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Thursday, 14 December 2017

War on cash to pump up silver, wine, art, gold

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  • James Saft - June 2014

Like it or hate it, the war on large-denomination cash will have an impact on other markets, as investors and crooks alike look for convenient stores of value.

In short, if cash becomes harder to get in large size, look for money to flow to art, wine and precious metals, as investors lawful and of other stripes seek alternatives.

There has been a sudden chorus of authoritative voices calling for an end to the printing of the highest value bank notes, most notably by European Central Bank chief Mario Draghi who on February 15 said the bank may drop its €500 note over concerns about its use in crime. Adding his voice a day later was former US Treasury Secretary Larry Summers, who called for a moratorium on printing new US$100 bills, also citing its role in crime.

There is surely an interesting argument in favour of ditching the big bills, which play a central role in many kinds of undesirable pursuits, from drug dealing, to money laundering to garden variety tax evasion. There is also, though Summers downplays it, a connection between getting rid of large notes and making negative interest rate policy (NIRP) run more smoothly.

Though Summers, and others, argue that NIRP can be effected without limits on cash by putting into place bank withdrawal fees, the fact remains that there is a clear link between having to pay to stash your cash at the bank and, well, just stashing your cash yourself. That’s a problem for central bankers who want to stimulate the economy, not increase the thickness of mattresses.

Note that in Japan, where rates turned negative last month, sales of safes have doubled in a year and the ¥10,000 note is now 92% of all notes. Swiss officials have said they have no plans to ditch the SFr1,000 note, even as the number of them in circulation has risen by about 50% since 2011.

Swag for the people

To be sure, there is no telling if negative rates will continue and expand, still less if calls for making cash that much less portable and, well, liquid, will succeed.

If both happen, however, don’t expect owners of cash, whatever their pedigree, to simply accept a penalty assessed on their holding of cash, that traditional and base-line safe haven.

“Investors are increasingly forced to seek alternative asset classes to insulate themselves in this war on cash. Simply put, very few asset classes can act effectively as an alternative safe haven,” said Joe Roseman, an investor formerly of hedge fund firm Moore Capital, whose 2012 book argued that extraordinary monetary policy would drive investors to silver, wine, art and gold or, as he termed it, SWAG.

This, of course, is not what policy makers have in mind. A principal aim of first quantitative easing and now negative interest rates is to drive money into financial assets, making money cheaper and easier to borrow and, hopefully, enticing companies to invest and expand.

Yet, as we’ve already seen, negative interest and very low interest rates have driven money into collectibles and other assets which buyers hope will retain value. See this Reuters story detailing the move towards alternative assets in places like Sweden, where prices for things like mid-century furniture have been exploding.

Make mattress money harder to get a hold of and we can expect, all else being equal, this trend to extend and expand, whether it is to watches, gems or to pre-paid credit or gift cards with no expiration date. A strange investment landscape, indeed.

Of course, assets like precious metals or art have a hugely different risk profile than cash, and as such it would be silly to expect most of the money people now legally stash away to be converted.

Cash’s traditional value for an investor is twofold; first, it was supposed to retain its value in nominal local currency terms; second, it has an option value because it is easy to turn into other assets as opportunities arise.

The first value is diminished by NIRP, to the extent that it now has a higher carrying cost. There is, too, the risk that inflation, once rekindled, gets out of hand, another issue arguing for real assets.

Art or wine, and to a lesser extent precious metals, don’t have the same optionality as the round-trip price of buying and selling tends to be high.

If an argument for cash remains in an economy where it is taxed, one way or another, it is this: we have little idea what comes next.

(James Saft is a Reuters columnist. The opinions expressed are his own. At the time of publication he did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com)

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