Source: The Economist
“Imagine the world economy goes into a tailspin. There is panic selling of risky assets. Where should you seek safety? Cash is the most liquid asset; but which kind? The dollar is a natural focal point. Yet America’s fiscal indiscipline and its sizeable current-account deficit might give pause. Other currencies have their faults, too. There is one other destination you might consider, if only because others are starting to think the same way. And that is gold….Gold keeps some strange company. Ardent gold bugs seem to know a lot about firearms, the best places with access to fresh water and the best ways to preserve food….Consider the alternatives, though. The euro is flawed. It has no unique sovereign issuer to stand behind it. And the yuan is not a currency you can trade easily….And the dollar? As a global currency it has no peers. During the last big crisis, in 2008, the dollar rallied…Tellingly, the managers of those rainy-day funds seem a mite concerned that they are crammed into the same spot. The dollar’s central role in global trade and finance allows America to impose financial sanctions to great effect. It has been doing so with greater frequency, so Russia, for instance, has drastically cut the dollar share of its reserves, to 22%, while raising the shares of euros and yuan. Russia has been a big buyer of gold, too. In that, it is not alone. Net purchases of gold by central banks rose by 74% last year to the highest since 1971, the year the dollar’s peg to the gold price broke. Now, as then, there are growing concerns that the dollar is a crowded trade… It is why gold is starting to appeal again as a spot to converge upon.”
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