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Clif Droke

Clif Droke

Clif Droke is the editor of the two times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock…

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Yes Virginia, Your Gold is at Risk

Government confiscation of gold bullion and coins is a touchy subject, one that elicits strong feelings from both sides of the debate. On one side are those who believe that "history always repeats" and that a government-sponsored confiscation of gold assets will be repeated, a la' 1933. On the other side are those who deny it can every happen again. And while this article won't lay the debate to rest, it will provide an important clue of what we can expect in the not-too-distant future.

I read an excerpt from a Gary North newsletter recently to the effect that government confiscation of gold is virtually impossible. "The government doesn't care about your gold coins," he wrote. "Yet there are conservatives who still fret about the government's coming to get their gold." Based on the latest development in Washington, however, those fears would seem to be justified.

On Dec. 13, 2003, President George Bush signed a new intelligence spending bill (HB 2417) which expands the reach and scope of the Patriot Act and makes it possible for the FBI to subpoena business documents and transactions from a broader range of businesses -- everything from libraries to pawn shops, to coin dealers, to eBay -- by simply issuing "national security letters." What's more, the feds won't have to first seek approval from a judge to obtain the personal info.

According to an analysis of the new bill at Rense.com, the new provision in the spending bill redefines the meaning of "financial institution" and "financial transaction." The wider definition explicitly includes insurance companies, real estate agents, the U.S. Postal Service, travel agencies, casinos, pawn shops, ISPs, car dealers and any other business whose "cash transactions have a high degree of usefulness in criminal, tax or regulatory matters."

For our purposes as gold investors, the part of the new spending bill that concerns us is the potential for the government to keep tabs on your purchases of gold, silver, and other precious metals investments. Commenting on this potential abuse of power and invasion of privacy, Alex Wallenwein observed, "Your own preferred gold dealer, no matter how liberty-oriented or meticulously conscious of your financial privacy...can now be conscripted to supply your government with every last detail of financial information he has about you. Do you buy gold and just store it at home? You must be a gold 'hoarder,' someone who intends to undermine the great American paper-fed economy. Do you buy gold and transfer it to an offshore gold currency provider? You must be a terrorist sympathizer who is trying to launder money or transfer it without 'official oversight.'...Are you buying expensive jewelry for your wife...? Your government wants to know every last detail about it."

This latest step by the Congress and the President to spy on U.S. citizen's financial records, including gold coin and bullion purchases, is the first step in a slow but steady process to pave the way for gold confiscation. This is the only logical way of looking at it. The history of government, and of finance, teaches us that the assets of ordinary citizens are always subject to confiscation (directly or indirectly) at some point in time. Everything that becomes the focus of the public's investment attention will eventually be seized, either through outright confiscation (a la' gold in 1933) or more commonly through artificial price manipulation (read depreciation). (This is one reason why financial bubbles are engineered -- to sell the public the asset and then take it away from them at a later time, thereby making money for the manipulators at both ends).

Now don't misread what I'm saying here. I don't believe there is an imminent danger of gold confiscation. There isn't enough interest among the general public in gold to merit any type of gold grab by the government right now. The gold bull market is just getting started, but at some point along the up-curve the public will be drawn in -- they always are since most people are attracted to rising prices. When gold starts out-performing the stock market on a consistent basis over the next few years then John Q. will jump on board with both hands and that's when the danger of confiscation (directly or indirectly) will be greatest. But we're not there yet, so there's no reason to panic.

I can hear the objections to this statement even now. A common retort to the "government will grab your gold" argument is, "Tyrants are never the same. Each regime is different than previous ones, so just because FDR confiscated gold doesn't mean that another administration will do the same." While there is some truth to this argument, the fact remains that all tyrants -- regardless of their personal and administrative characteristics -- are controlled by the same "higher power," which is to say, no tyrant is truly autonomous. They must answer to someone, and that someone always wants to confiscate the asset(s) the public holds dearest. There has never once in the history of finance been a time when a massive bull market didn't culminate with the public getting stripped of its investment -- it happens every time. Anyone who thinks the current long-term gold bull market will end any different is dreaming.

But there is something that separates this gold bull market (which hasn't become an investment mania or "bubble" yet) from other types of bull markets, namely, we're dealing here with the "ultimate" tangible asset, one that has a far greater significance to the global economy than just stocks or bonds or real estate. I do not believe the gold bull market will be allowed to end the way other bull markets have ended in the past. There is a movement afoot to restore gold's role as an underpinning in the monetary system, and if gold is to be crowned as "king" once again, and if the public ends up with a large stake in the yellow metal in coming years then we are back to the possibility of another FDR-type confiscation of non-numismatic gold. History really does repeat.

Could confiscation happen again in our time? "Due to the huge lending practices of gold by global central banks, there now exists an ever increasing likelihood of just such an event," says analyst Don McAlvany. On top of the "national security letter" threat there is the reporting requirement threat. McAlvany points out that when it comes to reporting requirements with any type of gold bullion or bullion coin it is better to err on the side of caution.

He is referring to the IRS amendments to the Income Tax Regulations, first promulgated on Jan. 5, 1984 and amended on Dec. 28, 1992. This regulation declares that all gold bullion liquidations are reportable by law on Form 1099 by coin dealers. Coins with a premium above 15% do not have to be reported by dealers.

In order to avoid the threat of confiscation, I agree with McAlvany that an investor's gold portfolio should include a sizeable holding of semi-numismatic coins (i.e., circulated, older coins with a modest premium over their bullion content). High-grade numismatic coins are not an option for some investors and aren't always the best value anyway. But the real threat is having a large portfolio position in bullion coins which could be subject to confiscation at some point in the future. The most quoted semi-numismatic gold is the $20 Liberty in Very Fine (VF), Extra Fine (EF) and Almost Uncirculated (AU). These are not rare coins, thus PCGS grading is not required. I endorse the plan proposed by one gold analyst that investors concerned with the safety of their long-term holdings should gradually begin upgrading their portfolio, exchanging the more common bullion coins to semi-numismatic and/or numismatic varieties according to your needs. Again, there is no reason to panic and switch out of bullion altogether at this point along the curve since the threat of confiscation is not yet imminent -- it's still probably a few years away. But it is coming!

There are some who protest that just because numismatic coins were exempt from confiscation in 1933 doesn't mean they will be in the future. I disagree. Current law already exempts numismatic and semi-numismatic coins from reporting requirements; moreover, the general public doesn't get involved with numismatics to a large extent, making it unlikely the government would come after this class of coins. The elite have always been into numismatic collecting/investing and this alone makes a compelling case for a loopholes in the case of a future confiscation effort by the government.

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