Can The Canadian Dollar Collapse?

| About: CurrencyShares Canadian (FXC)

There has been much speculation regarding the stability of the US Dollar, especially as the Federal Reserve continues to use its printing press at full speed. Printing currency destroys the value of money---period. But how will other fiat currencies par with the debasement of the US Dollar, specifically the Canadian Dollar? Even though the Canadian economy is much more resource-based than that of the US, do not consider the Canadian Dollar as a safe haven. Here's why:

The Canadian economy is heavily dependent on the US

In 2011, Canada had a GDP of $1.737 trillion and $462.4 billion worth of exports. In other words, 27% of Canada's economy is exports, and 73.7% of all Canadian exports went to the US. (20% of the Canadian economy is exports to the US.) The US and Canada have the largest trade relationship in the world. This factor alone could have an adverse repercussion on the Canadian economy if the US experiences a depression or a collapse. The Canadian economy is still very tied with the US economy, but in the event of a US depression, Canada's economy could nevertheless recover rather rapidly if the right economic decisions are carried out, as its economy could replace the demand from the US to elsewhere.

The Canadian government's economic policies are to debase the Canadian dollar

As mentioned in the article Petrodollar Collapse, when--and not if--the US dollar eventually loses its status as the reserve currency, we should expect the Canadian Dollar to rise relevant to the US Dollar. This will create an environment where Americans will no longer be able to afford Canadian goods, essentially undermining the Canadian economy. Yet, as we have seen in recent years, Canadian politicians have responded to this crisis by a devaluation of their own currency, to again increase Canadian exports and jump start the economy. If Canadian politicians continue this policy, the consequences can become grave, as it will be a currency devaluation 'race to the bottom' and both countries will experience high levels of inflation. They purposely debase the Canadian Dollar in order to compete and increase exports.

What does the Bank of Canada have in reserves?

The Bank of Canada has negligible gold reserves. It currently stands, at 3.4 tons, in 80th place in the world in terms of countries with the most gold in reserves. Even countries like Mauritius, Nepal, Macedonia, and Sri Lanka have more gold than Canada. The gold share of national foreign exchange reserves is 0.3%. In other words, "zero". The majority of Canadian reserves are in US Dollar and other foreign currencies. Here is what they have.

  1. US Dollars - US $35.965 Billion or 53% of TOTAL RESERVES!!
  2. Other foreign "fiat" currencies (in US)- $18.954 Billion or 28% of Total Reserves
  3. Special Drawing Rights (IMF issued currency, in US) - $8.6 Billion or 24% of total Reserves
  4. Reserve position in IMF (in US) - $4,263 Billion or 6% of total reserves
  5. Gold (in US)- $187 Million or 2.7% of total reserves

It is clear that the Canadian Dollar is backed up by the majority of other "fiat" currencies, in particular the US Dollar. (Special Drawings Rights (SPR) is also a fiat currency that is issued by the IMF). If you believe that the US Dollar will collapse, then it makes no sense holding Canadian Dollars since they are backed up primarily with US Dollars.

What is the significance of the gold reserves held by the Bank of Canada?

The Bank of Canada holds 3.4 tones, or 1,09312.54 troy oz, of gold in reserves. At today's gold price of $1,730/oz, Canada's value of gold in reserves is approximately US $189,110,694.20 (189.11 Million). When we compare that with Canada's money supply in circulation according to the Bank of Canada, we have the following;

  • M1 (cash outside banks + checking accounts) is $611.7 Billion. Here the value of gold reserves represents .03% of M1.
  • M2 (M1 + Savings accounts + money markets) is $1.047 Trillion. Here the value of gold reserves represents .018% of M2.
  • M3 (M2 + large time deposits, long term deposits) is $1.461 Trillion. Here the value of gold reserves represents .013% of M3.


The Canadian dollar is not used in international markets

You cannot buy very much with Canadian Dollars outside of Canada. In very seldom circumstances you can, but overall it's not widely accepted as a form of payment.

In the end, the Canadian dollar is exposed to many risks ahead. Considering that: (1) Canadian politicians are artificially debasing the Canadian currency alongside that of the US dollar to help prop up Canadian exports, and (2) their increasingly socialist policies, the Canadian dollar is very likely to experience the same high inflation that its neighbor to the south will experience. The Canadian dollar is definitely not a safe haven from a US dollar collapse.
