The Death of the Euro

On June 23 the UK elected to abandon the European Union (EU) in what can be characterized as a 52% to 48% squeaker. Emotional reactions to the event have ranged from giddy triumph in more rural, traditional areas to stunned disbelief in London.

Political figures differ too on the significance of the vote. Former London Mayor and Brexit champion Boris Johnson dismissed the “remain” group’s fears over the economic and political consequences as “hysteria,” while German Chancellor Angela Merkel expressed “deep regret” over the move.

But no doubt Jim Mellon, chairman of Burnbrae Group, a private equity and venture capital firm, has voiced the most alarming take yet.  He claims the euro, the currency used by 19 of the EU’s remaining 28 member countries, almost 340 million individuals daily, is “unsustainable,”  and will likely collapse within five years, perhaps sooner.

After the dollar, the euro is the second largest reserve currency and the second most traded currency in the world.  If Mellon’s correct in his projection, an end to the currency would cause serious global ramifications and, worryingly, those damaging repercussions will inevitably reach into the U.S. economy.

According to James Sagner, associate professor in the School of Business at the University of Bridgeport, Connecticut, “The most common currency for transactions between U.S. and European businesses is the dollar….But the euro is a close second, and that leaves anyone doing business with Europe very exposed.”

Werner Bonadurer, a clinical professor of finance at the W.P. Carey School of Business at Arizona State University, takes the scenario even further. If the euro were to collapse altogether, he envisions a “multiyear” depression in Europe, and a recession lasting several years in the U.S.

Here in the States, we kid ourselves if we think we’re insulated from the effects of the euro, or somehow protected by the dollar. It’s all fiat currency, and as such its value entirely depends on circumstances far outside our control. Completely un-coincidentally we read more every day about how post-Brexit investors are flocking to gold as a safe haven—an attempt to protect our worthless fiat currency from their worthless fiat currency.

Clearly gold has been a beneficiary of Brexit, surging twenty-five percent since the beginning of January. (While the breakaway itself from the EU officially occurred on June 23, Brexit talk had been in the air for months.)

The question remains: if the euro continues to weaken, will you continue to rely on stocks, bonds and other dollar-denominated investments? Although you shouldn’t panic, it’s wise to think the unthinkable and to assess your nest egg’s vulnerability to destructive forces that can gut your portfolio, and your retirement.

The question you need to ask yourself is why are investors around the world rushing to get gold?  Because gold’s value can’t be destroyed by disaffected British voters, workers in China, criminals on Wall St. or even everyday inflation’s erosion of your dollar’s buying power.

As professional investors look into even the short-term future they’re seeing currency collapses, negative interest rates, quantitative easing and other central bank flails and misfires—and they want to protect their wealth. They know gold will hold onto its value long after the euro, or any other fiat currency, becomes a mere souvenir.