We show here how the combination of (a) using electronic money as the unit of account and (b) a time-varying paper currency deposit fee can be used to eliminate the option to circumvent the negative rates by withdrawing, storing and, later, redepositing paper currency. The key idea is that a negative interest rate can be accompanied by a time-varying deposit fee that ensures the value of paper money and the value of funds in electronic accounts will move in tandem. Such a deposit fee only needs to be imposed at the central bank’s cash window—the facility through which the central bank and commercial banks interact to bring cash in to and out of circulation—and not on households, firms, or banks. Levying the paper currency deposit fee on net deposits of paper currency allows the central bank to create an exchange rate at the cash window between electronic currency and paper currency, so that in a negative interest environment, the value of paper currency can be caused to depreciate over time relative to electronic money. The objective is a policy at minimum distance from the current monetary system consistent with eliminating the zero lower bound. In particular, such a policy requires no extra regulations or quantity constraints. Instead, its impact on the economy works entirely through the price system.

Eoin Treacy's view

This is about the best, though unintentional, argument for owning gold and stocks with reliable dividend growth I’ve seen. One of the primary arguments used by fundamental analysts to disparage gold is that it does not pay a dividend and as a result cannot be valued. That’s does not seem to trouble them when it comes to suggesting that fiat currency should be intentionally debased and eroded by negative interest rates. With $7 Trillion in bonds currently in a negative yield environment, gold has a positive carry just by virtue of not paying anything. 

Gold has rallied to break back above the 200-day MA and has paused in the region of the psychological $1200 area. A sustained move below the trend mean would be required to begin to question medium-term potential for additional upside. 

The NYSE Arca Gold BUGS Index lost 85% of its value between 2011 and June last year. It broke up out of that six-month range last week and some consolidation is underway. A sustained move below 130 would be required to question medium-term recovery potential.