Is reserve currency status an economic blessing or a curse? The answer might seem obvious, as reserve currencies have been shown to confer lower borrowing costs on their issuers. But what of the borrower who, enticed by low interest rates, borrows more than they can pay back? Naturally the result will be a default. However, for the issuer of a reserve currency that is unbacked by a marketable commodity, such as gold, in the event that they borrow too much, they can just print more currency. While this avoids default indefinitely, it also hollows out the economy, erodes the capital stock, reduces the potential growth rate and, eventually, leads to a dramatic devaluation of the currency and loss of reserve status. History has not been kind to countries that have followed this path. In my view, the grave investment risks associated with the US dollar’s inevitable and potentially imminent loss of reserve status are not priced into financial markets.
Right now, the global financial system is facing a crisis that is really unprecedented. The reserve currency of the world (the U.S. dollar) is collapsing and the second most powerful currency on the planet (the euro) is also collapsing. As the major paper currencies of the globe crumble, the hunger that investors around the world have for gold continues to grow. Today, the price of gold hit an all-time record of $1607.90 an ounce. But that record surely will not live for long. The truth is that gold has been steadily climbing for quite some time now. A year ago, the price of gold was hovering around $1200 an ounce and and many “mainstream economists” scoffed at the idea that the price of gold could go significantly higher. Well, nobody is laughing now. As colossal debt loads continue to crush both Europe and the United States, the euro and the dollar are going to continue to collapse. There are going to be more bailouts and central banks are going to be doing more money printing. So how high is all of this going to push the price of gold?
That is a very good question.
At the moment, the price of gold is experiencing its longest rally since 1980. As the financial markets become increasingly unstable, investors are looking for security, and security is not to be found in anything denominated in dollars or anything denominated in euros.
Peter Schiff puts forward a good reason to own physical gold and silver as the dollar is collapsing.
The US dollar is in terminal decline; America is tragically bankrupt, unable to pay its lenders without printing the dollars to do so, and embroiled in an economic depression. It is only a matter of time until the dollar faces a crisis of confidence. The difference between this collapse and the bursting of any other bubble is that the dollar is the backbone of the global economy. Its disappearance will leave a vacuum to be filled.
There are three main contenders for the role: the euro, the yen or the yuan. But each of these currencies suffers from a critical flaw that makes it unsuitable as a reserve currency. When it comes to fiat alternatives, the world would be going from the frying pan into the fire.