Let us first have a look of the Dollar's role in the world economy, in particular with regard to its share in settling world trade and financial transactions. A currency's share in settling world trade and financial transactions reflects ongoing developments since it is directly determined by the changing relationships of economic and trade power. So that tells us more than the share of world foreign exchange reserves, because it reflects only past trends since it concerns money which has already been accumulated.

Unfortunately there is no clear and recent data on the current proportion of international trade invoiced in the various world currencies (in particular the Dollar and the Euro). Based on various sources, it seems that approximately 50% of the world exports are invoiced in Dollars (but only 12% of world trade is with the United States), 30% in Euros and the remainder mainly in Yen.

In addition to oil, the trend which asserted itself strongly in 2011 is the negotiation of non-Dollar bilateral trade agreements. If one considers with particular interest the China-Japan agreement at the end of 2011 because it concerns the second and third world trade powers (moreover, China is Japan's primary trade partner, Japan is China's third, and until now 60% of the trade between them has been invoiced in Dollars), one can also mention agreements or negotiations between China on the one hand and Russia, Brazil, on the other, between Russia and Iran, and many others. These agreements challenge the use of the Dollar by major international trade countries.

Innumerable SWAP agreements are also in place (for example between China and Argentina, Thailand, etc.) to launch the process of providing the appropriate local currency to the country partner. Already one can see the role played here by the BRICS (18% of world trade) and China in particular.

In mid-2009, China started a programme called "cross-border renminbi settlement" intended to allow (and encourage) Chinese businesses to pay and invoice their international transactions in Yuan. Initially in a test period until mid-2010, it has since been extended to the whole country and the results are impressive. Yuan transactions are growing exponentially to constitute more than 2 trillion Yuan in 2011 (against less than 500 billion in 2010).

HSBC considers that half of Chinese international trade could be done in Yuan two or three years from now, i.e. the major part of its trade with Asia and the emerging nations. That corresponds to 2 trillion Dollars (around 7% of current world trade). This estimate gives an idea of the Chinese currency's potential. That will require the creation of Yuan backed financial products, which Hong-Kong will get down to with great enthusiasm, just like the City of London. And an increasing number of British businesses now pay for their Chinese imports in Yuan now since that enables them to save on exchange rate costs.

Even H&M is thinking of doing the same (turnover 10 billion Euros).

Who is interested in free convertibility when it's simply a question of paying an invoice?

Source: IMF

The movement to exit the Dollar for commercial transactions is thus already well underway. It will accelerate in 2012. We estimate that in two years the Yuan will nibble away approximately 10% of the Dollar's share in the international trade and the Euro will continue its advance. Thus, at the end of 2013, between 35 and 40% of the world's transactions will be in Dollars, between 30 and 35% in Euros and 10% in Yuan. And in 2016, the situation will be nearly equal between these three currencies. The Dollar will thus have lost its supremacy as the only major commercial currency, while remaining one of the three major currencies of course.

In addition to the US Dollar, the two other big currency losers will be the Yen and the Pound sterling.

As long as a stable international monetary system is not implemented, exchange rate volatility will be very important in times of crisis. One can see it for example by simply studying Euro/Dollar rates since 2007:

EUR/USD exchange rates, 2007-2011

The new World Monetary System

The existing world monetary system with the dollar as world reserve currency has reached
the final stage and is gradually coming to a close.

What will the future bring, what will be the new world monetary system?

Even Fed Chairman Ben Bernanke sees problems in the current system, of course without the dollar itself calling into question:

"As currently constituted, the international monetary system has a structural flaw: It lacks a mechanism, market based or otherwise, to induce needed adjustments by surplus countries, which can result in persistent imbalances."

The Chinese central bank governor, Zhou Xiaochuan criticized:

"Issuing countries of reserve currencies are constantly confronted with the dilemma between achieving their domestic monetary policy goals and meeting other countries' demand for reserve currencies. On the one hand, the monetary authorities cannot simply focus on domestic goals without carrying out their international responsibilities; on the other hand, they cannot pursue different domestic and international objectives at the same time. They may either fail to adequately meet the demand of a growing global economy for liquidity as they try to ease inflation pressures at home, or create excess liquidity in the global markets by overly stimulating domestic demand. The Triffin Dilemma, i.e., the issuing countries of reserve currencies cannot maintain the value of the reserve currencies while providing liquidity to the world, still exists.  … therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies.

1. Though the super-sovereign reserve currency has long since been proposed, yet no substantive progress has been achieved to date. Back in the 1940s, Keynes had already proposed to introduce an international currency unit named "Bancor", based on the value of 30 representative commodities. Unfortunately, the proposal was not accepted. The collapse of the Bretton Woods system, which was based on the White approach, indicates that the Keynesian approach may have been more farsighted. The IMF also created the SDR in 1969, when the defects of the Bretton Woods system initially emerged, to mitigate the inherent risks sovereign reserve currencies caused. Yet, the role of the SDR has not been put into full play due to limitations on its allocation and the scope of its uses. However, it serves as the light in the tunnel for the reform of the international monetary system.
2. A super-sovereign reserve currency not only eliminates the inherent risks of credit-based sovereign currency, but also makes it possible to manage global liquidity. A super-sovereign reserve currency managed by a global institution could be used to both create and control the global liquidity. And when a country's currency is no longer used as the yardstick for global trade and as the benchmark for other currencies, the exchange rate policy of the country would be far more effective in adjusting economic imbalances. This will significantly reduce the risks of a future crisis and enhance crisis management capability."

The IMF itself contemplates the special drawing rights (SDRs) as a model for a future world currency:

"A sui generis Global Currency:

1. From SDR to bancor.

A limitation of the SDR as discussed previously is that it is not a currency. Both the SDR and SDR-denominated instruments need to be converted eventually to a national currency for most payments or interventions in foreign exchange markets, which adds to cumbersome use in transactions. And though an SDR-based system would move away from a dominant national currency, the SDR's value remains heavily linked to the conditions and performance of the major component countries. A more ambitious reform option would be to build on the previous ideas and develop, over time, a global currency. Called, for example, bancor in honor of Keynes, such a currency could be used as a medium of exchange—an ´outside money` in contrast to the SDR which remains an "´aside money`."

A statement by Kremlin in April 2009 states:

"We call for a reform of the international monetary and financial system to enhance its stability and eliminate global economic disproportions (or to reduce the risk of their emergence). With this in view, we suggest that IMF (or an Ad Hoc Working Group of G20) should be instructed to carry out specific studies to review the following options:

1. Enlargement (diversification) of the list of currencies used as reserve ones,…
2. Introduction of a supra-national reserve currency to be issued by international financial institutions. It seems appropriate to consider the role of IMF in this process and to review the feasibility of and the need for measures to ensure the recognition of SDRs as a "supra-reserve" currency by the whole world community."

IMF chief Christine Lagarde favors the Bancor, as it indicated in its time as French Finance Minister. In an article in the Telegraph "Currency wars are necessary if all else fails" dated 10 October 2010 reported by Ambrose Evans-Pritchard:

"And while the French deny that they are in talks with China over the creation of a new currency regime, I heard French finance minister Christine Lagarde say in person at a meeting in Italy that France would use its G20 presidency to push for an alternative to the dollar. She specifically cited the "Bancor", the idea floated by Keynes in the 1940s for a commodity currency priced off a basket of metals."

The outgoing World Bank President Robert Zoellick

... looks beyond Bretton Woods II and brings gold to the mix. His article in the Financial Times of 8 November 2010 "The G20 must look beyond Bretton Woods II" caused considerable ripples in the financial world. From his proposals for the G20:

"Fifth, the G20 should complement this growth recovery programme with a plan to build a co-operative monetary system that reflects emerging economic conditions. This new system is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalisation and then an open capital account.

The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.The development of a monetary system to succeed "Bretton Woods II", launched in 1971, will take time. But we need to begin."

Zoellick's proposal does not provide for the return to gold such as in Europe between 1870 and 1971. His statement make sense only in relation to a currency basket in which gold also plays a role. One interpretation of this concept is offered by Marcus Grubb (World Gold Council) in a Reuters interview. Grubb describes a future supranational currency, based like today's SDRs in a basket of currencies which, contains gold as an additional component.

The media completely misunderstood Zoellick.

What is developing?

John Maynard Keynes

New currency systems are nothing abnormal in history. The transition to a new monetary system is nothing new. The challenge is to think globally for a reform of the monetary system. It calls for a broad consensus and consideration of different interests.

As you can see from the previously cited statements above that there is a surprisingly high level of agreement on some outstanding issues:

1. The new monetary system should not be based on one or only a few national currencies.
2. Instead, a real, additional, supranational currency is to be created, which is based on a model of the IMF's special drawing rights.
3. It should - according to certain criteria chosen - contain all major currencies.
4. Majority opinion is that the IMF should be allowed the position as a world central bank, the IMF will operate the new currency monetary policy for global needs.
5. Keynes' idea of the "Bancor" is named. That means an international clearing currency in connection with an International Clearing House (International Clearing Union). The Bancor is defined in units of weight of gold.

The central banks of the U.S., the Euro Zone, Russia, Japan, China, India and Brazil, and possibly the United Arab Emirates provide the IMF currency amounts (= baskets of their currencies) in proportion to their foreign trade volume similar to today's SDRs disposal. The weighing of the currencies is periodically adjusted to the real volume of foreign trade. hey would form the new super-currency which would serve both as a reserve currency for the national central banks as well as a real currency in commercial transactions. The issue would be done by the IMF, which performs as a higher Fed.

A basket of different currencies would protect the users of the new super-currency from strong fluctuations of individual currencies to each other, but not against a simultaneous fall in the value of all currencies in the basket.

For this reason the Bancor comes in to discussion or the direct use of gold.

A fixed ratio to gold provides too little flexibility. Therefore it is conceivable that one not bind the new super-currency to gold, but to the extended currency basket to another component with the use of gold. The IMF could take over some of the gold of the national central banks and integrate it as a stabilizing component as a kind of "other currency" in the super-currency. One unit of this new currency would contain not only dollars, euros, yen, etc., and their ratios would be adjusted to each other in an "unchangeable" measurement in grams of gold. At a minimum the super-currency always would have the value of their gold content. But due to their amount fiat currencies the super-currency nevertheless would be flexible enough.

The pricing of gold would still take place in the free market. The loss of purchasing power in one currency or even all currencies in the baskets would be compensated partially by the increase in the purchasing power of gold in such a situation (= Zoelleks reference point).

The "gold component" in the new world monetary system

Approximately 163,000 tonnes of gold have been mined in world history. Some 3,000 tons or 2% are added every year. This corresponds almost perfectly with the annual average of global economic growth.

1. At least 29 700 tons, or 18.2% are owned by central banks.
2. 110900 tonnes or 68% are in private hands, the overwhelming majority of it in the form of jewelry or works of art.
3. Further 22´400 tonnes (13.7%) are in the warehouses of the industry or can not be allocated.

The amount of global central bank gold is probably sufficient for the initial phase of a new super-currency with a gold component. With further inflows from the private sector the central banks and the IMF could expect a high price for gold as soon as the new monetary system has proven to be stable and has been accepted worldwide.

Private gold investors would benefit enormously. Not only Soros, Paulson and Tudor Jones, who still hold a significant proportion of their funds in gold, not only the other "super
rich", purchased tons of gold (Reuters), but also the really huge and powerful "pillars of the world", accumulating gold for many decades.

In the described scenario gold would be blessed with high real wage increases, probably five figure sums per ounce by today's standards. Here, gold is different from all other commodities. Silver does not have this option. Silver, palladium, oil or other commodities can certainly outperform gold temporarily. But because of a revival in monetary nature, gold could outperform all other classes by far especially for the period of transition or turmoil.