Cash Is A Store of Value If Interest Rates Are Negative

Here is what happens when you take a quote out of context... Rick Santelli (CNBC), Zero Hedge and no doubt many others by now have honed in a line from Federal Reserve Chairwoman Janet Yellen. Zero Hedge has shortened the quote for their headline which reads: Santelli Stunned As Janet Yellen Admits "Cash Is Not A Store Of Value", this would suggest Yellen had been critical of holding cash for that purpose (as a store of value), however watching the clip reveals a very different message.

Yellen does say "cash is not a very convenient store of value", but she says so immediately following a comment that she's surprised there hasn't been a larger pickup in demand for cash (in the Eurozone areas where interest rates are negative).

What Yellen is actually implying in her response is that holding (physical) cash IS a good store of value when interest rates are negative, the reference to it being an inconvenience is presumably about having to deal with it physically. Like precious metals, holding assets physically comes with a different set of risks to owning them digitally in an account.

In fact I recently commented on the blog of JP Koning about holding cash as a store of value, pointing out there may be an opportunity for new services in the secure storage of cash (not unlike an allocated bullion account):

Physical cash acts as a store of value (or potentially even rises in value if the area is experiencing deflation) when interest rates are negative because the nominal amount you own doesn't change, where as if you hold a deposit in a bank account you may be charged a negative rate.

Of course over the long term, assuming a successful return to inflation and positive rates, cash is not a good store of value, but there are periods such as now, in countries where interest rates are negative, that holding cash as a store of value makes sense.

The deceptive way in which Zero Hedge and others have framed this quote by Yellen is why you need to be careful about the narrative and agendas that others drive as I have pointed out several times in the past.

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Self-Confessed Gold Bug

Some time ago I added the self-confessed label of ‘gold bug’ to my Twitter profile. Typically the term has been used by the mainstream media or those who own no Gold in a derogatory way as a weapon to feed a narrative that the metal is not worth owning and those who do so are irrational.

I decided to take ownership of the label for two reasons. The first was to reclaim the word so that it’s use against me has no impact. The second was to try and change the perception that a ‘gold bug’ must have a particular view. I am attempting to highlight that we are not all defined by the way someone else means the term.

Many try and characterise gold bugs as holding a very narrow set of views (such as Barry Ritholtz), but ironically in their race to pigeon hole those they berate, often they overlook their own lack of objectivity.

A quick glance at my website or Twitter feed will see many judging the book by its cover, but those who've taken the time to stay and read on will find that many of my views differ to the gold bug caricature that is often assumed. I try and cut through the unfounded conspiracy theories that permeate much of the Gold blogosphere, at times I've owned 'paper gold' and I've even warned investors to be cautious when the sector is overheated, for example in August 2011 (3 weeks before the peak in Gold) I wrote:

"...investors (specifically in the US) may want to consider moving some of their assets back into real estate (even if simply to purchase their own home to live in) as the ratio (HOME:GOLD) is currently the lowest it's been since the 1980 peak in Gold."

The reality is that gold bugs have a wide range of views, reasons for owning Gold and ways of maintaining exposure. Some of them may be ‘gun toting, government hating, hyperinflation expecting, only physical owning, all conspiracy believing’ gold bugs who expect a SHTF scenario in the near future where we return to using it as a means of exchange. Others may have a less extreme view, maintaining a small position in Gold to hedge against the unlikely event of disaster. Of course this is a very westernised depiction of a gold bug, there are billions of people for whom saving in & owning the metal is just a way of life.

So the next time someone uses the term gold bug against you, stand up proudly and own the title. You can explain that it simply means you think it’s worth having exposure to Gold (which is perhaps the only shared view that any gold bug must have) and that your stance is shared by central banks and many of the world’s wealthiest individuals alike.

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