Friday, August 13, 2010

Kelantan's Gold and Silver Coins

For students of monetary theory, the issue of the gold and silver coins by the Kelantan Government that will be used for the payment of salary of civil servants, and are acceptable even for payments to Tabung Haji and Bank Islam Malaysia is an extremely interesting event. Will it work? Does Bank Negara Malaysia approve it?

The coins are supposed issued by a private gold trading company owned by the Kelantan Government. The website of the private company provides the exchange rate for the gold and silver coins to the ringgit paper money. 1 dinar = RM581, 1 dirham = RM13.

Presumably, the price of the coins must go according to the amount of gold and silver in the respective coins, as per the recipe of any commodity currency. That information, unfortunately, is not available in the public domain. But somebody which is quantitatively inclined (not me) may try to calculate the amount of metal in the coin based on the quoted price of the coin and the quoted price of gold and silver in the world market (hopefully, unless they use the local market prices).

But that would be the purist's view. The private company of the Kelantan Government has to pay for the minting of the coins. There is a cost to minting. I do not know whether they are deducting that (imputed) cost from the weight of the metals in the coins. If not, then they would be losing money. If yes, and if they do it incorrectly, even unwittingly, they may be accused by those who are paid those coins to have cheated.

It is, of course, a dangerous thing, according to conventional economic wisdom (as in the secular world), to allow one firm to control the trading of any commodity or product or even concept (option, for example). Is the private company acting like a gold trading company which means that it must make money even if non-profit in order to pay the salaries of the workers, or does it act like a currency board whose job is merely to ensure that there is even gold and silver coins for use in the economy. Even for the conventional currency board, there is a specific conversion of foreign reserves to the paper money. So for this gold trading private company, presumably, there will be a conversion from the paper money of the Kelantan government to the gold and silver coins. At what rate this can be done, of course, will be dictated by the prices of gold and silver in the global markets.

It is unlikely that the gold trading company can act as a central bank to the Kelantan government. For one thing, the central bank was traditionally invented to finance the government of the day; in those days, to finance war (and I suppose, in modern times, the same thing). It is unlikely that that private company can mint more gold and silver coins if it does not have the money. Of course, it can do so if it borrow paper money from the conventional banks and use that money to mint more coins.

There could be a serious shortage of the coins in the near future. It's novelty can make it into a collectors' item, which means that it may not really go into circulation. If the gold trading company, in order to not to be accused of shortchanging the users, overvalues the coins, then there is real incentive to keep the coins. If gold and silver prices are thought to be rising in future, there is also scope for speculation by hoarding. Furthermore, if there is a real shortage of coins and if the Kelantan government insists on being paid in coins, then the prices of the coins will rise even more and this will accentuate the shortage.

So, I do not think that the real central bank should worry about this gold trading company. After all, it has even problems on its hands trying to figure out the real value of the paper ringgit by making sure that the exchange rate of the ringgit is properly managed in respect to the currencies of "its major trading partners."

Since de minimis has quoted Archimedes in one of his posts, I wish in passing to mention that the Archimedes' fundamental axiom on truth. The translation I have committed to memory is this: "Given me a fix point in space, and I will move the earth for you." It applies to central banking in the fixing of the price of currency. That fix point in the world of currencies is the international reserve money which for the moment (probably not long) is the US dollar. (That was why when the US dollar tanked because its economy collapsed, the ringgit was still at the same point to the fallen hero. I am glad that some readjustment has been made to fix this out of sync exchange rate by strengthening the ringgit a bit.)

I think the issue of the gold and silver coins is very novel exercise and should be encouraged as one would encourage the issue of gold and silver wafers or bars as the marketing guys would call them.


hishamh said...

I don't think this is legal:

Check pg 53-54.

If KGT allows the value of the dirham and dinar to fluctuate based on the gold price, they will be operating a de facto separate monetary system within Malaysia.

If the dinar's going to be fixed to the Ringgit then they will run into a lot of trouble if the gold price goes against them, as I think it will eventually will.

BTW, in the recent crisis the value of the USD went up, not down.

semuanya OK kot said...

The Mad Hatter is very quiet on this. Is this not according to his wish and "vision"?

cikgu said...

Tun Dr Mahathir too mooted the idea of using the Gold dinar for International Trade earlier on. So Kelantan is being proactive. We try domestically first before going International. People rejected this currency just because it is initiated by PAS Government.

etheorist said...

Thanks for the comments. I do not want to worry about its legality...that is for Bank Negara to be worried if it sees that somebody else is trying to usurp its power - although I do know that when the original central bank was written, the world was on the gold standard. Now that, thanks to Nixon that the world is now floating on a lot of paper money, the return to the gold or silver standard is not something I will discourage. But, this would be quite beside the point. I am more interested in flushing out the mechanics of the proposal by the Kelantan gold trading company as an enterprise. I am sure they are still operating within the current ringgit legal tender by posting the exchange rates to the ringgit. This is no different from gold jewellers are doing by buying back gold (which is now very common). If there is a greater acceptance of the gold or silver coins for payments, by not - this has been done with shares, houses, etc (ask the banks). I apologise for my reverence, but I like innovations and new ideas of all sorts, even if I do not necessarily wish to use it myself.

Silver Bullion Coins said...

Interesting blog. It would be great if you can provide more details about it. Thanks you.

Anonymous said...

USD value dont go up. They have printed trillions of new dollar into their economy. Fiat currency will always go back to their true value. BNM cannot stop if Kelantan govt just want to use the money as barter trade. BTW, a lot of country around the world now already lost confidence with the USD. Gold price do not really fluctuate, it will maintain its value. So stock up gold and silver now.

kelantan said...

looks like good coins for collecton