I wish this were not necessary, but articles like this one keep popping up. So, from time to time, I push one of them down. Here is a recent one.
The Greatest Threat to Gold Ownership
If you hold precious metals in your portfolio, there is a good chance you fear hyperinflation and the crash of fiat currencies.
You probably distrust governments in general and believe they are self-serving and have no interest in your economic well-being. It is likely your holdings in gold are your lifeline; your hope to get you through these times while holding on to your wealth.
But have you ever given it any thought to the possibility of having this lifeline confiscated by the authorities?
In my conversations with friends and associates, I have often raised this question. The typical responses:
“They’d never do that.”
“I’ll deal with that if and when it happens.”
“I just wouldn’t give it to them.”
I consider these wishful thinking responses.
It’s an interesting thought that the greatest threat to gold and silver investment might not be the possibility of losing on the speculation, but the government taking it away from you. It’s a thought that I’ve found few want to even think about, let alone discuss.
If you fall into this camp, you’re in good company. Some of those forecasters whom I respect most highly also treat it either as “unlikely” or, at best, “something we may need to look at in the future.” To date, in conversing with top advisors worldwide, the two primary reasons they believe gold will not be confiscated:
1. “Confiscation would mean the government acknowledges the reality of the value of gold.”
Yes, this is quite so. They would be changing their official view… which, of course, they do all the time. But I submit that all that they need to do is put the proper spin on it.
2. “They would meet greater resistance than they did back in ’33.”
I expect that this is also true, but that a plan will be put in place to deal with that resistance.
The advisers he consulted are correct. There are lots of other arguments that support them. I shall cover some of these arguments in greater detail here.
The mark of someone who has no clue about gold is that he goes back to 1933, when the USA was the last nation on a gold coin standard. There was a massive depression. Prices were falling. People held gold coins for the same reason that they held currency. Its price was fixed by law. The price would not fall. They did not hold it as an inflation hedge. They held it as a deflation hedge.
The gold newbies then equate that era with ours: inflationary, no trace of a gold standard for 40 years, and a population that does not use gold. In short, they argue from a world in which gold was money, and draw conclusions for a world in which gold has not been money for almost 80 years.
We’ll address both of these assertions in more detail shortly, but first, a bit of history.
In 1933, Franklin Roosevelt came into office and immediately created the Emergency Banking Act, which demanded that all those who held gold (other than personal jewelry) turn it in to approved banks. Holders were given less than a month to do this. The Government then paid them $20.67 per ounce — the going rate at the time. Following confiscation, the Government declared that the new value of gold was $35.00. In essence, they arbitrarily increased the value of their newly-purchased asset by 69%. (This is enough reason alone to confiscate.)
You know this guy has no concept of history or money. The world of 1933 was radically different from today.
Today, the US Government is in much worse shape than it was in 1933 and they have much more to lose. The US dollar is the default currency of the world, but it’s one that’s on the ropes, which means the US economic power over the rest of the world is on the ropes.
The US dollar is not on the ropes. Its status as the world’s reserve currency is challenged only by the euro, which really is on the ropes. http://lewrockwell.com/north/north1033.html
I think that readers will agree that they will do anything to keep from losing this all-important power.
I hope no reader takes any of this seriously. It’s nonsense. Power over gold has nothing to do with reserve currency status, since no currency is connected legally to gold. You cannot walk into any bank and demand gold for any nation’s currency at a fixed rate. This has been the case ever since 1933.
The US has essentially run out of options. At some point, the fiat currencies of the First World will collapse and some other form of payment will be necessary.
He is arguing for universal hyperinflation in every Western nation. This has never happened. I mean not ever. To argue this way shows an ignorance of history that is astounding. He is predicting the suicide of all Western governments and currencies. It’s easier for governments to default selectively on targeted interest groups, such as oldsters, than to commit suicide. He does not understand this.
Yes, the IMF is hoping to create a new default currency, but that, too, is to be a fiat currency. If any country were to produce a gold-backed currency in sufficient supply, that currency would likely become the desired currency worldwide. Fractional backing would be expected.
It’s all hypothetical. No nation is anywhere near doing this. No exporting nation would dare do this. It’s currency would skyrocket. That eliminates Asia. So, who’s left? Latin America? Does he think Brazil is going to introduce a gold coin system? His whole argument is just plan nuts.
As most readers will know, the Chinese, Indians, Russians and others see the opportunity and are building up their gold reserves quickly and substantially. If these countries were to agree to introduce a new gold-backed currency, there can be little doubt that they would succeed in changing the balance of world trade.
Substantially? Utter nonsense. They have been building reserves from hardly anything to slightly more than hardly anything. He needs to present figures: the dollar value of gold holdings compared to the dollar value of IOUs from Western governments. He doesn’t, because the figures would show that gold is an afterthought to central bankers. It’s hardly worth mentioning in terms of total reserves for those nations’ domestic currencies. But he talks as if it were a big deal. It’s marginal buying. They are not selling IOUs issued by Washington.
But, just for the record, at $1800 an ounce, India has 8.7% of its foreign reserves in gold. This does not count its holdings of domestic IOUs from the government. Russia has 7.7%. China has a piddly 1.6%. To launch a 100% gold-backed currency, the size of their holdings of domestic assets would have to plummet by 100%, and their holdings of foreign reserves would have to plummet by over 90%. They would have to sell these assets. To whom? The market for government debt would collapse. This would create domestic depressions in all three of these BRIC countries. Domestic prices would fall by 95% or more. Their commercial banking systems would collapse within weeks.
Is there some other plan to create a gold standard in each of these countries? If so, what are these plans? These nations have never publicly discussed such a plan. I know of no Keynesian economist who has suggested one. I know of no monetarist/Friedmanite economist who has done so.
Is there the slightest possibility that the Keynesian central bankers of these three nations are contemplating the establishment of a gold standard? No.
Maybe Robert Mundell is advising these countries. But how will they figure out what he is talking about or how his plan could be implemented? Nobody in the West ever has.
That said, the US Government is watching these countries just as we are and they are aware of the threat of gold to them.
Who says? There is not a shred of evidence that Obama or anyone in his Administration is paying any attention to the gold holdings of BRICs. Why should he? These nations are exporting nations. They want to sell for dollars, not gold. They want foreigners with dollars or euros to buy their products.
The US ostensibly has approximately 8,200 tonnes of gold in Fort Knox, although this may well be partially or completely missing. Additionally, they ostensibly hold a further 5000 tonnes of gold in the cellar of the New York Federal Reserve Building. Again, there is no certainty that it is there. In general, the authorities don’t seem to like independent audits.
True, but so what? There will be no audit of Ft. Knox. Congress will not even audit the Federal Reserve. But if the government confiscates the public’s gold, there could be — probably would be — demands to audit this gold. “What is the government hiding? If gold is this important, is the government’s gold really there?”
In any case, the gold in Ft. Knox and the Federal Reserve Bank of New York is worth about $500 billion at $1800 an ounce. Of course, it really isn’t. If the government tried to sell it, the dollar price of gold would fall. Here are the figures. You can read them here. The government could sell the gold and do only one of the following (add 20%, because gold’s price is up).
At $1,500 per ounce, the total value of U.S. gold reserves is about $393 billion. Sound like a lot of money? Enough to get the U.S. out of the debt/spending crisis that we are in? Here’s what the U.S. could do with an extra $393 billion.
* Pay off 2.75% of the national debt
* Pay less than one year’s interest on the national debt
* Reduce the estimated 2011 budget deficit of $1.645 trillion by about 23%
* Reduce this year’s U.S. budgeted spending of $3.8 trillion by about 10%
* Pay for 40% of the $1 trillion dollar cost of the wars in Iraq and Afghanistan
* Cover about 33% of the estimated cost of the bailing out Fannie Mae and Freddie Mac
* Cover half of one percent of the estimated unfunded U.S. government liabilities for Social Security and Medicare
* Pay off about 4% of total mortgage debt held by American families
The author of the confiscation article ignores all of this. The largest hoard of gold on earth — if it’s really there — is a drop in the fiscal budget.
In fact, there are rumours that the above vaults are nearly or completely empty and that the above quoted figures exist only on paper rather than in physical form. While there is no way to know this for sure, it’s not out of the question.
These rumors have been around for 40 years. They have had no effect on anything, nor will they. Nobody in Washington cares. The voters do not care.
Either way, if the US and the EU could come up with a large volume of gold quickly, they could issue a gold-backed currency themselves. It’s a simple equation: The more gold they have = the more backed notes they can produce = the more power they continue to hold. By seizing upon the private supply of their citizens, they would increase their holdings substantially in short order.
This is all nonsense. The world is run by Keynesians. This includes China. They are all export-driven mercantilists. There is no one, outside of Ron Paul and a few dozen Austrian School economists, who is calling for a gold coin standard. Why would the New World Order abandon the heart of its control: central banking based on IOUs from governments?
Either that or they could just give up their dominance of world trade and power… What would you guess their choice would be?
Again, this is nonsense. World trade is based on fiat money, central banking, and government IOUs. The powers that be are not going to abandon the heart of their power in order to return to a gold standard, which was the #1 restraint on their power from the mid-nineteenth century to 1914.
It is entirely possible that the US Government (and very likely the EU) have already made a decision to confiscate. They may have carefully laid out the plan and have set implementation to coincide with a specific gold price.
It is also entirely possible that this guy is just some newbie trying to make a name for himself.
So, how would this unfold? Let’s imagine a fairly extreme scenario and ask ourselves if it could be pulled off effectively:
The evening news programmes announce that the economic recovery is being hampered by wealthy private investors who, by hoarding gold, are skewing the value of the dollar and threatening the middle and poorer classes. The little man is being made to suffer while the rich get richer. A press campaign to equate gold ownership with greed ensues.
Right. The evening news tells middle America that rich people have made lots of money — no evidence — by buying gold. On hearing this, a million viewers think, “Maybe I should buy some gold.” Is that what Obama wants? Is that what Bernanke wants?
The Government announces the Second Emergency Banking Act, advising the public that, “the first EBA was instituted by FDR to solve this same problem during the Great Depression. This act was instrumental in helping the little man ‘recover’.” (As the average man on the street doesn’t know his history or how wrong this statement is, he’ll believe it. Besides, the announcement has a “feel good” message and that’s all that matters.)
The author of this silly article knows even less about U.S. history. Joe Lunchbucket does not draw preposterous conclusions from his lack of understanding. This guy does.
Possessors of gold, who make up a small minority of the population, would become pariahs. It won’t matter that the guy who owns two gold Maple Leafs is not exactly a greedy, rich man. No one will wish to be seen to resist confiscation. Neither will they wish to go to prison for resisting, no matter how remote the possibility.
How well has the war on drugs worked? Has it ruined the trade? Did the drug dealers hand in their drugs?
This guy is so far out of touch with reality that it is mind-boggling.
The US pays for the gold — in US dollars, which are rapidly headed south. Yes, the Fed will need to print more fiat dollars in order to pay them off but this suits their purpose, as it inflates the dollar even more. Those who have turned in their gold will do whatever they can to unload the US dollars as quickly as possible and will need to find another investment at a time when there are very few trustworthy investments other than gold. The stock market would likely rise, showing the public how the gold confiscation program is “working”.
The US will not have to pay for much gold. Hardly anyone with gold coins will hand them in.
One last scary possibility: The Government demands that gold is turned immediately and that settlement will occur following confiscation. After confiscation, they announce that, as there have been such a large number of cases of rich people ripping off the little man, processing them all could take months, possibly even a year or more. A further announcement states that some investors have made an unreasonable profit on the backs of the poor and that they should not be granted this profit. This profit must be returned to the people. (You can almost hear the cheers of the people.) Then they set about making assessments. They find that most investors do not have formal, acceptable receipts for every coin in their possession. So, if you paid $1200 for a Krugerrand a couple of years ago, you get paid $1200. If you bought it at $250 in 1999, you get paid $250. But if you have no receipt in an acceptable form, you get a “fair” median payment, say, $500, regardless of when you bought it.
What would be the cost of implementing this program in manpower? Every person sent by the IRS to follow up on this, household by household, cannot be used to collect taxes from the public. Does he understand any of this? No.
Does he think the public interest law firms on the Right — and maybe the ACLU — will let the government get a free ride on this? Has any of this even occurred to him?
Appeals: Each investor will be allowed up to one year to appeal the decision of the Treasury as to what is owed him. Of course, the investor knows that the dollar is sinking rapidly and he would be wise to shut up and take what he is being offered.
This guy thinks gold holders are sheep. He is saying this loud and clear.
I think gold holders are the kind of people who own guns. I think the government will not collect many gold coins.
In any case, gold as a percentage of investment assets is about 1%. Here are recent figures.
Eric Sprott (Sprott Asset Management and founder of the silver ETF: PSLV) recently explained how under-owned gold is as an asset class. Sprott wrote that despite a 30 percent increase in gold holdings during 2010, gold ownership as a percentage of global financial assets has only risen to 0.7 percent (gold ownership in 2011 is below 2010 levels). That’s a big increase from the 0.2 percent level in 2002, but Sprott points out that it’s misleading because the majority of that increase was fueled by gold appreciation, not increased level of investment.
Sprott estimates that the actual amount of new investment into gold [bullion] since 2000 is about $250 billion compared to roughly $98 trillion of new capital into other financial assets over the same time period.
Gold as a Percentage of Global Financial Assets is Low
The bar chart [below] from CPM Group shows gold as a percentage of global financial assets over time. In 1968, gold represented nearly 5 percent of financial assets. In 1980, the level had fallen below 3 percent. That figure had shrunk to less than 1 percent by 1990 and has remained there since. Sprott wrote that “it is surprising to note how trivial gold ownership is when compared to the size of global financial assets.”
Gold as a % of Total Global Assets
In short, there is no fiscal payoff for the government to confiscate people’s gold. But the author of the confiscation article mentions none of this.
Again, this hypothetical scenario is an extreme one. The reader is left to consider just how likely or unlikely this scenario is and what that would mean to his wealth.
I have considered it. We can safely ignore it.
But bear this in mind: If the above scenario were to take place soon, the average citizen would have mixed feelings. They would be glad that the evil rich had been taken down a peg, but they would worry about the idea of Government taking things by force because they might be next. It would therefore be in the Government’s interests to implement confiscation only after the coming panic sets in — after the next crash in the market, after it becomes plain to the average citizen that this really is a depression and he really is in big trouble. Then he will be only too glad to see the “greedy rich” go down, and he won’t care about the details.
As terrible as the thought is, it seems unlikely to me that the government will not confiscate gold, as they have little to lose and so much to gain.
This poor guy lives in a fantasy world in which nothing he says has any contact with statistical reality. A President always has a lot to lose when he announces that he is going to do something, but fails to achieve it.
Congress will not be allowed to debate this. The government will not telegraph the confiscation. So, a President must do it on his own authority, just as Roosevelt did. The House of Representatives would fight Obama. The executive order would be rejected by the House. But why would a Republican President do this, even if Republicans controlled both houses of Congress? They would rouse a major voting bloc: the Tea Party. Why would they do this? To gain what economic benefit?
The author does not discuss this, which is not surprising. He is a British citizen who lives in the Caribbean. He seems to know little about American politics.
Those who own gold would prefer to think that this cannot happen, but they have quite a lot riding on that hope and precious little evidence to support it.
I do not know who this guy is. I have been in the gold bug markets since 1960. I have never heard of him. I know of no books written by him. I can see only that his evidence makes no sense.
To my knowledge, this is the first article that directly outlines the worst case scenario. It is entirely possible that this scenario will not take place, just as it is possible that confiscation will not take place. The purpose of this article is to hopefully spark some serious discussion — both for and against the possibility.
Any time that a person you have never heard of presents what he claims is the first argument for something, and brags about it, you should assume that he’s a crackpot. He may not be, but the odds say he is. He has to prove otherwise by the power of his logic and the relevancy of his facts.
This guy is stating that gold experts have missed the Big Picture. What is the Big Picture? That the government cares so much about gold that it is willing to reveal its concern to the general public by trying to confiscate gold. The government would be announcing this. “We have said since 1974 that gold is irrelevant. Actually, we lied. It is incredibly important — so important that you are no longer allowed to own it. Turn it in at a fixed price immediately. Or else!” Or else what? Jammed courts? A case that may get overturned by the Supreme Court?
Why? So that Chinese and Indians can buy gold a little cheaper?
Where will the government get the money to buy the gold? It is running a $1.3 trillion deficit as it is. How will the President and/or Congress justify this added expense? How will this create jobs?
If the Federal Reserve System buys the gold from the government at (say) $1800 an ounce, it will be paying $1800 for an asset kept on its books at $42.22. How will the FED handle the bookkeeping? By listing the newly confiscated gold at $42.22, or by revaluing the existing gold at $1800? Then what? Sell assets equal to the new official value of the gold? Or just add the newly created digital money to the monetary base?
There might be renewed calls for an audit of the government’s holdings of gold. Why would the President risk this?
Problems! Problems! For what?
There is a reason why experts in gold have paid little attention to this Big Picture: it makes so little sense.
Investors are, by their very nature, planners. It may take a community of investors to develop a legal plan to deal with the above eventuality. Time to get started.
If he really believes all this, then he should have contacted the appropriate gold lobbying groups and public interest law firms to find out if this preparation has already been started. If he thinks the law can save us, then he should find out if the ground work has been done. To ask investors to do this investigation on their own is wasting their time. It is scaring them for no good reason.
He should have gone to the industry, found out what has been done already, and directed investors to donate to one or more legal defense organizations.
This kind of article is an example of an unknown author trying to make a name for himself. He has been writing only since March 2011 on a site I had never heard of until a subscriber sent me a link to his article.
I think we can safely ignore his opinions.
Published on September 22, 2011. The original is here.