What the Advent of E-Money Means for Gold

Graph paper, a calculator and a pen on it.

It’s amazing how quickly things change.

Not so long ago, the idea that you would no longer use notes and coins would have seemed crazy.

And by ‘not so long ago’, we mean within the last 10 years.

But that has all changed.

Even though most folks use cards or online transfers to pay for things, cash is still handy for small purchases…or to pay for a split bill at a restaurant…or to give the kids pocket money.

But don’t expect that to last for long. The era of cash (physical in-your-pocket money) is almost over.

And despite the fact that this is part of a technological revolution, the biggest winner from the end of cash could be gold.

We’ll explain why…

There’s a lot of stuff in the press about ‘e-money’, digital currencies, and virtual currencies.

The idea has moved from a pie-in-the-sky concept of money, which was really at the fringe of finance, to become a mainstream topic.

To the extent that central banks, including the Bank of England and the Bank of Canada, are seriously looking at proposals to adopt a fully digital currency.

That would mean no more coins or bank notes. For folks who rarely use physical cash, they may not notice the difference. They may even see it as a blessing.

The convenience is clear. No more annoying trips to an ATM machine to get a measly $20.

But there will be one big change that few will notice or even care about. And that change is the reason why we like gold as the best bet on the coming revolution in e-money.

The end of money

Just note, that when we talk about e-money, we’re not talking about ‘private sector’ digital currencies, such as Bitcoin.

Because the proposals and research underway by some of the world’s central banks is all about creating their own alternative to Bitcoin — a central bank-created e-money.

In this scenario, national central banks would have the sole power and authority to create the e-money legal tender.

(Note: Legal tender means that you must accept the money as a form of payment. In Australia, Australian dollars are legal tender. You have to accept them. US dollars are not legal tender in Australia. Therefore, if someone offers to pay you in US dollars, you don’t have to accept it, and can demand Aussie dollars.)

One proposal by a couple of academics at the Bank of England, is that central banks could issue e-money as percentage of a nation’s gross domestic product (GDP). Their proposal is 30%.

In Australia’s case, with a GDP around $1.8 trillion, the Reserve Bank of Australia (RBA) could issue around $540 billion in e-money.

Here’s the problem — and it’s a big problem. Right now, the commercial and retail banks are mostly responsible for the creation of credit and money in the banking system.

It’s not perfect, but you could argue that it’s a ‘demand driven’ system. That means if the demand for loans falls, banks are unable to increase credit. That can lead to a credit contraction and a slowdown in the economy.

That’s not a bad thing. Too much credit growth leads to bubbles, followed by an inevitable crash.

But if the central bank takes control of credit creation, that’s a whole different story…

It’s all about to change

With the central bank creating credit, suddenly, the credit market would switch to a ‘supply driven’ system.

This isn’t entirely new. There is an element of that already in place. However, the US Federal Reserve (Fed) and European Central Bank (ECB) have taken it to a new level.

Their asset purchase programs are an example of ‘supply driven’ credit. Because consumers and businesses haven’t increased their debt levels as much as governments would like, governments have increased their debt levels.

And in order to support that government credit growth, the Fed and ECB have agreed to buy the debt. The central banks do that by creating fresh money on their balance sheet, and then transferring it to the government in exchange for government bonds.

It’s a simple process. It’s also a process that would be without limit in a non-cash world. Central banks have sole control over credit creation. Theoretically, they could issue as much or as little credit as they like.

Although, we know the reality. It wouldn’t be about how little they would create, it would be about how much.

We’re all for technology. We love any technology that helps improve things. But a central bank-controlled e-money system isn’t an improvement. It’s the opposite.

Giving complete control over the value of money to a group of bodies, which has only succeeded in destroying the value of money for the past 50 years, is a bad, bad idea.

It’s for that reason we see gold as the best investment to hold as the world’s central banks shift from physical cash to e-money. Many view gold as a relic of the past. We don’t.

We view gold as the single best way to protect your wealth against the onslaught of inflation, which will inevitably take hold under central bank e-money.


Kris Sayce,
For The Daily Reckoning

PS: Like gold? Then you’ll love this from my colleague, Greg Canavan. Greg’s as big a fan of gold as I am. But while Greg also sees a great future for the gold price, he tells me there’s an even better way to leverage gold’s gains than just owning gold. He explains it all here.

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.

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