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Monday, March 26, 2012

Is the future of the euro inevitably linked to gold?

Here's a rather interesting - although perhaps not a new - perspective on the euro. Slightly more optimistic than the doom and gloom that are commonplace these days (yes, we're guilty too).

James Rickards, an American lawyer, economist and investment banker (and a notorious Fed money printing critic), and author of bestselling "Currency Wars", published in 2011, has, somewhat counter-intuitively, rushed to defence of the euro.

In an interview with Goldmoney, Rickards sets out the two main reasons why he's "bullish" on the euro:

1) There's sufficient political will amongst EU leaders to introduce fiscal transfers from north to south, thereby paying the price to keep the euro intact

2) The eurozone sits on a formidable backstop, as its member states hold more gold than the U.S. (8.133 tons vs. more than 10.000 tons), noting that the size of the UK debt mountain could be of more concern than that of the eurozone (despite, we would add, total debt levels in eurozone being higher than those in the U.S).

Rickard is actually convinced that the euro will in some way be pegged to gold eventually, as that is the only credible backstop that the euro has at its disposal.

We're not entirely convinced - but an interesting perspective. You can watch the interview below.


Rik said...

I strongly doubt if Europa's politicians are pro a transfer from North to South, mainly for the following reasons:
-It is highly unpopular in almost all potential paying countries. Germany might not have real alternative parties, but most other paying countries have:Finland, Holland, Austria.
You need all to go along.
-It will likely reduce the pace of the necessary structural reforms in the South (the reason Merkel is doing what she does is partly based on this reason).
-Look at the amounts involved and you would take all the growth from likely all countries without possibly Germany. Which has all sorts of consequences: more cuts than already taking place also in the North; budgetproblems as we see now already happening and as a consequence thereof downgrades, higher interest with its own negative consequences (more interest to paying gov. debt and more costs (so less activity in) the business sector; higher mortgages further downward pressure on real estate prices (where there is still a lot of hot air in).

The only solution is large structural reforms (of which we havenot seen many). Cut tons of red tape in law and in practice and make especially laborcosts competitive again (basically much lower wages and much lower wage-taxes). Could mean halving the costs of the welfare state and fire 30-40% of the civil servants (compared to wellfunctioning organisations there are too many of them anyway).

The reason is imho mainly that Europe's politicians simply cannot oversee the problem and are afraid of drastic measures. They rather let is stay in the mess it is in than make a mistake.

Rik said...

Another 'problem' is the fact the quantity mentioned looks large is however only backing the Euro up for say 10%. So it is simply marginal. The rest is and will remain fiat (basically confidence in Central Banks and governments).
There is simply not enough gold in the world for these kind of operations.
Basically it is what is done now (Central Banks have gold as part of their assets). Possibly even some of the PIIGS will have to sell gold to close one gap or another in austerity plans etc.
Bit of a weird idea imho.

Anonymous said...

The major problem here is that a huge amount of "Europe's Gold" no longer exists for Europe.

For example, in theory, Germany's gold supply is tucked away in a vault in New York City.

However, when asked to produce it, the US government has ummed and ahhed and made distinct noises suggesting it's all been either taken or (re)hypothecated.

In short: While some European countries still hold their own gold, many have effectively lost it to he theives on Wall Street.

Rollo said...

Gold will still be around when the Euro is in the dustbin of history. The only question is how far away that will be.

Anonymous said...

The Euro is essentially backed by the floating price of gold (ECB mark-to-market gold quarterly on their balance sheet). I believe it is no coincidence that Gold and the Euro have moved in tandem up against the dollar since the intro of the Euro. If you believe the price of gold will increase in the future, then the Euro will continue to strengthen as the increase in the price of Gold will offset other asset losses on the ECB balance sheet.

Idris Francis said...

yet another supposed expert with feet of clay. In the end it does not matter at all what the EU elite wish to do if those whose money and prosperity they wish to hand over to less hard-working people do not wish to part with it. And in the end, there will me millions of refuseniks versus a few hundred elite. They should steer clear of lamp posts.

I am baffled by Anonymous' comment that gold and the euro have moved in tandem against the dollar since the euro's launch. In the early days of the euro the euro fell to parity with the dollar, rose somewhat in later years and has since fallen - but it is now perhaps no more than 20% higher than the dollar. That is by no means in tandem with the 6 times or so increase of gold in the same period.

Patrick Barron said...

The euro was "misconstructed" in the words of Dr. Philipp Bagus, author of "Tragedy of the Euro".

It is a must-read for anyone who believes that the euro has a future.