Tuesday, February 17, 2009

Gold Confiscation: Be Prepared

In 1933, US President Franklin D. Roosevelt signed an executive order outlawing all private ownership of gold. Citizens were legally required to turn over their gold bullion to the government in exchange for their equivalent value in US dollars, which was $20.67. Once the citizens had this cash in hand, Roosevelt immediately devalued the dollar by 40%, and in an instant these people were robbed of 40 percent of their wealth.

A lot of people point out that this confiscation of gold took place during the Great Depression, and that there is no basis for worry in the present day. But there are plenty of people who predict that our current economic woes will be even worse than the Great depression. The government makes the rules, and in times of serious trouble they do so blatantly. I don't know if there will be another gold confiscation in the US, but it could happen, and the laws used to originally outlaw private gold ownership are still on the books. And gold has been nationalized in other countries as well. The possibility is there.

How can gold investors protect themselves from such a confiscation of gold? The basic idea is to keep it as far out of reach as possible from the potential confiscators, and to diversify your gold portfolio so that you possess gold in a number of different forms, locations, and countries.

First, it's important to note that in 1933 most people who privately held physical gold bullion in their homes or another discreet storage place did not turn their gold in. The government did not send the police from door to door looking for private stashes of bullion. They made possession illegal, and asked everybody to turn over their gold, but it was basically done on an honor system, and it's estimated that 78% of privately held gold was not turned in. So, right off the bat we can see that personal possession, rather than holding allocated gold with a bank, provides you with security from confiscation. The banks, however, gave government agents access to safe deposit boxes and that gold was seized unless you could prove it was exempt from confiscation (more on exemptions later). If you held gold in an allocated storage account with an American financial institution, your gold would have also been seized.

In addition to keeping some precious metals in your home, some serious gold bugs even suggest that you should keep a collection of ounce gold coins on your person at all times, in case the government does decide to raid homes. But I personally don't
understand this level of paranoia in the current situation, and won't resort to this unless we are in the midst of serious strife like a hyperinflation.

The problem with keeping possession of your bullion after a confiscation is that you would not be able to legally liquidate it, unless you sold it to the government. I imagine there would be a black market for gold, and I also imagine there would be people attempting to smuggle it out of the country, but in my opinion the main purpose for keeping bullion with you or in your home is to provide some immediate liquidity in times of emergency. To maintain a large amount of wealth in gold, it makes more sense to own gold overseas that is geographically protected from confiscation.

One way to possess gold overseas is to open a digital gold account. If you own digital gold in an account based in Switzerland or Dubai, for example, if there's ever a confiscation in the US (or wherever you happen to live), then guess what -- your gold is safe. Digital gold accounts generally allow you to use your digital gold to purchase another currency within your account, so you could buy another currency then send a bank wire transfer to your account in your home country (or an account elsewhere). Maybe the government would make these overseas possessions illegal too, but there must be ways to keep your possessions discreet, and there will always be legal loopholes for those who bother to find them (which is usually only rich people with a lot to lose). During the original gold confiscation of 1933, the wealthy did not lose their gold. They held gold in offshore havens. In today's modern digital age, the average joe can find cheap and convenient ways to legally keep money offshore to protect his assets. I encourage you to look into the precise legality of keeping digital gold and currencies overseas and what kind of reporting is legally required, and find out how well it can protect your wealth.

You could also consider segregated vault storage in an overseas country, which provides the highest level of security. It does, however, cost a fair amount in storage fees, and it does not offer you the same flexibility to transfer your gold as a digital account does. If I had a very large stash of gold I would put some in segregated storage, but at the moment I have a modest portfolio and will hold back on this for now.

If you have a head on your shoulders and can keep on top of developments as they unfold, perhaps the best way to deal with gold confiscation is to let it be confiscated, take the currency that the goverment offers you in return, and buy something like real estate before the currency is revalued or inflates until it is worthless. According to GoldSilver.com owner Michael Maloney in his book "Guide to Investing in Gold and Silver":

"The government will only nationalize gold and silver if people are asking for them in payment. If people are asking for them in payment, it means that we are in the midst of a hyperinflation. If we are in hyperinflation, the vast bulk of the wealth transfer will have already occurred, and it will have been mind-boggling huge. So just sell the government your precious metals and buy something tangible right away (like lots and lots of real estate) before the currency becomes worthless."

In addition to holding onto your physical gold and having an overseas digital gold account, you can further diversify by owning shares in some gold mining stocks. After the outlawing of gold possession in 1933 and subsequent revaluation of the dollar, the US stockmarket's value continued to plummet while those who invested in gold mining stocks saw returns of hundreds of percent. This would remain a legal way to invest in gold indirectly. It's not as good as physical possession, but it provides diversification and reduces risk.

The last aspect of diversification that has some proponents is to keep a portion of your portfolio in numismatic gold coins. Numismatic coins are coins that have value over and above their metal content, because of rarity, aesthetics, or other reasons that make them "collectible". Under the laws enacted in 1933, numismatic coins were exempt from confiscation. This doesn't mean much to me, though, since most people kept their gold anyway. It may be reasonable to own a handful of numismatic coins, or gold jewelry for that matter, as a very last resort for liquidity in case of a total emergency. But I tend to think that in that case, bullion coins would be readily accepted anyway despite being illegal. If there is anarchy, the law become meaningless and the market prevails. So I personally don't see any purpose in wasting money on numismatics just so I can follow a law that nobody else will be following. But then again, if I had a family to take care of then maybe I see more value in being this conservative and covering my final base.

FDR gold coin -- oh the irony!Whether your government will ever attempt to confiscate your gold is still unknown. But by diversifying your gold portfolio both in form and location of your gold, you will allow yourself to rest easily knowing that you are prepared for whatever happens.

I found the irony of an FDR gold coin hilarious!

1 comment:

Ben said...

only 22% confiscated, eh? heh, I would have never known. I was afraid I would have to bury it. ;)