Some call it the “War on Cash.” Others, citing studies, suggest we are approaching “Peak Cash,” referencing the similar transformation that will accompany environmental constraints such as “Peak Oil.”
No matter what you choose to call it, the world’s advanced economies are all hurtling toward a system of fully digitized money—perhaps coming as soon as this quarter-century. Perhaps the biggest beneficiary of this development would be gold.
Abolition of Banknotes?
Since at least the 1960s, when new legislation reduced the silver content of circulating U.S. coins to zero, the powers that be have taken steps toward fundamentally altering the way our physical money works. This is a trend decades in the making. In most cases, it has been a progressive tip-toe toward one definitive outcome: the eventual death of cash.
The elimination of legal tender notes and coins is an idea—and an economic policy, at this point—has been pursued gradually, and is always justified by the notions of convenience and efficacy. It has also been a candle burning at both ends: fraud and money laundering are cited as cause for eliminating large-denomination banknotes, while at the same time inflation has rendered the smallest-denomination coins superfluous. In many countries, the equivalent of $2 notes or $2 coins tend to make the $1 note less necessary or useful, as well.
Moreover, the Kansas City Fed recently published a position paper that essentially extols the benefits of abolishing cash. The authors suggest that this removes one of the key constraints on extremely unorthodox monetary policy having its intended effect. Notably, they compare the abolition of paper currency to removing the “encumbrance” caused by the gold standard.
The paper directly comments about the possible mechanisms central banks could use to make paper money trade at a discount compared to its digital counterpart. (Analysts writing for Market Slant point out that this is an upside-down arrangement, “tails wagging dogs,” because “the real thing almost always trades at a premium to the tracking product.”)
Beyond this underhanded manipulation, the perceived virtue of convenience would incentivize the use of digital money. In this way, central banks could effectively end physical money without appearing to have done so in an overt or autocratic manner (such as outright declaring a prohibition on all circulating banknotes). It’s surreptitious.
As the editors at Market Slant rightly observe, even in the far-fetched case of outlawing gold ownership, “the government has far better tools at its disposal these days” to, in effect, confiscate gold.
Gold During Currency Crises
2016 has already reaffirmed the long-held wisdom about gold’s role as a safe haven in times of economic turmoil. The specter of the death of cash would amplify this type of scenario. Frank Holmes from U.S. Global Investors argues that, in the event that cash were eliminated, “gold’s role as a store of value would become even more apparent.” He and others forecast that such a scenario would cause demand for gold to skyrocket in spite of high prices.
Whether you’re worried about currency stability or the real possibility that physical money will disappear in our lifetimes, it’s clear that gold is the best way to preserve your purchasing power in the event of such uncertainty.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.