This week, I had to give thought to something I haven't considered since my kids were young: Just what kind of a present do you get for a 10-year-old?

In this case, the 10-year-old isn't a child. It's a currency. The euro - now coin of the realm for 16 nations – celebrated its first decade on New Year's Day.

So why would we at Hard Assets Investor care about a fiat currency that's just managed to shake off its training wheels? Two reasons. Well, one and a half, really.

Reason One: No other currency in the world could be backed by more gold than the euro. I say "could" because the euro's value really isn't driven by gold. The gold window was effectively shuttered in 1971, long before the euro's birth. Still, the Eurosystem – the European Central Bank (ECB) and the national central banks of European Monetary Union (EMU) member countries - owns more than 36% of the world's official gold reserves, a third more than the horde maintained by the United States.

That leads us to Reason One-And-A-Half: During the tenure of current ECB President Jean-Claude Trichet, the euro's been more inflation resistant than the Yankee dollar. That, in part, explains why the euro has been gaining ground on the greenback as a world reserve currency and why we use the euro in our real-time monetary inflation calculation (see "Explaining Inflation ... Again").

The ultimate refuge from currency devaluation (read: "inflation") is a peg to gold. You can't, of course, turn in euro notes for bullion, but M. Trichet's policies would certainly get you closer to redeemability than the tenets of U.S. Fed chairman Ben Bernanke. After all, "Helicopter Ben" wants to dump greenbacks on the populace. Just try to imagine Trichet doing the same with his gold ingots. Doesn't figure, does it?

Now, don't get me wrong. The euro is a fiat currency, too. To be sure, there's been inflation in the euro zone; it's just not been as virulent as the Yankee variety. Over its 10-year life span, the euro inflated, in terms of its gold purchasing power, at a 9.8% annual rate. That hardly seems a record worth crowing about until you note that the U.S. inflated its currency at an 11.8% annual clip. Compared to the Brits, however, even American inflationistas seem circumspect. The world's third most widely held reserve, the pound sterling, has been devalued at a 13.1% annual rate over the past decade.

Euro Inflation In Gold

 European gold holdings aren't monolithic. Only 5% of the euro zone's gold is actually held by the ECB. Most of the gold and foreign exchange reserves held by EMU countries before the launch of the euro remain in the possession of their national banks. Under the terms of the 1992 Maastricht Treaty, however, these reserves are at the disposal of the ECB. It's as if the state treasuries of California and New York held gold pledged to the Federal Reserve.

 Prev12Next