Would a cash taxation as proposed by the IMF boost gold demand?

News Arnulf Hinkel, financial journalist – 22.02.2019

There are still only a few signs of a slowdown in the European economy, but quite a few market experts believe that a recession in Europe and later on also in the US are quite possible in the years to come. In such phases, stimulating the economy by cutting key interest rates has proven effective, but the ECB's current base rate is already at 0.0 per cent. Therefore, the International Monetary Fund (IMF) recently proposed a taxation of cash and savings as an economic stimulus.

Private investors to boost economy through increased consumption

In the event of a severe recession, according to the IMF's proposal, key interest rates should be lowered to below zero, which would equal a taxation of savings deposits, and is supposed to make spending more attractive. Now, savers could simply withdraw their savings in order to avoid taxation. According to an IMF working paper, the responsible central bank would have to divide the money supply base of an economy into two currencies in order to close this gap: cash and electronic money. The latter would function as book money and would be taxed the same way as cash deposits. Then, a specified conversion rate between cash and electronic money as well as dual pricing of products and services would then ensure that withdrawing money would lose its effect of avoiding negative interest rates.

Investing in gold would become much more attractive

Gold has served as a protection against economic and geopolitical risks virtually since the invention of cash. The precious metal could also function as a safe haven if cash were taxed as proposed by the IMF. According to the statistics portal statista, €11.67 trillion were in circulation in the European Union in November 2018. In view of this sum, it is not difficult to imagine that the implementation of the IMF proposals could trigger a considerable surge in demand for gold.

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