What happens to Gold if the Euro collapses...?
LET US START OFF by saying that we do not see the Euro collapsing and being shelved, at least not yet, anyway, writes Julian Phillips at GoldForecaster.com.
No exit process was written into their rules anyway. But it is technically possible, and it's better to be forewarned.
What would prompt such a collapse? The future of the Euro lies in the hands of its members, especially Germany – the richest and strongest member of the Eurozone. A collapse could only come about if the leading members felt it to be in their national interest(s). There would be absolutely no philanthropy in the process should anybody exit or if the Euro disappeared.
So, principally, would Germany gain more by leaving the Eurozone than staying in it? It may be more in their interests to have the poorer nations ejected from the Eurozone, retaining the big benefits and losing the problems. Then they would hold onto the Euro. But what would any of these possibilities result in?
Full Euro Collapse
Simply put, the Eurozone would revert to what it was before the Euro existed. The European Central Bank (ECB) would have to return all of its gold to the member states in proportion to their initial contributions. Their old currencies would have to be resurrected and Euro reserves converted back to the mix passed to the European Central banks from the beginning of the Eurozone.
Dollar and Chinese Yuan reserves (if the Yuan were internationalized in time) would be built up again to replace the lost Euro reserves. The world's foreign exchange markets in the meantime, however, would be in chaos. Confidence in most if not all currencies would almost disappear.
By extension the ripple effect through the economies of the world and business in general, would be destructive. There would be a huge scramble for all hard assets, but particularly precious metals led by gold and silver. Briefly the US Dollar would reign as king.
Partial Euro Collapse
More likely the Eurozone will shrink first. The poorer southern countries of the Eurozone would be cast out of the union and would have to revert to their previous currencies. Spain would return to the Peseta, Greece to the Drachma, etc.
The example of Argentina un-pegging from the US Dollar at the start of the 21st century should be seen as the precedent for this process. The wealthy of Argentina found their capital hammered when it was forcefully converted from the US Dollar to the Peso in that process. So the lifting of deposits, which is happening now, from banks in Greece, Portugal and now Spain, was only to be expected.
If they had their own currencies, either the fall in the value of those currencies would deter that capital flight, or the imposition of Exchange Controls would block it. We would also expect to see Exchange Controls imposed immediately in all countries that leave the Eurozone. This would prevent capital hemorrhaging from the country, even after it left the Eurozone in disgrace.
The exchange rate of the exiting countries would initially fall heavily, and then take a long time to recover, if they managed to recover economically at all. By leaving the zone, these countries would ensure they would suffer at least one, if not more, decades of growing poverty, much as is expected to happen with them remaining inside the Eurozone.
With the richer nations remaining in the Euro, the exchange rate of the Euro would soar at first, hammering its global trade competitiveness but attracting the world's capital. It would jump against all currencies, but most decisively against the US Dollar, as its indebtedness would fall and prospects would improve.
If Germany Quits the Eurozone
It is possible in one scenario to see Germany recognizing no further advantage of remaining in the Eurozone and opting to leave. This is unlikely, but technically possible. If it were to do so, there would be few really strong economies left behind in the currency union. This would be a disaster for the Euro, which would tumble against the US Dollar. If the poor countries of the Southern part of the Eurozone remained in the EU, then the Euro would remain on an ever deteriorating slope.
Germany would return to the Deutschmark and follow a similar currency path that it experienced prior to the creation of the Euro. This would mean repeated upward revaluations, usually preceded by denials of such revaluations from the Bundesbank.
In that event, the US Dollar would be favored as the global reserve currency almost exclusively and would rise on foreign exchanges, despite so many reasons why it should fall. It would in fact be falling but slower than other important currencies, giving the impression of strength in weakness. This is until the full international appearance of the Yuan.
Either Way, Expect Dramatic Global Shifts
Resource producing currencies would soar if the Euro failed. In an attempt to lower their exchange rates they would turn to lowering their interest rates in the hope of maintaining the export competitiveness of their locally manufactured goods. With resources having an international market price, outside their own currency, such nations would drive down their exchange rates, so long as local inflation allowed it. (This is what China is doing now and as was suggested by the International Monetary Fund recently.)
The overall result would be a volatile and damaging use of currencies as part of trade wars. Should that happen, Protectionism and Exchange Controls would become commonplace, particularly in smaller economies.
As China grows in international importance over the next decade, we believe that the Yuan would quickly become of equal importance to the US Dollar and move into center stage as a global reserve currency. This would accompany pricing of goods (imports) in Yuan and exports from China in the currency of each importer's currencies. We believe China is very aware of this and has made plans for the Yuan to internationalize.
With Foreign Exchanges becoming increasingly volatile, confidence mercurial and uncertainty hanging over both the present and the future, then hard assets – and particularly internationally-mobile assets such as precious metals – would be increasingly sought after as a counter to all currencies.
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