Gold and the Euro's First Decade


"One-and-a-half-reasons for gold investors to keep a close eye on the Euro. . ."

This new year, Brad Zigler at Hard Assets Investor considered what kind of a present to get for a 10-year-old? In this case, the 10-year-old isn't a child—it's a currency. The Euro—now coin of the realm for 16 nations—celebrated its first decade on New Year's day. Why would HAI care about a fiat currency that's just managed to shake off its training wheels? Two reasons (well, one and a half, really):

Reason One: No other currency in the world could be backed by more Gold Bullion than the Euro. I say "could be backed", because the Euro's value really isn't driven by gold. U.S. president Richard Nixon Shut the Gold Window in 1971, long before the Euro's birth, locking the metal out of the world's monetary system. But still, the Eurosystem—the European Central Bank (ECB) and the national central banks of each European Monetary Union (EMU) member country—own more than 36% of the world's official gold reserves, a third more than the horde maintained by the United States.

Reason One-and-a-Half: During the tenure of current ECB president Jean-Claude Trichet, the Euro has been more resistant to inflation than the Yankee Dollar. That, in part, explains why the Euro has been gaining ground on the greenback as a world reserve currency over the last decade (and why we use the Euro in our real-time monetary inflation calculation here at HAI).

The ultimate refuge from currency devaluation is a peg to gold. All told, the gold held in the Eurosystem amounts to 10,887 tons (350 million ounces), which represents more than half of the zone's reserve position. In contrast, more than three-quarters of U.S. reserves are held in gold. But the U.S. holds 25% less gold by volume than the Europeans. . .showing the Eurozone's comparative size and strength of currency reserves overall.

Up until now, the Euro has been steadily whittling away the Dollar's hegemony. Euro allocations have risen by more than a third in the past decade, mostly at the expense of the U.S. currency; in fact, it is now the second most widely held reserve currency in the world.

However, apprehension about a breakup of the Euro bloc is already growing. The widening disparity between the weak and strong economies of Europe—plus the one-size-fits-all monetary policy response—may end up chafing some members. The Euro was born amid doubts of its sustainability in a global economic crisis; and now that crisis is here, so the next few months will tell us if we should make plans for a second decade's celebration.

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