Julian Phillips believes more and more that some governments will confiscate citizens' gold holdings and is covering the why's and wherefores in a series of four articles of which this is the first.
Author: Julian Phillips
Several analysts and respected members of the gold community have stated that the confiscation of gold is unlikely because the conditions that precipitated it in 1933 don’t exist anymore. We agree wholeheartedly with the latter part of that view. But, even so, we feel that the confiscation of gold is extremely likely for very different reasons.
For the last 40+ year, the world has used un-backed paper money and attempted to discredit gold. This system is entirely reliant on the confidence people have in governments and the central banks that issue money the money (at will). Over the 40 years of this experiment, gold has gone from $35 to $1,715, a rise of nearly 50 times. Since 2007 we’ve seen banking crises across the developed world leaving bankers borrowing money from central banks and lending it back to them, rather than lend it out into the general economies or in some cases to each other.
Before we continue, we would like to stress one point that gold investors must be made aware of. This is not simply an academic discussion. If we are wrong, you will continue to own your gold with it under your full control. If we are right and you haven’t acted prudently to protect against confiscation, you will lose your gold. It’s all about risks and rewards.
With gold being of a value far in excess of its price in the monetary system –as seen in its use as collateral via the Bank of International Settlements currency/gold swaps of the last few years— and with gold possibly soon to become a level 1 asset on bank balance sheets, the demand for physical gold from the banking system as well as from emerging world central banks is set to rise tremendously and soon. The Basel III discussions should allow for this to happen any time between 1 January 2013 and 1 January 2015. If gold is re-rated to a level I asset, as is proposed by Basel III (U.S. bankers are in on the discussions) then there is not enough readily-available gold to provide both the central banks of the world and the banking system with sufficient for gold to play this role.
That’s why your gold may be confiscated.
The consequential impact on the gold price is overwhelming. We’re moving into dangerous financial waters in this regard which reminds us that ‘gold is money in extreme times’, as Alan Greenspan said. But how could this happen? Investors hold gold in the correct belief that it will rise as the monetary system decays; it has done this since the turn of the century. When these times arrive, the price of gold will not be as important as the number of ounces held by anyone.
What most gold investors have done is to shrug off the probability that they may have their gold confiscated by their government, ‘in the interests of national financial security’. Confiscation is far more than just an event that will hurt individuals. It will hurt institutions (who are allowed to own gold) and change the world’s monetary system significantly.
Importantly, Central Banks and the Authorities possibly will not wait for the monetary system to crash before acting to ensure they have enough gold to keep the monetary system working. They will act well ahead of that time to make sure they avoid a collapse and attempt to engineer the event so as to catch gold investors by surprise, removing their chances of making any contingency plans. With their prime objective being to shore up confidence in the monetary and banking system, they could not afford to signal the market about their intentions beforehand. We are not just talking about the U.S.A. but many other countries that may precede or follow the United States in these acts.
The trouble is that the gold they ‘acquire’ may be yours. Wisdom demands that the banking crises, which have been occurring since 2007, do not happen again because this time around they may well collapse. Prudence demands that investors don’t take that risk but act before it is too late. The risks of not guarding against this eventuality are enormous; the rewards of guarding against it are massive. If it doesn’t happen, then you will lose little if anything. If confiscation does happen, then you lose a lot. It’s a matter of risk and reward.
We believe that the confiscation of gold for this purpose is a very real and present danger.
This prospect brings to the table the following questions which all gold investors, including institutions need to address now before they are caught in the net. We will look at these questions in subsequent articles:
1. What will happen to your gold if it is owned directly in your name?
2. What if it is in a safe and hidden place at home?
3. What if it is in a safe deposit box at the bank?
4. What if it is unallocated and sitting in an E.T.F.?
5. Does it help for your gold to be allocated?
6. What if a bank holds it for you?
1. What will the Authorities do when they want your gold?
2. How will you use your gold if it is illegal to own it?
3. Will a ‘Black Market’ in gold work?
4. Is it enough to hold your gold outside your country?
5. What if the Authorities order you to repatriate it?
6. What if the Authorities order you to transfer ownership of your gold to them?
7. What if the Custodians banks of your gold E.T.F. are told to pass your gold to the Authorities?
1. The evidence of history on Confiscation and Exchange/Capital Controls.
2. After U.B.S. is Switzerland really safe?
3. Are Private Vaults safer?
4. Will you be forced to sell your gold under a confiscation Order?
5. How can you sell or use your gold if it is illegal to own it?
6. Do you have time to wait before you act?
7. How can S.M.A./U.G.T. overcome a Gold Confiscation Order?