The financial turmoil in Greece has helped send investors around the world scrambling for the safety of gold and green – as in U.S. greenbacks.
Both gold and the U.S. dollar have been gaining in value. Last week, the price of an ounce of gold reached nearly $1,250, roughly double what it was just three years ago. And the dollar reached its highest value, compared with the euro, in 18 months.
It might seem as though this turmoil in Greece shouldn’t affect Americans. Greece is a relatively small country that’s far away. But it is a member of the European Union, and uses the euro as its currency.
And that’s the problem: Greece’s financial troubles are hurting all the countries that use the euro. About a decade ago, most continental Europeans traded in their traditional forms of money – the old French franc, the German mark and so on – and began using the new currency.
This change was supposed to offer investors around the world a new “safe haven” – a currency as dependable as the dollar.
But if more countries using the euro start becoming overwhelmed by government debt, investors will worry. They don’t want to be investing in a collapsing currency.
In addition, some investors are convinced that the money that Europeans and the International Monetary Fund have been using to try to fix the Greek debt crisis could lead to much more inflation in coming years.
When investors worry about inflation, they often buy gold and other metals such as platinum and silver. They are betting that if inflation takes off, these hard assets will rise in value too.
“Because governments around the world have run up such large budget deficits, and the central banks have been creating so much paper money, gold very likely will continue to appreciate very substantially over time,” said economist Richard Duncan, who recently wrote a book, The Corruption of Capitalism.
Most economists also believe the value of the dollar will continue to rise because the outlook here is brightening. Despite high unemployment and rising government debt, the United States is growing at a faster pace than Europe.
That drives more investors to want dollars and sends up the value of the U.S. currency. A strong dollar makes it cheaper for domestic stores to buy foreign imports, so that holds down the cost of clothes, TVs, shoes, Italian cheese and much more for U.S. consumers.
The positive image of the dollar also helps the United States cope with its own budget problems. Investors have been turning to U.S. Treasury securities as a safe haven.
That shift means the United States can attract global investors without having to offer high interest rates. That, in turn, makes it cheaper to finance the budget deficit.
And it makes other interest rates pegged to Treasury stay low, like home mortgage rates, which have been falling.
Still, the rush to invest in the United States has a downside. When the dollar’s value rises, U.S. manufacturers have a tougher time selling their products overseas.