The dollar has experienced unexpected demand from investors and institutions exiting the euro, the common currency of the 17 nations of the European Union.
The euro is in freefall and in danger of disintegrating altogether because of a severe economic and financial crisis which has gripped Europe. That crisis was originally caused by an acute and chronic fiscal disaster. European nations have been spending themselves into oblivion and running up unsustainable debt levels. Now, Greece, Spain, Portugal, Italy and Ireland are all in various stages of recession or outright depression. (In Spain the unemployment rate is 24% and in Greece unemployment for those under 25 is an astonishing 51%.)
For now the dollar has been the beneficiary of all this crisis as investors vacate the euro and replace their euro assets with dollar assets. As the value of the dollar increases, the price of gold has fallen.
But can this situation last?
We don’t think that it can.
First of all, the European crisis is likely to get worse and it will eventually begin to impact the US economy and financial markets in earnest. This is inevitable because of the counterparty risk associated with economic and financial globalization. Banks and financial institutions are no longer national, they’re international. They have operations overseas and relationships with foreign financial institutions, including big banks in Europe. There is simply no way that the US economy and financial markets can escape the impact of this still brewing crisis. When our economy and markets begin to suffer, the dollar will start to falter as demand for dollars will inevitably fall back down to earth.
After all, the same fiscal woes that have contributed mightily to this crisis in Europe certainly exist in the US—except our fiscal woes are actually worse in some cases. Our debt and deficits are larger to be sure. There is simply no way that the dollar can be considered a safe haven from a world debt crisis with America being the world’s largest debtor nation.
When this reality sets in in the not-too-distant future, investors will move into gold as the ultimate form of safe money. Gold has been trusted for 5,000 years as a secure store of value and medium of exchange.
Those who had the foresight to buy gold investments BEFORE the crisis in Europe migrated across the Atlantic Ocean will be rewarded particularly handsomely.