If Europe uses euros as currency, should then Africa use Afros as currency?
The euro is the official currency of the Eurozone, which is a monetary union consisting of 19 of 28 member states of the European Union. The euro was introduced in 1999 as an accounting currency, but physical coins and banknotes entered into circulation in 2002. The currency is managed by the European Central Bank, based in Frankfurt. Its international code is “EUR”.
Since it is a currency of the second largest economy in the world, the euro gained its position as an international reserve currency. Indeed, it is the second most widely held currency, after the U.S. dollar. However, the European sovereign-debt crisis questioned the soundness of the euro. The problem with the Eurozone (and its currency) is that it consists of several independent governments and one common central bank. Such a unique structure leads to the tragedy of commons: each Eurozone’s member can externalize part of the costs of its deficit and make the whole euro group carry the burden of the costs of irresponsible policies. Therefore, the euro is another fiat money, just like the greenback, but with a flawed and unstable institutional background.
Euro and Gold
The euro is one of the most important alternatives to the U.S. dollar among fiat currencies. This is why there is often a positive link between the euro and gold: both assets have negative correlation to the greenback. However, the relationship is far from being a perfect correlation, as one can see in the chart below. This is because gold is not merely an alternative against the U.S. dollar, but also against the current monetary system based on fiat currencies. Therefore, in some cases the euro and the dollar both lose (or gain) a ground against gold.
Chart 1: The EUR/USD exchange rate (red line, right axis) and the price of gold (yellow line, left axis, London P.M. Fix) from 1999 to April 2020.
And, as the chart below shows, the gold’s performance is similar both in the US dollar and the euro. The dollar-denominated price of gold rose almost six times, while the euro-denominated price of gold surged almost six and half times. It shows that gold is a hedge against depreciation in euro as well as in the US dollar.
Chart 1: The price of gold in the U.S. dollars (green line) and Euros (red line) as index (100 = January 4, 1999) from January 1999 to April 2020.
FAQs
This is why there is often a positive link between the euro and gold: both assets have negative correlation to the greenback. However, the relationship is far from being a perfect correlation, as one can see in the chart below.
Is the euro backed with gold? ›
Fiat money is a type of currency that is not backed by a precious metal, such as gold or silver. It is typically designated by the issuing government to be legal tender, and is authorized by government regulation. Since the end of the Bretton Woods system in 1971, the major currencies in the world are fiat money.
Do gold and Eurusd correlate? ›
EURUSD and XAUUSD (Gold): The moderate positive correlation indicates that EURUSD and the price of gold (XAUUSD) tend to move somewhat in sync at various time intervals.
What is a criticism of the euro? ›
By far, the largest drawback of the euro is a single monetary policy that often does not fit local economic conditions. It is common for parts of the EU to be prospering, with high growth and low unemployment. In contrast, others suffer from prolonged economic downturns and high unemployment.
Why was gold so important to Europe? ›
During the Middle Ages, gold and silver coins saw widespread use as currency in Europe, and facilitated trade with the Middle East and Asia; the shortage of these metals therefore became a problem for European economies.
Why was gold important to the European? ›
With this precious yellow metal, armies, mercenaries, and gunpowder weapons could be paid for, and their kingdoms could be defended and expanded. Gold has always been rare, but at the end of the 15th century, it was exceptionally so in Europe.
Which currency is still backed by gold? ›
What countries are on the gold standard today? Currently, the gold standard isn't used as the monetary system for any nation. The last country to abandon it was Switzerland, which severed ties between its currency and gold in 1999. Not coincidentally, Switzerland has the seventh largest gold reserve of all countries.
What is the new currency backed by gold? ›
Zimbabwe has introduced a new gold-backed currency called ZiG - the name stands for "Zimbabwe Gold".
Why isn't US currency backed by gold? ›
In August 1971, Nixon severed the direct convertibility of U.S. dollars into gold. With this decision, the international currency market, which had become increasingly reliant on the dollar since the enactment of the Bretton Woods Agreement, lost its formal connection to gold.
What is gold most correlated to? ›
Correlations. Gold provides diversification in a portfolio and is often correlated with the stock market during risk-on periods, while it decouples and becomes inversely correlated during periods of stress.
While Gold holds influence over the value and stability of currencies, it is just one factor among many that can shift a currency's value. Global markets, political events, central bank decisions, trade, and a slew of other events can affect the value of a currency, as well as gold, rapidly or over time.
Is USD connected to gold? ›
An example of a fiat currency is the dollar. The U.S. government officially ended the relationship between gold and the dollar in 1976.
Why will the euro fail? ›
The oversized reliance of major economies such as Germany and Italy on Russian gas has left investors unnerved, with economists forecasting a much quicker and more painful recession in the euro area than in the US. Added to that is the difference in interest rate levels in the US and the eurozone.
How has the euro failed? ›
By creating a single currency without the institutions to sustain it, the E.U. wound up with low growth, high unemployment, and popular disaffection.
What are the arguments for the euro? ›
Using a single currency makes doing business and investing in the euro area easier, cheaper and less risky. By making it easy to compare prices, the euro encourages trade and investment of all kinds between countries. It also helps individual consumers and businesses to secure the best prices.
Which currencies affect gold? ›
Because gold is generally dollar-denominated, a stronger U.S. dollar tends to drive gold prices lower, and vice versa. Real and expected inflation rates also affect the price of the metal.
Does gold go up when the economy goes down? ›
Due to its reputation for being a safe-haven asset, gold tends to perform well during a recession. For example, when the stock market collapsed in 2007, investment demand for gold spiked and continued to rise, and gold doubled in value between 2007 and 2011.
What happens to gold when the dollar weakens? ›
When the dollar weakens, gold prices tend to rise, as gold becomes more affordable for investors holding other currencies. We believe the Fed will ultimately lower rates by 175 basis points in the next 18 months. With lower rates comes a weaker U.S. dollar. This could be the catalyst for higher gold prices."
What economic events affect gold prices? ›
The price of gold is reaching new all-time highs, but its price has fluctuated dramatically throughout history, influenced by inflation, geopolitical tensions, supply and demand, and mining and refining costs, reaching a century-long low in 1970, followed by an all-time high 10 years later (adjusted for inflation).
