HEADLINE, From Future
"€10,000 Bid For Loonie"
Ottawa: Bidding was quiet, but spirited. Attendees
at auctions of collectibles are not known for any outward
expression of enthusiasm. That was the case, till the
last Canadian dollar bill printed was auctioned. Winning
bid was by phone, and believed to be a Middle Eastern
buyer. After the auction, one bidder spoke to us, "Ever
since the collapse of the U.S. dollar we knew this day
might come. Imagine, the Euro is now legal tender in
As the name implies, this article is the third in a
series on moneyization. For those not familiar with
the previous two articles, reading them in the archives
of one of the web sites on which they appeared is recommended.
Our topic, moneyization, is the global financial phenomenon
of individuals and businesses moving their wealth to
monies in which they have the highest confidence. Monetary
complacency is no longer the norm. People will simply
not hold a money, including that printed by their own
government, if they do not believe it will serve as
an adequate store of value. Many would give their life
for their country, but are unwilling to hold the money.
Moneyization, the tendency to shift to stronger monies,
has many names. Dollarization and currency substitution,
for example, have been terms used for this phenomenon.
Rational individuals and business will not hold weak
monies, like dollars, or accept payment in weak monies,
like dollars, if they understand the fundamentals. To
do so is to be willing to have the value of your wealth
reduced. The whole reason so many of us are interested
in the Gold market is that we too understand that holding
a weak currency is no longer the only option available.
Normally discussions as this focus on the wisdom of
individuals shifting their wealth to include Gold. This
strategy is appropriate for those individuals living
in nations where the future value of the currency is
in serious doubt. The United States, Canada, Australia,
and others are included in this list. A study of trends
in moneyization, the active avoidance of unattractive
currencies, suggests that many of today's currencies
will not exist tomorrow. In money, survival of the fittest
will indeed be the rule. Where money is concerned, Darwin
Before proceeding to the remainder of today's thoughts,
a warning to businesses. Too many of you are taking
the risk of invoicing in a potentially weak currency,
when doing so is not necessary. If your business is
invoicing in dollars, the value of your payment when
received will be worth less on receipt than the day
of the invoice. When you invoice in dollars, or some
other weak currency, that action is costing your business
money. Whenever possible, invoice in a stronger currency
such as the Euro. Your business should be invoicing
in value enhancing currencies. Indeed, a day will arrive
when invoicing in Gold will the norm. Sorry about that
Since last we talked, what has happened? Remember, that
we are learning to price currencies in Gold. As the
world moves to Gold as the primary money, we will buy
"things" with units of Gold. The first graph
portrays the recent Gold price for four monies, from
the U.S., Australia, Canada, and the European Union.
Remember, Gold is the price of a national money, and
is the vertical axis in the graph using ounces of Gold
A reason for coming to understand the price of currencies
in Gold is to overcome an illusion that sometimes misleads
investors. The foreign exchange value of a money can
go up against the dollar but yet still have a negative
trend for its purchasing power. In foreign exchanges
markets the dollar is a "ghost money," facilitating
the statement of different monetary values with a common
reference. Real money is Gold, and should be the common
Using Gold to price currencies removes that money illusion.
In the following table, recent trends are shown for
the Gold price of six currencies. Australia is the only
one that has a positive movement in terms of Gold, and
has the only arrows pointing up. The remainder, regardless
of what they appear to do against the U.S. dollar, have
fallen in terms of Gold. Australia's unique position,
in terms of national resources and proximity to China,
probably accounts for that money's performance.
Remember the words of Robert Mundell, "Monetary
mass is important"(Mundell,2003,21). Citizens living
in any money need ask themselves several questions.
Does my national money have the "monetary mass"
to be a survivor money 25 years from now? 10 years from
now? Who else around the world wants my nation's money?
Are imports invoiced in my national money or another?
If you can not answer all those questions in a way that
assures your mind that your national money will rise
to the top of the Currency Pyramid(Cohen,1998), then
switching to Gold is the only lighted tunnel.
The article may be longer than originally intended as
reasons for digressing keep popping to mind. For one,
why do banks in the U.S. and Canada not offer accounts
denominated in other currencies and Gold? The answer
is probably obvious. They are too busy levying excessive
service charges for overdrafts caused by accelerated
check clearings or service charges for debit/credit
card usage even if money is in your account when posted.
Service charges, not service, are the focus of banks.
Guess we answered our own question, purging our system
of some frustration. You might ask your bank why they
do not offer an account denominated in Euros or Gold.
Time they offered accounts for today rather than yesterday.
We might even some day have viable internet methods
of transacting with Gold.
Your goal is to start thinking about what the world
of money will be like in the years ahead. Money and
the way we use it are not constants. The technology
of money changes. Checks have not always existed, and
were invented to get around limitations on the ability
of banks to transfer money between accounts. One of
the revolutions in banking was the requirement that
U.S. national banks pay checks at par, not at a discount.
Do you think Lincoln bought his theater tickets with
a Visa card? Today, a new global explosion in the technology
of finance is again freeing consumers from the shackles
of yesterday's money. And note, the Euro was the first
Part of that new found freedom is the ability to move
wealth into monies that are of greater value. According
to data prepared by the International Monetary Fund,
in 2001 on average 34% of bank deposits in 85 countries
were denominated in a national money of a country other
than that of the residence of the depositor(De Nicolo´,
Honhohan & Ize, 2003). Regardless of the country,
the ability to move to a better money is available in
some shape or form. And most important, people are willing
to exercise that ability.
Where are they moving their money? Gold and the Euro
are clearly benefitting from these trends. Not too long
ago we wrote that a battle of monies was beginning to
unfold. In one corner was the U.S. dollar, held nearly
universally, and in the other corner was the newcomer,
the Euro. Around the world consumers and businesses
are making their bets. Which currency will they hold?
Which money "wins", rising to the top of the
Currency Pyramid, is important. The "winner"money
will reign for years as the top fiat money. Invoices
for global trade will be written in that money. Commodities
will come to be priced in that money. Bond offerings
will be denominated in that money. The "winner"
gets lower prices for imported goods. The "winner"
money will get lower interest rates as demand for the
"winner" money rises.
The Euro seems to be coming on strong as it rounds the
second turn. Team Euro did not intend to be so far out
in front so early in the race. Perhaps Team Dollar just
does not have an effective race plan or has failed to
adequately maintain their vehicle. Resting on your laurels
is sure way to place rather than win. The ECB and European
Commission do not seem to have intentionally planned
for the Euro ascendency, but lucky is better than good
Serious students of the Euro have been better prognosticators
than many, certainly better than the U.K. ideologues.
Robert Mundell, with a well-deserved Nobel prize, saw
the potential early,
"Looking at the international monetary system
as a constantly evolving oligopoly, it seems inevitable
that a countervailing power would develop to challenge
the dollar. Now at the close of the 'American century,'
the euro has appeared as a potential rival, the countervailing
power to the dollar"(Mundell,2003,p.17).
This author does not believe Europe is "better"
than the Americas, but patriotism can not be allowed
to sway our analysis of change in the world. Two errors
dominated the forecasts that misjudged the Euro's potential.
First, when a monetary union is formed, particularly
one with the ECB's mandate, depreciating the money as
an economic tool is no longer an option. Competitive
devaluations are no longer a policy alternative for
European nations. That reality has been slowly emerging
in many sectors of the EU. Both management and labor
realize that change is necessary if Europe is to work.
The idea of a thirty-five-hour week is fading, and the
Germans are going to shop on weekends. Labor's vote
on boards is likely to be weakened. Change is evolutionary,
but in the EU it is in the right direction.
A second misunderstanding relates to the difference
between absolute advantage and comparative advantage.
Many developing countries have an absolute advantage
in the price of unskilled labor. T-shirts, for example,
are going to be cheaper when produced in these countries.
Europe, as does other countries, maintains a comparative
advantage in some goods and services. The skills of
their labor offset the higher costs. Wages per hour
or day are only one metric. What those workers produce
in a period also matters, as does how well they produce
it. Mercedes Benz is made in Europe for just that set
of reasons. Now, global competition is putting pressure
on European productions costs in order to maintain competitive
The Euro has fundamental economic change and monetary
mass going for it. Let us focus on monetary mass. In
Chart Two is plotted the ratio of the Euro money supply
to the U.S. dollar money supply, using M-2 for this
exercise. Both are expressed in dollars for comparability.
We acknowledge that the money supply definitions are
not exactly the same, but close enough. For that reason,
the big picture is important rather than the squiggles.
Also plotted in that graph, using triangles, is the
value of the Euro in dollars, using the right-hand axis.
The size of the Euro money supply appears now larger
than that of the dollar money supply, and relative to
the size of dollars is rising. Around the world more
financial assets are still denominated in dollars rather
than Euros, largely due to the humongous amount of U.S.
debt that has been sold throughout the world. However,
the size of the Euro, as a money, is growing faster
than that of dollars. In the words of Mundell, the Euro
has the monetary mass.
Yes, rising supply should push down prices. What needs
to be remembered is money cannot be created without
demand. A large part of any money supply is created
when banks make loans. What is evident is that demand
for Euros is rising faster than the supply because the
price, or value, of the Euro is rising. The Euro is
gaining acceptance around the world, and in particular
those areas adjacent to the European Union. In previous
articles, the great move of consumers and nations to
using the Euro was discussed.
The size, or mass, of a money helps to determine its
demand. When companies want to borrow money they do
so where a pile of money is waiting to purchase their
bonds. That has been happening. Borrowers around the
world have been moving to Euro denominated debt. As
that happens, the Euro gains credibility. The birth
of the Euro was not without detractors and some rough
spots. Now though, the Euro is beginning to challenge
the dollar on world money markets. As this process goes
on, the attractiveness of the Euro as a reserve currency
and store of value will grow. Monetary history is in
The third chart portrays that relative money measure
along with the U.S. dollar price of Gold. As the Euro
has gained in popularity and grown in stature, it has
become more valuable. The Gold price of the dollar has
fallen, and the dollar price of Gold has risen. This
situation demonstrates the global shift away from U.S.
dollars to Euros. As the value of Euros rises due to
expanding reliability, acceptance, financing, and mass,
the dollar price of Gold should continue to rise.
As a rising price of Gold indicates a falling value
of the dollar, what this graph also shows is that money
demand in the world is shifting toward the Euro and
away from the dollar. A hundred years ago this happened
to the British pound. A shift in global monies is rare,
and one wants to be on the right side of it by owning
Gold. The U.S. dollar will not be vanquished and disappear,
rather it will become a second money. That process of
moving to second place can be either painful or unpleasant,
enjoyable not being an alternative. The work of Allegret
and Sandretto's suggests instability,
"The appropriate theoretical framework for such
a debate is hegemonic stability, according to which
the shift from a unipolar organization of the IMS[International
Monetary System] based on the dollar to a multipolar
organization should lead to an unstable equilibrium"(Allegret
The term "unstable equilibrium" is economist
speak for a potentially ugly situation. Their view of
the unfolding process is not positive. The hegemonic
battle between the dollar and the Euro will be painful.
As the allotted space has been exhausted, that will
have to await the next installation of Moneyization.
In the meantime, you are welcome to join us on this
journey of monetary and precious metal inquiry each
month THE VALUE VIEW GOLD REPORT and weekly in TRADING
Allegret, J.P. & Sandretto, R.(2002). The Euro as
a Stabilizing and Harmonizing Force in the International
Monetary System. Eastern Economic Journal,28,105-120.
Retrieved March 25, 2004 from ABI/Inform Complete.
Cohen, B. J.(1998). The Geography of Money. Ithaca:
Cornell University Press.
De Nicolo´, G., Honhohan, P. and Ize, H.(2003).
Dollarization of the Banking System: Good or Bad?(IMF
Working Paper 146). Washington, D.C.: International
Mundell, R.A.(2003). Currency Areas, Exchange Rate Systems,
and International Monetary Reform. In Salvatore, D.,
Deon, J.W. & Willett, T.D.(Eds.), The Dollarization
Debate(pp.17-45). New York: Oxford University Press.
Ned W. Schmidt,CFA,CEBS
is publisher of THE VALUE VIEW GOLD REPORT. That report
now includes a weekly message, TRADING THOUGHTS, to
help investors identify timely points for buying Gold
and Silver. You can join him for the Gold Super Cycle
His monumental report, "$1,265 GOLD", which
has now been read in 12 countries, has 255 pages and
98 graphs, is available at www.amazon.com
or from the author. Ned welcomes your comments and questions.
His mission in life is to rescue investors from the
abyss of financial assets and the coming collapse of
the U.S. dollar. He can be contacted at firstname.lastname@example.org.