On January 1, 1999, 11 European countries came together in an attempt to form an economic and monetary powerhouse. Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain were the first members of the eurozone.
Today, 17 of the 27 members of the European Union (EU) are part of the eurozone, the name for the collection of EU countries that utilize the euro. Over the last decade, the euro has become one of the world’s most powerful currencies, used by more than 320 million Europeans in twenty-three countries.
In 2011, the United States exported $268 billion in goods to the eurozone and imported $368 billion, making it the America’s biggest trading partner. According to S&P 500 data, roughly 14% of all S&P 500 company sales come from Europe. Not surprisingly, economic deterioration in the eurozone would have serious implications for the U.S. (Source: “Trade in Goods with European Union,” United States Census Bureau web site, last accessed December 19, 2012.)
The European debt crisis cannot be laid solely at the feet of the U.S. financial crisis. There was a build-up of debts in Spain and Italy before 2008, but it had little or nothing to do with governments. The private sector—companies and mortgage borrowers—were taking out huge loans. When southern European countries joined the eurozone, interest rates fell to unprecedented lows, fuelling a debt-laden boom.
That said, the European debt crisis became critical after the U.S. financial crisis of 2008–2009, as the slowing global economy exposed unsustainable financial policies of certain eurozone countries. In October 2009, Greece’s new government admitted the budget deficit would be double the previous estimate and would hit 12% gross domestic product (GDP). After years of uncontrolled spending and non-existent fiscal reforms, Greece was one of the first countries to buckle under the economic strain.
Fast-forward to the present, and the European debt crisis is pushing the 17-country eurozone toward recession, helping drag down the global economy. Ten European countries have already slipped into a recession. Three more have needed to be bailed out in order to avoid default.
In Spain, where the unemployment rate is 25%, there have been general strikes and civil unrest. In France, the European Central Bank (ECB) injected more than a trillion dollars to rescue three of the country’s largest financial institutions. Seven European countries have changed leadership because of the crisis, and Greece reneged on $133 billion in debts.
The chance of an economic recovery for the eurozone has been fading. With huge question marks looming over the health of some of the region’s biggest economies, a near-term rebound for the eurozone seems very unlikely. That may have to wait until 2014, maybe even later.
While Germany and France, the two largest eurozone countries, are expected to avoid recession, the euro will need to weaken in value for southern European nations to eliminate their current deficits and cut reliance on foreign borrowing, or to export enough to return to growth.
The multiple sovereign debt crises of European countries have placed pressure on the euro currency. With general high unemployment rates and anemic GDP growth, avoiding a recession doesn’t look likely.
Long term, we do not believe the euro will survive. We believe that Germany, the sole growth engine of Europe, made a mistake in joining the euro currency. And, at some point, we expect Germany to either withdraw from the 17-country eurozone or simply ask the weaker European countries to leave the euro currency.
For Americans, the struggles of Germany and the eurozone are a constant reminder of the interconnectedness of the global economy. What happens with the euro will have a profound affect on the value of the U.S. dollar and the price of gold bullion. You can find regular commentary on the euro in Profit Confidential.
Many central banks within the global economy are involved in printing more of their paper money (often referred to as “fiat” currencies). There’s a race to devalue currencies in hopes to revive economies and maintain a competitive stance. Countries believe that by printing more of their fiat currency, they can improve their exports to the global economy, because the goods will be cheaper for those countries that have a stronger currency.
Recently, we heard from the central bank of Brazil that it will commence a program “with the aim of providing FX ‘hedge’ (protection) to the economic agents and liquidity to the FX market…” (Source: Banco Central Do Brasil, August 22, 2013.) In simple words: Brazil’s central bank is going to make sure the country’s currency stays low compared to the currencies of its trading partners.
Through this program, the central bank plans to sell US$500 million on Mondays, Tuesdays, Wednesdays, and Thursdays of every week. This intervention is expected to last until the end of this year, but the central bank also made it very clear that it will continue with its plan as long as necessary.
Similarly, Columbia’s central bank is taking steps to lower the value of its currency. It has bought significant amounts of U.S. dollars and printed pesos. The finance minister of the country, who also represents the government on the central bank’s board, stated that the government wants to keep the country’s currency value between 1,900 and 1,950 pesos per U.S. dollar. (Source: Reuters, August 20, 2013.)
Our own central bank, the Federal Reserve, has been putting pressures on the U.S. dollar. Though we … Read More
Back in late 2011, I created a widely circulated video that included six predictions. I hit it on the head with five of those predictions. But the winners are not what are important to my readers today; it’s the prediction I didn’t get right that’s vital now
Back then, I said the U.S. dollar was “dead” and wouldn’t go anywhere. I pointed out that if it were not for the continued crisis in the eurozone, the greenback would fall flat on its face. The dollar hasn’t gone anywhere since. And if it were not for investors taking their money out of European banks and moving them into U.S. dollars, our dollar could have collapsed.
My second prediction back then was that the euro would decline in value. And it has. Prediction three was that both interest rates and inflation would rise. The yield on the 10-year U.S. Treasury has risen about 50% since then. As for inflation, if we calculate it the way the Consumer Price Index (CPI) was calculated when Jimmy Carter was president, it would be almost three times the rate the government tells us it is today.
I compared the rally in stocks that started in 2009 to the period following the 1929 stock market crash (1934 to 1937) and warned that stock prices would eventually follow the same fate they did after the “fake” stock market rally that followed the 1929 crash. I still have that opinion today.
Mark my words—gold bullion has a great future ahead.
As the prices for gold bullion face severe headwinds in the short term, the fundamentals are getting stronger. The most important sign that makes me believe it is that central banks continue to buy more in spite of a sharp decline.
It’s not mentioned in the mainstream media very often, but central banks from countries like Russia, Turkey, and others have been continuously adding gold bullion to their reserves.
I wouldn’t be surprised to see these countries continue to buy even more as their currencies—their primary holdings—continue to become prone to wild swings. Have you seen the charts of the U.S. dollar, Japanese yen, Canadian dollar, and euro lately?
Consider this: From January 2011 to May 2013, the Russian central bank purchased gold in 22 of 25 months. Altogether, the Russian central bank has purchased 207.4 tons of gold bullion. (Source: World Gold Council web site, July 2013.)
The central bank of Turkey, which became a buyer in October 2011, has added 329.2 tons of gold bullion to its balance sheet for 16 of the 20 months since then. The central bank of Turkey has started to use gold as collateral. (Source: Ibid.)
Dear reader, you must keep in mind that central banks are very conservative investors and try to preserve their wealth. If they continue to buy gold bullion as the prices come down, it only tells me one thing—they like the precious metal’s future prospects.
As I always say, and it is very well documented in these pages, the central banks will never say when they are going to … Read More
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