Public Article - 06 April 2006


Comments On Gold Confiscation And ETFs

I have gotten a flurry of emails on and off about confiscation of gold and or silver bullion.

The position of the Prudent Squirrel Newsletter is to be in physical assets in your possession, not much in electronic/stock accounts. The philosophy also includes a paid off house, and other real assets in your possession. The premise is that physical possession is key when markets are crashing/illiquid, and if you have possession, you don't have to worry as much about getting your hands on your money by having to sell it into a crashing/illiquid market. You don't have to worry about frozen accounts in a banking/financial crisis- you already have your hands on it. To me, possession is not only '9 tenths of the law', it is the best protection period.

Now about confiscation. The US had gold confiscation in the 1930's in the Great Depression. We had gold and silver coin currency in circulation, ie a gold dollar. The US instituted mandatory conversion of gold dollars into fiat dollars, ie they wanted all the gold coin USD currency back in the hands of the US government. Ultimately, they only got a relatively small fraction of it back. The rest was hoarded here and abroad.

Safe deposit boxes were also attached by the US government, and citizens were allowed to keep about 100$ of gold coin, the rest was confiscated (converted into paper dollars) by the US government. This is a scary proposition. When depositors went in to open their boxes, they were not permitted to do this in privacy, but in the attendance of a government agent, who would buy any gold from you with US dollar paper money.

At that time, one of the motivations for collecting the gold coin was that the US wanted to deficit spend during the depression to stimulate the economy and do government hiring programs that proliferated under Franklin D. Roosevelt. Many of our highways today, bridges and infrastructure, and the Hoover Dam, were built with deficit spending. Also the massive Tennessee Valley Authority.

When we had gold coin, that restricted the government's ability to deficit spend, so that was one major reason why the gold US coin was confiscated by law. They were also afraid of gold hoarding, ie flight out of the US currency, and so gold bullion was also confiscated.

There is one major difference between today and then, that is: we do not have gold US coin currency now. In other words, one of the prime motivations to confiscate gold in the 1930's is not now at work today ( to get back the US gold coin in circulation). The other risk, however, that of flight out of the US dollar into gold hoarding, still remains in effect.

To get around flight out of the US dollar, the major issue to the US government would have to focus on is the currency markets because they have the size and liquidity to do the job. The US government would probably institute foreign exchange restrictions, ie, freezing the conversion of electronic accounts into other currencies, IE if they are already denominated in US dollars, then they would probably be forced to stay in US dollars.

The amount of gold bullion available is a very very small fraction of the total assets available to change US dollars into. Foreign currencies would be the prime objective for converting out of the US dollar, and gold would be a very small part of this equation.

Therefore, I do not see gold being the main target of foreign exchange restrictions as it was in the 1930's. However, the US can indeed confiscate anything they feel threatens the stability of the US dollar with laws already on the books.

Electronic gold accounts would be a major target of these foreign exchange restrictions however. These are liquid alternatives to USD accounts, but again, the size of these things is literally a drop in the ocean of USD accounts world wide. One of the largest gold ETFs has about $6 billion in gold. By comparison, there are probably a total of well over $50 trillion dollars in USD denominated markets like the US stock market, plus all the insurance and financial instrument accounts that are like quasi cash. Lots of money market funds, bond funds, stock accounts, derivative accounts, being denominated and more or less convertible into US dollars upon their sale, would have to be converted into FOREX markets to deal with the size and volume. These have enough liquidity to handle the trillions of dollars that would seek haven from any USD crisis. (I am including gold ETFs and so on in Forex because gold is money).

The only real way that US dollars could be washed in a currency crisis would have to be into other foreign currencies that have the size and liquidity to be able to handle the volume of US money that would seek haven. The gold stocks, the gold ETFs and gold bullion are a very very minute fraction of the market size and liquidity that would have to be available. For this reason I do not foresee gold being the number one target of the US government in a currency crisis. Foreign currency exchange would be the main and first target.

To make a comparison of the relative liquidity of gold alternatives to foreign currencies I will make a basic calculation relative to bullion. If gold ETFs have at present several hundred tons of gold, the largest has $6 billion dollars worth now, and if there is only one trillion dollars seeking haven out of the USD into that ETF, that gold ETF would have to obtain about 200 times the gold they have to convert $ 1 trillion into gold. This is not going to be possible.

Given the fact that there is far less that 100,000 tons of gold in foreign and US central banks, even if they were to sell all of it to support the US dollar, they would never come close to achieving this. There is just not enough metal to make it possible, and in a crashing US dollar market, by far most people/entities would be forced into the other alternative of another more solid foreign currency.

If we were to consider the actual gold bullion in the hands of private individuals, that gold would just become unavailable for any USD price until the USD either stabilized or crashed into nothingness. As a matter of fact, I believe that gold bullion in general will become unavailable for any USD price in the event of a real serious USD crisis.

What is my point? Gold bullion is not going to be a feasible alternative to flight out of the US dollar because there is not enough of it to make a market. It will all just become 'not for sale'. The other main alternative would have to be other decent foreign currencies to flee into, because of the size and liquidity required. The US would have to institute currency exchange restrictions like Argentina did a few years ago, where they prevented people from taking out pesos (allowed a very low monthly withdrawal), and froze bank accounts.

Now, it is possible that the US would seek to get the gold bullion from the citizenry, but that would not be the major source of pressure on the USD in a real crisis, that would come from the FOREX markets and the US would have to freeze all US dollar denominated accounts to deal with that. Gold would be a very small secondary issue, and would not be the first that had to be dealt with. I do believe however, that larger gold depositories would be subject to freezes/attachments. Also, I do not foresee that having these depositories out of the country is going to do much. The US, Japan, and Britain are very closely aligned monetarily, and will cooperate in a real USD crisis and lock up large gold depositories under their jurisdictions.

It is my opinion that a few hundred or few thousand ounces in one's personal possession will be a very small issue to the US government, particularly since it will not be necessary to call in gold coin US currency since we abandoned this long ago.

There is another issue. Since gold is non traceable, it is possible that the US government would seek its control for security issues. In fact, there are stories out that some large gold ETFs are vehicles of choice for non legal money. That is not the ETF's fault, but it does put a spotlight on them in this regard. It may be possible that transacting in gold bullion would be too dangerous in a security alerted world. In that case, gold would have to just be kept for a later time, and not spent.

Christopher Laird
Editor-in Chief
The PrudentSquirrel Newsletter
E-Mail: Chris Laird