gold reserves which still only amount to around 2 per cent of total reserves. Just suppose it decided to hook into the gold dinar idea. The balance of economic power might then shift from the west to the east. Such a move would take time, but it is a thought worth mulling over on the beaches this summer. As the man said, “Post September 11th things will never be the same again.”.