01 August 2011

Can Gold Replaces USD as the main Foreign Currency Reserve Fund?

While we are waiting lawmakers in U.S. to approve the increment of ceiling of the U.S. Debt Level, it is an argument from the public to replace USD with the Gold. Currently the gold price in U.S. stood as U$1,600.00 and above. I believe that while governments from other countries are still seeking for alternative investments to reduce its reliance on USD, we cannot deny that USD is still the best (or in another word, the ONLY) foreign currency that have the most liquidity in the world as compared to other currencies / alternative investments. If the government keep on buying Gold as foreign currency reserve fund, then it will drives gold price up and ultimately create a bubble in the gold market, which we do not like to see.

However, in my humble opinion, gold cannot replace USD as the main Foreign Currency Reserve Fund, but it will be the supplement to the USD as the correlation is somehow very low if not negative to each others. In this period of time, there is still no strong evidence to tell us that Gold can replace USD as the main Foreign Currency Reserve Fund, however the FOREX market will remain unstable until the lawmakers approve the above increment of ceiling of debt level.

Quote from Reuters:

(Reuters) - Gold fell more than 1 percent on Monday as U.S. lawmakers neared an agreement to raise the country's debt ceiling.
The most-active U.S. gold futures fell more than 1 percent to $1,614 an ounce and spot gold was down 0.9 percent at $1,611.89, off a low of $1,606.79.

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