Advantage: Euro

Editor's note: The following is a guest commentary from one of WND's sponsors, Kevin DeMeritt, president of Lear Financial. If you would like to learn more about investing in precious metals, take advantage of the free information Lear Financial is making available to WND readers.

You've probably heard the saying: "When it comes to your breakfast, the chicken was involved (eggs) ... but the pig was committed (bacon)." On Jan. 1, 2002, 12 European nations will understand that difference only too well. That's "E-Day," when Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain will start bidding a fond farewell to their respective currencies and commit to going fully "online" with the euro, Europe's single common currency, by Feb. 28, 2002, at the latest.

Although the euro became the common currency for 11 of these nations back in 1999 (that is, the participating currencies were fixed in value against one another and against the euro), the members were still allowed a foot in the door with the retention of their own paper money and coins. Now, however, that "foot" gets permanently removed, and the door will forever shut on such historic currencies as the French franc and the Italian lira.

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It will rank as the single biggest monetary event in history. What happens next, though, may severely weaken the world's dominant currency – the dollar.

To be sure, the euro has faced steep challenges. For example, there is no precedent of a large geographical area having a single currency that was not also a single state. The logistics of the changeover are mind-boggling, too. All in all, though, it appears that the nations involved will take this enormous leap of faith on the first of the year, and that's what has holders of dollar-denominated assets – and currencies like the British pound that are closely tied to the dollar –concerned. Here are five reasons why the euro could send the dollar into a tailspin:

1. Designed to out-dollar the dollar

As Jill Considine, president of the New York Clearinghouse Association, which handles most U.S. currency transactions says, "It's not just another currency. … There's going to be a new, competitive landscape."

Italian Prime Minister Romano Prodi put it more bluntly: "We are building a competitor to the dollar. There is no doubt about that." This, of course, was the intent of the euro – succeeding the dollar as the world's premier currency was part of the original "mission statement" of its creators.

2. Greater than U.S. economic strength

The economic might represented by the combination of euro nations is greater than the U.S. That's both in terms of gross domestic product and world trade. The total value of the EMU countries' stocks, bonds (both public and corporate) and bank lending amounts to U.S.$23 trillion – $3 trillion higher than the U.S.

The Financial Times estimates that up to $1 trillion in international investment may quickly shift from U.S. dollars to euros, sending the dollar into a tailspin. It follows that as more and more international trade is conducted in euros, the demand for dollars will decline to that extent, along with the dollar's strength and prestige.

3. A more secure central bank

This all-powerful, supranational European Central Bank will act like our own Federal Reserve, but with one important difference: Free of the political meddling the Fed endures, it will be far more independent and better equipped to push the strength of its currency. Managing it will be monetary hardliners headquartered in Frankfurt who have been raised on the strength of the deutsche mark. The member nations boast an average 25 percent gold reserve. With this kind of strength, management and independence, the world's financial markets will probably see the euro as a more secure storehouse of wealth than one backed by the only partially independent Fed. The bottom line? The "European Fed" will further add to the growing number of defections to the euro.

4. The new reserve currency?

Since the dollar has been the base of world trade, foreign banks have kept it in reserve. For example, the Japanese central bank holds an all-time record $350 billion reserve. As the euro comes online, just how much of that $350 billion will be traded for euros? Add all the other countries who might trade dollars for euros, and the number becomes astronomical.

5. Changing perception of the world's superpower

Never-before-seen terrorist events in America, a looming U.S. recession and a poor dollar performance against the euro in 2001 all set the stage for the Jan. 1 changeover. With the 12 European nations committing to the euro at this critical juncture, the world may begin seeing America as a suddenly vulnerable superpower. A loss of confidence in the dollar may ensue, and confidence in the euro may accelerate. That's especially so should terrorism escalate in the U.S. A report by the HSBC Group of London concerning the declining dollar stated, "The risk of a disorderly meltdown scenario is increasing, raising significant dangers for the global economy."

Is your portfolio tied to a weakening dollar?

So where should the wise investor put his money now that the countdown to a falling dollar is nearing zero? Probably not euros, that's for sure. While investing in the euro may seem a smart strategy in 2002, the volatility of this brand new and undeveloped market may simply be impossible to handle. There's too much currency risk, too much uncertainty connected with Europe's single common currency just yet. Until this market matures, you could be whipsawed out of any monies you invest here.

Instead, investors should follow the example set by the Austrian Central Bank and other world institutions. Rather than selling gold in expectation of 2002, the Austrian Central Bank – its nation being among the 12 euro nations – recently bought $1 billion in gold. This "currency neutral" asset exists outside the world of currency volatility and is a stable, storehouse of value, which is why the euro nations are busily building their gold reserves.

Like these institutions, you, too, should up your portfolio's percentage of the golden metal. A falling dollar is serious business. You can prepare for it the way people have preserved their spending power since time immemorial. That means reconfiguring your portfolio to include 15 percent in gold. This is a prudent move in any economy because gold is "negatively correlated" to dollar-denominated stocks, bonds and funds. That means not only do gold coins boast a superior track record to equities, gold often moves contrary to the direction of these paper assets and the dollar, providing you with a solid diversification. It's a smart move. Otherwise, you might just wake up to find that your portfolio was tied way too tightly to a falling U.S. dollar.

Special for WND readers, Lear Financial is making available free information on investing in precious metals.

With more than 20 years of industry experience, Kevin DeMeritt is president of Lear Financial, one of today's fastest growing and most successful precious metals investment firms.