By Appointment Only

Concerned About the War on Cash & NIRP? Buy Gold & Silver!

Gold and Silver
Gold & Silver

As many of our readers know, there’s been an alarming amount of commentary as of late regarding the elimination of large bills (and possibly cash altogether). Another concern is the potential pursuit of a negative interest rate policy (NIRP) by the Federal Reserve. The purported benefits of a cashless society are that it will help to eliminate funding for terrorism, illicit activities, such as drugs and prostitution, and force individuals not currently paying taxes to do so. NIRP has already been implemented in Japan, Switzerland and other parts of Europe in an attempt to stimulate spending, in hopes that it will translate into GDP growth and bolster their respective financial markets. Both agendas are quite alarming, will result in less freedom, and have the potential to destroy the financial markets. In this article, we’re going to discuss the possible drawbacks of the above agendas and why gold & silver may be the best way to combat these potentially devastating policies.

The War on Cash

It’s been a slow creep, but over the years, there has been a trend toward reducing the use of cash in our society. It’s hard to believe, but we’ve gone from the use of bills as high as $10,000, last issued in 1945, to $100 today. On an inflation adjusted basis, $10,000 in 1945 would be worth $131,620 today! Even though $100 doesn’t buy you much these days, the financial elite are making a push to eliminate these “large bills.” As recently as one week ago, Larry Summers, former Treasury of the Secretary, wrote an Op-Ed for the Washington Post advocating the elimination of the $100 bill. This is just the most recent push for the elimination of cash. Plenty of other examples can be found here and here. Additionally, not surprisingly, the Chief Economist for Citigroup has also recommended that it’s time to eliminate cash. Of course, his comments are clearly self-serving, as an increase in the use of credit cards will help to bolster the profits of Citigroup and other credit card processing companies.

Issues

One of the major drawbacks in eliminating cash is that it greatly reduces privacy, allowing credit card companies and various other entities to monitor all of your financial purchases. It also makes it challenging for low margin businesses to continue to operate profitably. Additionally, eliminating cash makes it more difficult to conduct private-to-private transactions, such as purchasing vehicles or other high dollar items. These days, not many people are willing to accept personal checks for the sale of their valuables. Even cashier’s checks or certified funds can be counterfeited with relative ease.

Another potential issue with the elimination of cash is the ease by which the Federal Reserve can institute a bank holiday or capital controls. A bank holiday results in the freezing of your bank accounts, while capital controls limit your ability to use and withdraw funds from your account. While it may seem far fetched on the surface, I’m sure that citizens of Cyprus and Greece felt the same way until it became a reality.

Greece & Cyprus

In the case of Greece, many businesses and/or vendors refused to accept credit, which destroyed a number of small businesses. Those individuals that had access to cash and or gold and silver were substantially better off than 98% of the population. You may also recall the bank bail in instituted in Cyrpus in 2013. We all remember the bank bailouts spearheaded by Hank Paulsen, the U.S. Secretary of the Treasury, during the last recession. However, not many people are familiar with the term “bail in.” A bank bail in is actually much more devastating to one’s wealth than a bail out, as a percentage of one’s deposits are confiscated in an attempt to rescue the banking system. Typically, the more money on deposit, the higher the assessment. This doesn’t mean by any stretch that we advocate withdrawing all of your money from the banking system and stuffing it in your mattress or using all of your funds to buy gold and silver. However, we think it’s important to warn folks of the potential dangers of having your life savings tied up in the banking system. Again, a percentage of your wealth in physical gold and silver coins or bullion is a great way to hedge against this risk.

Why Gold & Silver

Considering that gold and silver have been used as money for thousands of years, it’s likely that they would be widely accepted regardless of the financial crisis, thereby allowing you to continue transacting for various goods and services. Additionally, because gold and silver are viewed as a way to maintain one’s purchasing power, they may in some respects be a better option than cash, as currencies are oftentimes devalued during a bank holiday. Just recently, we shared with our readers the value of gold in other major currencies; many of which have performed weakly in the foreign exchange markets over the past few years. As you can see, the price of gold has risen the most against the weakest performing currencies. There’s no reason to believe that gold and silver wouldn’t respond accordingly as measured in dollars if the dollar is further debased at some point in the future.

Negative Interest Rate Policy

In many ways, the elimination of cash, or at least large bills, and a negative interest rate policy go hand-in-hand. When central banks pursue a negative interest rate policy (NIRP), as we’ve recently seen with the Bank of Japan, the European Central Bank, and other major European countries, such as Switzerland, Denmark and Sweden, they effectively charge depositors for the privilege of depositing their money in the bank. If this sounds absurd to you, then you’re absolutely correct! At the time of this writing, the aforementioned countries/central banks are assessing negative interest rates to their depositors of -.1%, -.3%, -.75%, -.65% and -.5%, respectively. This means that after one year, a deposit of $100,000 in a Swiss bank will be worth $92,500. When faced with negative interest rates, the logical thing to do is to withdraw cash from your account and store it outside of the banking system. However, with the elimination of large bills and/or cash altogether, it would be impossible for depositors to do so. The goal of a negative interest rate policy is to encourage savers to spend their money, thereby increasing GDP, or to force them into equities, resulting in higher stock market prices. Both are good options from the perspective of central bankers, and help to give the appearance that the economy is healthy. Unfortunately, these policies are most devastating to retirees, who are on a fixed income, and are forced to take on more risk than they can handle.

NIRP in the U.S.

Up until this point, the Federal Reserve has pursued a zero interest rate policy (ZIRP). This has helped to keep interest rates artificially low in hopes that it will stimulate the economy. Unfortunately, the Federal Reserve has yet to receive the desired effects, and reportedly, are considering a negative interest rate policy (NIRP). If ZIRP can lead to the debasement of a currency, NIRP has the potential to cause the dollar to plunge. Since the value of gold and silver tend to be inversely related to the strength of the dollar (although, on occasions, there are exceptions), we can expect for gold and silver to rise in value if negative interest rates are pursued by the Federal Reserve. Since the debasement of any currency results in a reduction in purchasing power and a general increase in prices (especially with respect to imports), we recommend that you consider an investment in physical gold and silver coins or bullion – not in the gold futures market, which is highly leveraged.

If you happen to believe that a ZIRP policy in the U.S. is unlikely, we suggest checking out this chart from Zero Hedge. While it can be interpreted a few different ways, it appears as though investors are betting on the Federal Reserve implementing negative rates as early as 2017. While my local banker, his CEO and the talking heads on CNBC will deny we’re moving toward a NIRP, my suggestion is to follow the money.

Summary

In conclusion, we’ve discussed the current war on cash and the prospects of a negative interest rate policy by the Federal Reserve. The actions of the financial elite indicate that we’re moving toward a cashless society; most likely beginning with the elimination of large bills. Less cash in the system will make it easier for central banks to impose a banking holiday, capital controls, and a bail-in, if necessary. Of course, this also benefits a negative interest rate policy, as savers will be forced to divert their funds toward equities, causing a rise in stock prices, or to spend their money, resulting in GDP growth. Higher stock prices help to support the narrative that the economy is fundamentally strong. In either situation, an investment in gold and silver will help to maintain your purchasing power and provide you with options outside of the banking system. Having a bit of cash on hand probably isn’t a bad idea either.

Tony Davis
Tony Davis