Will Gold, the Dollar or the Euro collapse?

07
Jan

Right now, the markets have pulled gold back in the face of what seemed to be an upward turn in the U.S. economy.   Many may feel this is the time to sell gold.   The growing Eurozone debt crises could spell the end of the euro as we know it.   The debt problems of the U.S. are worse than Europe so it is a time to ask, “Will these three forms of money collapse?”

A Dollar collapse
Over the last few years we have seen a great deal of well-qualified speculation that the U.S. dollar should collapse.   The nation is seriously over-borrowed and still increasing the amount it needs to borrow [By March 31st it must increase its borrowing limits of face short-term default].   It has run an unacceptably high trade deficit for decades and is completely unconcerned that this continues without any intention of rectifying matters.   The twin deficits cannot be resolved by cutting back less than $100 billion in defense spending.   We are now told that U.S. House Republicans have proposed policies in their first week that would make the shortfall worse.   Were it any nation other than the U.S. in such a situation it would have an exchange rate to the euro of $1.70 or worse and be seeing distress levels on its Treasury yields.   Yes, it would be at least on the brink of collapse or in the process of doing so.

A Euro collapse

The Eurozone debt problems are not being resolved.   Each day we are hearing more bad news; Greece will want to extend its repayment period on its ‘rescue package; Ireland could well default under a new government unwilling to accept the interest rate levels it has to pay on its ‘rescue package’; Belgium is government-less and headed quickly into the same hole as Greece and Ireland with the Latin countries of Portugal, Spain and Italy following the same road as these other.   If the E.U. has to bail out all of these countries then it will be over extended and will send the euro tumbling like a stone [eventually at $1.00 or lower – sorry, the U.S. dollar is racing down too].   The prospect of the debt-stretched nations being ejected from the E.U. is not off the table, nor is Germany’s exit from the E.U.

A Gold Price collapse
With so many hoping for and expecting the economic recovery to turn up in the developed world, on a broad front, some gold investors are taking the present drop in the gold price as an exit point ahead of returning confidence in the currencies of the developed world.   They may also feel that we are seeing the end of the gold ‘bull’ market.

Future Prospects
But despite all these fears we see no sign of a collapse of any of these three items.

A look at the world’s two main currencies in the hands of the Chinese gives us some insight into why this has not happened yet.

“The euro and the European financial markets are an important part of the global financial system and were, are and will be one of the most important investment areas for China’s foreign-exchange reserves,” said Deputy Governor Yi Gang of the People’s Bank of China.   The same applies to their $3 trillion investment in the U.S. dollar.   The same goes for every other country on this earth.   It is in nobody’s interest that either the dollar or the euro collapse.   After all, currencies serve primarily as a means of exchange.   Without them, barter would be back and that is not going to happen.   So long as there is no complete disaster facing these currencies, they will continue to serve their role in the international and national monetary system as the means of exchange.   Take a look at countries that suffered hyperinflation.   They continued to use their collapsing currencies right to the end, when they had to turn to the U.S. dollar as their means of exchange.

The secondary role of providing a measure of value is one that investors focus on and would were it the only function of currencies, have caused a collapse of both currencies by now.

This leaves mere mortals the option of moving away to instruments that will retain their value when currencies don’t.   Governments and businesses don’t have that option when they conduct international business.   That’s why China wants the dollar and the euro to hold up.   The benefit of doing this to China is twofold.   First, China continues to sell its goods to those nations and secondly, they increase their power over the two currencies and their fixed interest [particularly government] markets.   The only time they would have an alternative to this would be if there were another global currency of similar liquidity through which it can trade.   At the moment, there isn’t any [but not for too much longer -we discuss this further in our Gold Forecaster newsletter].

This makes the exchange rate moves of the two leading world currencies all-important to world trade profitability.   Your wealth is measured in your home country currency, so you should always be in touch with the success or failure of your currency to measure value.

As for gold price collapse likelihood, we have to look at its exceptional ability to measure value and ignore any means of exchange role.   With the head of the World Bank suggesting that the gold price be used as a reference point on which to measure a currency’s value, we see why the head of Germany’s Bundesbank called gold a ‘useful counter to the swings of the dollar.’   Using basic logic then we can only see a collapse in the gold price if the inherent value of both the euro and the dollar soar to unseen heights against the broad spectrum of assets, including gold.   Is this happening?   Is it likely to happen?   Would you place your trust in the euro or the dollar as an investment likely to take your wealth to new heights?   More to the point, could we expect the Indian, Asian and Chinese investors to place their faith in these two currencies and away from gold?   Therein lies the answer to whether there will be a gold price collapse!

So what will we see for the Dollar, the Euro and the Gold Price in 2011?
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