ECB’s War on Cash And Gold

May 10, 2016

The European Central Bank decided to end production of the €500 banknote. What does it mean for the gold market?

Last week, the ECB decided to permanently stop producing the €500 banknote. The ECB’s decision is a manifestation of a widespread war on cash declared by some central bankers, politicians and economists. The reason cited by the ECB are concerns that the €500 banknote facilities illegal activities. Indeed, the note is often called “Bin Laden note” due to its association with money-laundering and terror financing. Surely, some €500 banknotes are certainly used for criminal purposes, since they are convenient due to their high value (for example, a million euros in €500 notes weighs just 2 kilograms, compared with 22 kilograms for the same amount in $100 bills. However, the ECB’s decision relies on anecdotal evidence, as there is no reliable data on the use of €500 banknotes in illegal transactions. Actually, most money is laundered without cash via bogus companies. Criminals may always switch to the Swiss 1,000-franc note.

As we explained in February, the war on cash is fundamentally positive for the gold market. This is because a cashless society would be the end of financial privacy and personal freedom, which should boost demand for gold as investors would seek currency alternatives and safe havens.

However, gold bulls should pull in the reins. Why? First, the issuance of the €500 banknotes will be stopped around the end of 2018, when the ECB will introduce a new series of €100 and €200 banknotes. Second, the €500 banknotes will remain legal tender. Therefore, the ECB’s decision is not a ban on €500 banknotes – they will continue to be used as a means of payment and a store of value, but there will be no more issuances.

The bottom line is that the ECB decided to end the production of the €500 banknotes from the end of 2018. It is not a ban on these notes, as they will remain legal tender. However, the ECB’s decision may spur some fears about the war on cash, especially in Germany, where almost 80 percent of transactions are conducted in cash. Thus, the mistrust in the ECB may increase even further and increase safe-haven demand for gold. However, the ECB’s decision should have minimal impact on the gold market, since most of the Europeans have never actually used these banknotes.

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Arkadiusz Sieron

Sunshine Profits‘ Gold News Monitor and Market Overview Editor

Arkadiusz Sieroń is the author of Sunshine Profits’ monthly gold Market Overview report, in which he keeps subscribers up-to-date regarding key fundamental developments affecting the gold market and helps them prepare for the major changes. Arkadiusz is a certified Investment Adviser, a long-time precious metals market enthusiast and a Ph.D. candidate. He is also a Laureate of the 6th International Vernon Smith Prize.  You can reach Arkadiusz at Sunshine Profits’ contact page.

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China is the world’s biggest gold producer with more than 355 tons annually. Australia is second.

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