What Effect Would a Digital Dollar Have on Gold and Silver Prices?
Over the past decade, cryptocurrencies have gone from curiosities used mostly by technophiles to established financial assets whose futures are traded on some of the world’s largest commodities exchanges. Crypto is big business now, and cryptocurrencies have gained so much adoption that central banks have begun to realize that crypto could break central bankers’ currency monopoly. That’s why central banks around the world are now attempting to create their own digital currencies.
China has arguably taken the lead when it comes to the development of central bank digital currencies (CBDC) with the creation and adoption of the digital yuan. The new CBDC has already undergone trials and is being rolled out, making other world central banks sit up and take notice.
The Federal Reserve is among the central banks now discussing the idea of introducing its own CBDC, after years of denying that it would ever attempt to do so. Like other central banks, it can’t risk being overshadowed by China and ceding the 21st century monetary world order to China.
If the Fed were to go ahead and adopt a CBDC, the obvious question most people would have is “how will this affect me?” From point of sale transactions to retirement savings, a digital dollar could have a major impact on the US financial system. Precious metals investors in particular may want to keep tabs on these latest developments.
The Dollar Is Already Digital
One thing to keep in mind is that in many respects the US dollar is already digital. While cash purchases at point of sale still make up a significant portion of financial transactions, most financial activity today is already done digitally.
Just imagine the average urban American who pays for everything by credit card, especially online. You swipe your credit card at the grocery store, or enter your card details online at Amazon. At the end of the month, you have to pay your credit card bill. Odds are that you do that by logging into your account online and setting up a transfer, sending funds from a bank account to your credit card account.
All that is done digitally. Your bank accounts, retirement accounts, and brokerage accounts are all digital. Since that’s the case, you may wonder what the big deal about a digital dollar is. How would it change the way things work already?
Potential for Faster Price Inflation
One of the reasons the Fed had been hesitant to work on a CBDC is that a CBDC could theoretically obviate the need for commercial banks. Currently, physical cash is ordered by banks, the Fed tells the Bureau of Engraving and Printing how many Federal Reserve Notes to print, and the Fed delivers the notes to banks to fulfill their orders. In the case of quantitative easing, the Fed creates digital dollars out of thin air and uses them to purchase assets on the open market from financial institutions. It’s then up to those financial institutions to decide what to do with those dollars, whether to loan them out or to keep them on hand as reserves.
With a digital dollar, the Fed could create its own digital dollars and issue them directly to financial institutions or even to individuals. Jay Powell could wake up tomorrow morning, decide that each American deserved an extra $1,000, and at the press of a button could deposit $1,000 into every American’s bank account. The Fed could even set up bank accounts for every taxpayer, eliminating the need for commercial bank accounts.
That’s the theory anyway, and it’s something that many left-wing economists have been pushing for. They don’t want quantitative easing going through the banking system because banks benefit from the new money first. These economists want quantitative easing going to individuals first to boost consumption, something that’s colloquially known as “helicopter money,” because it’s like sprinkling money from a helicopter onto the streets for people to scoop up and spend.
With a digital dollar operating like that, there is a potential for quicker price inflation, particularly with staple goods like gas and food. We’ve seen the result of the handful of stimulus payments that have been made, as prices of meat, milk, and other food staples have jumped significantly. Whereas injections of money through the banking system tend to inflate asset prices first before consumer goods prices, injections directly to individuals via a digital dollar could end up pushing up consumer prices before asset prices.
All of that money would end up in the banking system eventually, but it would change the entire conduct of monetary policy. Rather than taking months for monetary inflation to result in higher prices, the price increases could be nearly instantaneous, depending on how much money the Fed decides to create and hand out.
Gold and Silver Should Benefit
One thing is nearly certain when it comes to a digital dollar – it won’t mean a return to sane monetary policy. The ability to create money out of thin air is a power that can go to the heads of central bankers. And with a digital dollar potentially making it far easier to get money directly into the hands of Americans, expect the Fed to take full advantage of that power.
As more money enters the economy, prices rise and the purchasing power of each dollar decreases. And among the biggest winners as a result are gold and silver. As the dollar continues to weaken, gold and silver get stronger. These precious metals have always been trusted to maintain their purchasing power over time, but they are particularly impressive during times of monetary weakness.
During the stagnation of the 1970s for instance, gold and silver prices averaged over 30% annualized gains, while in the aftermath of the 2008 crisis gold nearly tripled and silver more than quintupled. That’s pretty impressive performance, but it could happen again if the Fed continues down the road of ultra-loose monetary policy with a digital dollar.
If you’re a gold or silver investor already, keep an eye on what the Fed is doing with regard to a digital dollar. It could result in your precious metal assets gaining significantly in the future. And if you’re not already investing in gold or silver, maybe now is the time to start thinking about it.
With a precious metals IRA, you can invest in physical gold or silver coins or bars while still maintaining the same tax benefits as a conventional IRA. You can even fund a precious metals IRA by transferring or rolling over assets from an existing IRA, TSP, 401(k), or similar retirement accounts into a gold IRA or silver IRA, without tax consequences. And when it comes time to take a distribution, you can request distribution either in cash or in physical gold or silver.
If you’re worried about rising inflation and the potential for a digital dollar to unleash massive price increases throughout the economy, you might want to consider protecting your assets with gold and silver. Talk to the experts at Goldco to learn more about how gold and silver can defend your hard-earned wealth.