Will the government seize your gold?
- The Obama-FDR connection
- An unlikely scenario for gold
- My favorite gold investment today
Today’s topic might seem somewhat oblique to general investment strategy, but I think the ramifications of this issue are kind of an 800 pound gorilla in the room.
Some very intelligent, highly successful, amazingly talented gold investors routinely suggest that the end-game for the dollar will be preceded by the seizure of gold assets by the Federal Government.
If there’s a significant likelihood that gold will actually become illegal, then all my suggestions and research intended to help you find compelling gold investments are completely off course. It won’t matter if I help you find your next 10-bagger gold stock if the government seizes gold assets and halts trading on such companies.
So I want to tackle this issue head on.
This undercurrent of worry in the gold investment community may be born from the fear that history sometimes tends to repeat itself. Gold investor’s prudence in holding gold may be punished by President Obama’s administration, should he choose to replicate the policy of President Franklin Roosevelt and outlaw the ownership of gold. There’s no doubt that as the 'Godfather of liberal thought' that Obama looks up to FDR, and certainly wishes to follow in the footsteps of one of America’s most popular presidents.
You can read FDR’s entire Executive Order outlawing gold by clicking here. Pay special attention to Section 2.
It seems like a strange Orwellian dream that in this country between 1933 and 1971 owning gold bullion was illegal. The move was entirely evil, but I completely understand why it was confiscated - the Federal Government couldn’t inflate its currency to pay for war, public works and social programs without first confiscating gold.
That was because all dollars up until that point were convertible to gold - so if the Government simply printed excess dollars, it would soon find itself running out of gold, which could cause another run on banks, and might result in the complete destruction of the currency.
It’s the very idea of outlawing the ownership of something so innocuous and mainstream that I can’t wrap my head around. For instance, if tomorrow the government outlawed aluminum foil or sacks of barley under penalty of fines and imprisonment, it would be just as strange.
To outlaw gold today doesn’t seem to make much sense to me, especially since it wouldn’t directly enable the government to pursue some other monetary policy. Outlawing gold would be strictly punitive, and not very constructive. I suppose you could make the same case that the War on Drugs isn’t very constructive and is only punitive, but there’s no public perception that buying gold destroys lives, so I don’t see the political upside for taking gold down the same road.
In the same way that legislators in Congress are currently working on the final version of a massive new bill to further regulate the derivatives markets, I can imagine a time when it might be politically expedient to pass a bill further regulating foreign exchange (ForeEx) traders, and maybe such a bill would include language outlawing the exchange of Federal Reserve notes for speculative assets such as gold?
I’m grasping at straws here because I just don’t see how a 'gold ban' would work. The only thing a ban on gold would accomplish at this point would be to make gold skyrocket in price. It wouldn’t strengthen the dollar unless the Federal Government then turned around and sold all of its seized gold to foreign banks - but at that point the dollar would be so worthless I don’t see how it would really help all that much.
And logistically, I don’t know how the Government could do it. The kind of person who bought gold as a way to hedge against inflation and dollar insolvency isn’t very likely to render their gold back to Caesar very willingly, I imagine.
If you have any thoughts on this topic, please share them by writing to me at editorial@resourceprospector.com.
I think all gold investors view their gold purchases, at the very least, as a type of hyperinflation insurance. Hyperinflation is clearly the worst case scenario for the dollar, and there are plenty of historical examples of what happens in countries that experience such inflation.
The history of currency destruction and the government response to it is surprisingly unmarred by violence, coercion and marshal law. From Zimbabwe, Hungary, Austria, Germany, Argentina - history is replete with countries that printed their currencies into oblivion. All of these countries attempted currency controls, but these types of policies really don’t hold much water with a populace that needs to eat. And typically, regimes in power during hyperinflation don’t stay in power very long.
So to answer the question - even in the worst case scenario, I think it’s highly unlikely that the Federal Government would or could outlaw and seize private gold holdings.
As I said earlier this week, gold and productive gold companies are a great long term hedge against inflation. I’m careful to make the distinction between gold companies, and gold companies that are actually able to get gold out of the ground. Most junior gold companies do not produce any gold. That’s why it’s important to buy the best companies, with solid balance sheets that have proved an ability to actually bring gold to market.
Ian Wyatt, my boss and Chief Investment Strategist here at Wyatt Investment Research, recently put together a report all about a small North American gold miner that’s currently selling for less than $4 a share. They’re already producing gold. Last year they produced over 70,000 ounces of gold, and they have over 20 million proven ounces. At today’s prices, that’s $25 billion worth of gold. But they’re only a $200 million company – so as they continue to bring that gold to market, I expect shares to soar.
They really are the best junior gold miner in the market today.
Buying this company today is the equivalent of buying their gold reserves for $120 an ounce.
You can read more about this company by clicking here.
Good investing,
Kevin McElroy
Editor
Resource Prospector
