Gold Rally Shows Investor Discomfort with Dollar and Euro: Greenspan

The US is grappling with its large budget deficit and controversial program of quantitative easing.

To get a sense of what the market feels about all this, one can’t get the best picture by merely looking at the performance of the US dollar versus other currencies, said former Federal Reserve chief Alan Greenspan on CNBC.

Against the euro, for example, the US dollar hasn’t seen a sustained decline because the two are “almost equally flawed” currencies, said Greenspan.

Gold, however, doesn’t suffer from the same problems. Greenspan said gold has acted as a universally accepted form of payment throughout time; its value doesn’t depend on changeable conditions like collateral, backings, or signings.

In fact, when currencies fail (like Germany’s did in WWII), the market naturally reverts to gold as an instrument of payment.

Against gold, the US dollar has been falling rapidly in recent years.

This shows that there are investors who are uncomfortable with what’s going on in the US (and the euro zone). Moreover, foreign central banks are among the buyers of gold, which reveal their lack of confidence.

If the world's central banks do indeed move away from the dollar, it could spell doom for the currency.

Nevertheless, Greenspan doesn’t think society has shown any indication of wanting to go back to the gold standard or replace fiat currency with gold.

However, to get a sense of confidence in currencies like the US dollar, “watching the price of gold isn’t too bad,” he said.