Euro Crisis Fueling Gold`s Rise as Key Currency

Citigroup analyst David Thurtell said, “People are saying, ‘If Greece is in trouble, we don’t want to buy euros anymore. People have been going out of euros and into gold.”

In the 19th century, gold was used as a reserve currency but was replaced by the U.S. dollar after the Second World War with the establishment of the Bretton Woods system. The dollar’s status, however, is fading fast.

The European Central Bank said the share of dollars among reserve currencies worldwide dropped from 70.9 percent in 1999 to 64.1 percent in 2008. Amid the global financial crisis, the share dropped to 61.5 percent last year.

The share of the euro, on the other hand, has continuously increased from 17.9 percent in 1999 after its launch to 28.1 percent last year. The euro has become the world’s No. 2 reserve currency a decade after its inception.

Confidence in the euro is also dropping, however, in light of Greece’s fiscal crisis and the ripple effect throughout the euro zone to Portugal, Spain and Italy since the end of last year. Skeptics warn that if the crisis spreads throughout the rest of Europe, the euro system will collapse.

Amid the jitters, the Chinese yuan has emerged as an alternative currency. “In the wake of the Greek crisis, important conditions for the euro to become a key currency have been undermined,” the Bank of Korea said Tuesday in its report, “The Future of the Euro.”

The euro, which had been the leading candidate to replace the dollar as the global standard, is not expected to leapfrog the greenback. Instead, China is predicted to take this opportunity to globalize its currency.

The yuan accounts for only 0.2 percent of global foreign exchange transactions and does not meet basic conditions such as coming from a developed financial market, so considerable time is needed for the Chinese currency to ascend.

In an RBS survey of foreign reserves managers at 43 central banks worldwide, more than 50 percent said the yuan will comprise five percent of global foreign reserves in 2026 at the earliest.

The greenback’s power is growing weaker, its nearest competitor euro is in trouble, and the yuan is not ready to take over. So gold -- the ultimate safe asset -- is expected to grow stronger in influence.

In particular, major foreign currency holders such as China and India are finding alternatives to the dollar but experts say there is no good alternative other than gold.

Korea ranked sixth last month in the amount of foreign reserves with 278.9 billion dollars, but its share of gold is the world’s lowest at 0.2 percent.

“To diversify foreign reserves, we are paying attention to the international financial market, including that for gold, but we have not bought gold yet,” said a Bank of Korea source. “Gold has grown too expensive so we’re not sure whether it’s the right time to invest in it.”

Former Bank of Korea Gov. Lee Seong-tae was negative toward gold investment, but the central bank is expected to buy gold soon. His successor Kim Choong-soo has not publicly commented on gold, but is known to have closely monitored the trends of global commodity prices.

jaeyuna@donga.com