The European Cash-vs-Gold Dilemma

For private investors the primary alternative to a gold investment has traditionally been the interest-bearing bank account. Why should that investor put money in gold when it doesn’t add interest? If he simply puts his money in an interest-bearing account, he’ll automatically come out ahead, or so the thinking goes.

The argument against this reasoning, of course, is a no-brainer. In an inflationary environment, fiat currencies like paper dollars lose value while gold moves up in value. The yellow metal can easily come out ahead if it climbs faster than currency climbs, even with interest added on. It is precisely this scenario that’s beginning to captivate European investors, even though Europe is currently undergoing deflation rather than inflation.

The European Central Bank (ECB) was the first central bank to delve into negative rates. Currently, the ECB is charging banks four tenths of a percent to hold cash overnight. Sweden, Denmark, and Switzerland also now have negative rates.  And back in November, Janet Yellen said if a change in economic circumstances necessitates such a move, our own Fed would not rule out going negative.

In a report this month, UBS strategist Joni Teves suggests European investors may be beginning to get the point.  According to Teves, “Should concerns about negative interest rates become more widespread, this could trigger an increase in physical gold demand out of Europe….”

That sounds about right, doesn’t it? If a bank is going to charge you to stash your cash there, why not move to an asset you know will perform much better than your local currency, minus the cut now take by your “friendly” banker?

Believe it or not, in 2015, European demand represented only nine percent or almost three hundred tons of global consumer demand for gold. If Teves is right, many European bank accounts that served as safe havens for investors may not be all that safe after all.

So the old argument that a gold investment is good only during inflation has been undercut by banks’ imposition of negative interest rates. Robin Griffiths, ECU Group Chief Technical Strategist agrees, “As you don’t get a return on money at the bank, the fact that gold doesn’t give you a return is not a negative anymore… Gold hedges other risks than just inflation; deflation is just as good …”

Now here’s something to think about.  I’ve suggested in previous columns you shouldn’t wait and buy gold; but rather you should buy gold and wait.  But let’s suppose you decide to wait and buy gold.  Suppose too that the Fed goes ahead with Janet Yellen’s implied intention of last November to impose negative interest rates in the near future.

Where will your retirement funds be if all your waiting simply amounts to negative interest levied against more of your savings – the extra cash you managed to accumulate during the time you waited?  Not to mention how far back in the gold-buying line you’ll be, watching other buyers drive the price up.

Don’t wait for the banks or the government to make the decision for you.  Entitle yourself to peace of mind, and invest in physical gold.  You’ll be in good company from across the Atlantic.