(As we head into Independence Day weekend 2004, I have been amazed at the number of questions I have received lately on gold confiscation. Apparently these rumors are making the rounds again. Since this is on folks' minds, I am updating my "The Gold Confiscation Hydra" essay originally published in March 2002. Liberate yourself from the bondage of the fear of confiscation and declare independence from numismatic marketing psy-ops!)
While all things gold continue to fascinate me, from the history of gold to mining gold to investing in gold to using digital gold for Information-Age transactions, there is one front of gold inquiry that never fails to cause me consternation, sometimes leaving my blood boiling. This thorny subject is the seemingly perpetually dredged up specter of a future gold confiscation in my beloved homeland, the United States of America.
Like the fabled Lernaean Hydra of ancient Greek mythology, a fearsome abominable serpent-like beast with nine vicious heads spewing venomous and lethal breath, no matter how many times the gold confiscation ideas are challenged and slain in public debate they keep respawning and rearing their ugly heads.
The ancient Greek sages claimed that Heracles (Hercules to the Romans and us) attempted to slay this vile hellspawn in his Second Labor of Eurystheus to prevent the Hydra from ravaging farms near Lerna in the Peloponnese.
Hercules confronted the terrible monster and, throwing his legendary strength behind his mighty war club, violently knocked one head of the Hydra clean off. Unfortunately, our hero was dismayed to realize that every time he severed a head from the demonic serpent, two new ones would grow back in its place! Hercules, not one to crumble under adversity even while locked in seemingly hopeless mortal combat, finally realized that he could use red-hot firebrands from a nearby fire to burn the Hydra's heads off and instantly cauterize the bloody stumps of the necks, preventing more Hydra heads from bursting forth.
The great warrior burned off all of the Hydra's heads except for the last one, which he severed and buried. Hercules later brilliantly used the dead Hydra's noxious blood to smear on his own arrowheads to make chemical missile weapons to launch at his future foes.
While a mere mortal like me certainly cannot aspire to slay the Gold Confiscation Hydra like the mighty hero Hercules, I would still like to offer my thoughts on gold confiscation this week. Perhaps, should the gods smile on me, I can help lop off a single head of the Gold Confiscation Hydra to do my small part in vanquishing this bothersome beast.
I have been pondering gold confiscation for a long time and, after careful study of both sides' arguments and even the original 1933 gold laws, I have come to the conclusion that the probability of such an event happening again in the United States of America in the future is incredibly low, probably less than a 1% chance. In a nutshell, there are three primary reasons why I believe this to be the case.
First, there are vast, vast structural differences between the gold environment of 1933 and today.
Second, confiscating gold again would be the final coup de grace slaughtering the fragile US dollar as thoroughly as if Hercules himself had shoved a burning firebrand down its gaping throat.
Finally, the fearsome social implications of a new gold confiscation attempt in our brave new world make it a political suicide play for any future tyrant of the dark ilk of socialist dictator Franklin Roosevelt.
Before I elaborate on these three arguments, I would like to first address another controversial issue surrounding gold confiscation. Where, oh where, when the Hydra heads of gold confiscation begin spewing their venomous words, do they first spawn?
Next time you see a debate erupt on future gold confiscation, take the time to carefully track it back to its original source, the proverbial spark that kindled the fires of the current gold confiscation debate that you are observing. In my experience, maybe 8 times out of 10, if you track the Gold Confiscation Hydra's slimy trail back to its dark subterranean den, you will find that it emerged from a gold numismatics merchant.
Gold numismatics are simply rare collectors' gold coins that trade at high premiums to their intrinsic gold content value. Rare gold coins are beautiful to behold and can be very good investments when demand for gold rarities waxes ecstatic.
Coin dealers often love rare gold coins because they are much more profitable to sell than plain old gold bullion coins like the American Gold Eagle that only trade at a small premium to the spot price of gold. The disparate profit structure for gold merchants in selling rare gold coins versus gold bullion coins is quite revealing and a key piece to understanding the gold confiscation debate.
A gold merchant can sometimes sell rare gold coins for 25%+ profit margins, a nice healthy markup. The cutthroat competition in the much larger market for gold bullion coins, on the other hand, often limits profit margins to 3% or so over the spot price of gold. Now if you were a red-blooded capitalist gold merchant, would you prefer to sell gold coins for a 25% profit or 3% profit? Exactly. I would feel the same way if I fed my family by selling gold coins.
Now there is certainly nothing wrong with rare gold coins or the merchants who sell them. Rare gold coins are wonderful for collectors of beautiful things. I have friends with impeccable honor and integrity who sell rare gold coins to gold collectors who traffic in beautiful things. There is, however, a big problem when gold numismatics dealers use blatant scare tactics as Machiavellian marketing tools.
They occasionally try to herd naïve gold investors into very expensive, highly illiquid, and subjectively valued rare gold coins by implying that there is a high probability that Uncle Sam will break down their door, conk them over the head with the butt of an MP5, duct tape them and their family together, comb their house with a metal detector to steal all their gold bullion coins, then throw them in prison just for spite. Hogwash!
My company, Zeal LLC, sells financial newsletters. If you asked me if I believe whether the best source of financial information is the Wall Street Journal, CNBC, or private investing newsletters, honestly what do you think I would say? You got it. It doesn't mean that I am right or wrong, just that I am biased because my heart and passions are near and dear to this business. It is the same with gold numismatics merchants. Is it any surprise that they cling to and propagate confiscation theories that increase their profits and provide better financial futures for their own families?
Anytime you hear a newsletter publisher tell you that newsletters are the ultimate way to get valuable financial information, or anytime you hear a rare gold coin merchant tell you that rare gold coins are the best gold investment because the Franklin Roosevelt Gestapo chose not to bother with them in 1933, you should really take these assertions with a heaping pile of salt. Do your own due diligence and be cautious to believe anyone who has a direct financial interest in getting you to subscribe to a particular worldview!
Now that the typical shadowy subterranean origins of the Gold Confiscation Hydra have been exposed to the unforgiving rays of sunlight, I would like to briefly discuss the vast differences between the gold environment in 1933 and today, the lethal chain of financial-world events in a neo-gold confiscation that would ultimately shatter the fragile fiat US dollar, and the enormously dangerous socio-political implications of such a course of action by a future American tyrant.
The general and gold environments of 1933 were light years away from what we experience today.
In 1933, gold was legal-tender currency in the United States of America. The dollar was literally as good as gold as the US and many other European countries had been on the gold standard for a century. If you possessed paper dollar bills, you could present them to the US Treasury and demand gold bullion. If you had a $20 bill (a lot of money back then), you could exchange it for a $20 one-ounce-gold legal-tender United States coin. In 1933 gold really was the coin of the realm and was accepted everywhere as money.
Today, ever since US President Richard Nixon tragically severed the final link between gold and the dollar on August 15, 1971, there is absolutely zero official or legal-tender relationship between gold and the dollar. In fact, the US Treasury and the Federal Reserve have spent hundreds of billions, possibly trillions of fiat dollars over the last three decades, to attempt to prove this very point to the international financial markets and American populace that gold is no longer relevant in the modern world of central banks.
Socialist pro-government economist John Maynard Keynes' gold-is-a-barbaric-relic thesis has been the rallying cry of the recent official campaign to fully decouple gold from the national fiat-currency markets. And it has been done.
In 1933, many American banks kept gold in their vaults. If you had an account at a bank, you could, in some cases, actually demand to withdraw gold instead of paper dollars if you wished. As the Great Depression raged untold multitudes of US banks were on the verge of failing. Dictator Franklin Roosevelt, only one day after he was inaugurated as President on Saturday March 4, 1933, broke his solemn campaign promises to the American people and unilaterally shut down all the banks in the United States by declaring a four-day "bank holiday". A terrifying banking crisis descended on the nation.
Because gold was legal tender, both American bank depositors and foreign investors could demand to withdraw their accounts in gold bullion if the contractual provisions of their particular account allowed this, and many did. As people sensed trouble and began dumping their paper dollars for US legal-tender gold coins, the mushrooming gold demand would have contributed to further banking problems and possibly a systemic US banking failure. In history when a country's banking system totally collapses, the government falls soon after. The 1933 gold confiscation happened a month after the bank holiday and was intimately related to the banking crisis.
Today, of course, US banks don't keep gold in their vaults and no one can demand gold in lieu of dollars if they want to cash out their accounts. While a gold rush certainly could exacerbate a bank run in 1933, today there is absolutely no link whatsoever between gold and commercial banking. Gold demand and prices can soar today and still have no direct effect on the solvency of the banks. Remember 1979? Gold soared but the banking system didn't implode.
In 1933, gold was legal-tender US currency because the US was on the Gold Standard, paper dollars could be surrendered and gold bullion demanded at the US Treasury and many banks, and the health of the fragile fractional-reserve US banking system could be placed in mortal peril by rapid increases in gold demand trends. In addition, back then a run on gold could deplete the US Treasury and collapse the US dollar. All that is impossible today because of the official decoupling of the dollar from gold!
Today of course, the US government and central banks around the world go to great pains to assure us that gold is nothing but another garden-variety commodity, like wheat, that has zero role as money in the modern fiat world.
While Franklin Roosevelt was a dishonorable rogue and a thief who stole the future of many Americans nine months before he almost doubled the gold price by decree in his notorious dollar devaluation in 1934, we can look back at history and fully understand why gold was the very cornerstone of the US monetary and banking system at the time.
Today, there are no legal or contractual links between gold and the US dollar, the Federal Reserve, and US banks.
If some future American tyrant even wanted to try and outdo Franklin Roosevelt to become America's worst president in history by stealing gold from the American people again, what on earth would his justification be this time around? Even if the US financial system was collapsing and bank runs were rampant, because there are now no links between gold and the dollar there is no conceivable reason, real or contrived, that would justify a new gold confiscation to the markets and court of public opinion.
You may be thinking, yes, there may be no possible way to justify a new gold confiscation in today's post-Gold Standard world, but we are talking about the federal government here, which is not known for acting rationally. The government is not logical and not rational and it will do whatever the heck it pleases regardless of whether it makes sense or not. I agree with you completely that governments do not act rationally but I have a counterpoint to add.
Even though governments perpetually lie, cheat, and steal, there is one thing that virtually all governments and bureaucrats have in common throughout history. Almost without exception, they all want to stay in power and ensure that nothing upsets the cozy status quo of the public trough at which they happily feed like gluttonous parasites. This brings us to my second reason why a future government gold confiscation in the US is an extremely low-probability event that will probably never happen.
If the US federal government outlaws gold again and demands that Americans surrender their gold coins under threat of fines or imprisonment, the US dollar is toast. Over. Finished. Done. Gone. Out.
A fiat currency like the US dollar is ultimately nothing more than a confidence game. If you compare a $1 bill to a $100 bill, what makes the $100 bill worth more? They weigh the same, are both printed on a few cents worth of the same special paper, they look similar, they feel the same, they take up the same space in your wallet, etc. A $100 bill is only worth more than a $1 bill because you have faith! You have confidence that it is so as do other people all over the world. Intrinsically, there is no reason why a piece of paper with $100 printed on it should be worth any more than an almost identical piece of paper with $1 printed on it.
With no link to gold, the US dollar is ultimately like Monopoly money. Its perceived value is nothing but a concept, an ethereal idea like faith, that doesn't exist in a physical sense but only in our minds. And, whether the US government likes it or not, the world eagerly watches the dollar gold price for any evidence that the US dollar is in trouble due to waning confidence because of the massive inflation in the US fiat-currency funny money.
If the US government tries to call in private gold again, it will be the biggest shock to national and international confidence in the US dollar that the world could ever imagine. Many foreign investors, who we rely upon to generously buy trillions of dollars worth of capital investments in the States today to finance our gluttonous American appetite for debt, would instantly have their faith shattered to the very core when they heard the news that the US was confiscating gold again.
Foreign investors invest in the US partially because we have rock-solid Judeo-Christian laws that protect the sacred rights to own private property, one of the critical pillars of freedom. If the US government tries to seize private property like gold in a big way, foreigners will flee fast. Any country that violates the sanctity of private property is not a good place to invest and is punished severely by international markets.
Sophisticated global investors controlling trillions of dollars would immediately realize that serious trouble was afoot if a new US gold confiscation was announced. Even though there is no gold standard for the dollar, they would know that the great dollar confidence game had reached the end of its rope if the US government was in such dire straits as to confiscate private gold again. It would be a crystal clear signal to the markets that an imminent dollar devaluation against gold, the ultimate money for six thousand years of human history, was hurtling down the pike like an unstoppable juggernaut.
Instantly, within minutes after the announcement of a new US gold confiscation, the massive forex markets, the largest on earth, would be deluged with investors and governments from all over the world trying to frantically dump their dollars before dollar confidence totally collapsed. In this surreal environment, dollar supply would vastly overwhelm dollar demand. Heck, there may not even be any dollar bids in this chilling scenario!
The Gold Confiscation Hydra, if unleashed from its hole by some crazy future American Administration, would instantly signal to the world that the US dollar is going down the tubes and the flagship reserve currency would quickly plummet by 20%, 30%, maybe even 50% in a matter of days. It could prove to be the greatest and most terrible day of financial carnage ever witnessed in the history of the world!
It would not make a bit of difference if a future gold confiscation was announced when gold was trading at $300 or $3,000 per ounce. If a new gold confiscation was announced tonight, there would be unprecedented US dollar sell orders and the dollar would crash.
Since the US federal government and Federal Reserve officially renounced gold in 1971, declaring it to be nothing but another commodity like rice, a new government grab for gold would annihilate the global dollar market as dollar holders' crucial confidence and faith in the fiat US dollar with no intrinsic value suddenly vanished. Without confidence, a confidence game is doomed. The US dollar only has value because folks believe it does, and if their beliefs are challenged or even confused by a new government gold grab, a horrific overnight dollar crash is virtually assured.
Now back to the goofy government bureaucrats who may be tempted to resurrect the Gold Confiscation Hydra. Because all governments and government officials like their cushy jobs and power and want to perpetuate and grow the parasitic system that pampers them, they will never dare to attempt a monumental gamble that top US Treasury and Fed officials well know would instantly slay global confidence in the US dollar.
If the dollar crashed that rapidly, in a day or a few, the US government would probably fall and anarchy would reign while a new government was formed from the ashes. And that new government would not include the old government that made the foolish decision to confiscate gold that slaughtered the dollar! Because of the phenomenally strong self-preservation instinct of government bureaucrats to maintain the status quo, I believe there is a less than 1% probability that they would ever intentionally kill the US dollar by recalling gold and annihilating global confidence in the fragile fiat currency.
So far I have illuminated the gold-numismatics-merchant shady origins of the recurring Gold Confiscation Hydra scare rumors, discussed why there is no conceivable reason that events like 1933 could transpire today under our current financial system officially decoupled from gold, and pondered how the fiat US dollar is a fragile global confidence game that cannot be shaken by something as earth-shattering as a new gold confiscation.
The final reason that a new gold confiscation is not in the cards is the ugliest part of this essay. Please allow me to be brutally honest, as the internal US socio-political implications of a new gold confiscation are horrifying.
Almost always when gold investors discuss the Gold Confiscation Hydra, they fail to take the next logical step and imagine what would actually happen in the US if Tom Brokaw suddenly reported on the General Electric Nightly News that all gold investors had two weeks to haul their gold to their friendly-neighborhood Federal Reserve member bank and surrender it for dull green pieces of fiat paper.
First, imagine that there are 100m investors in the United States today. Of that 100m, maybe only 10% have ever even considered gold as an investment and probably only 3% own physical gold. 3% of 100m investors is 3m American investors who suddenly discover that they face serious fines or imprisonment for their now grievous crime of owning gold, which is paradoxically just another commodity according to three decades of government propaganda.
Now I don't know about you, but I work with gold investors every day and I know we are a cantankerous lot. We believe in all these antiquated concepts like freedom, the US Constitution, the sacred right to private property, and that we actually have certain God-given inalienable rights endowed by our Creator that no man or government can ever take away. Strange eh? Wait, it gets even more interesting!
Gold investors are generally very intelligent and very peaceful and exemplary citizens but we strongly believe in the Second Amendment to the Constitution of the United States of America and are heavily armed to protect our families and property from violence and theft. If you took any other cross section of America, you could scarcely find a group that was more wary of government abuses of power than those who have taken the time to study the incredibly deep subject of gold, the political metal.
Of those 3m gold investors who heard the new confiscation order on the news, I suspect that maybe half would comply outright because they wanted to stay out of trouble. That leaves 1.5m American gold investors who own physical gold but are not interested in trading it in for paper Federal Reserve Notes regardless of what Tom Brokaw said the US government demanded.
Interestingly, even in the much-more-trusting era of 1933 there were huge numbers of Americans who simply ignored Franklin Roosevelt's illegal extra-Constitutional request for citizens of the US to surrender their gold bullion. In our infinitely more cynical environment of today when even the Keynesian socialists don't trust the government, the gold investors are the least likely of all investors to voluntarily submit to such a ridiculous scheme.
Now all of a sudden the federal government has a huge problem on its hands. It has ordered gold to be surrendered but suspects that 1.5m Americans still possess the dangerous metal. What does the government do next?
First of all, the government has to track down who owns gold, an exceedingly difficult and expensive task. Some coin dealers keep extensive records and some don't. Some gold changes hands outside of coin dealers in private sales between individuals. If the government really wants to devote the time to searching for now contraband gold, it will have to send people door-to-door to millions of suspected families because the government won't know which ones chose not to comply.
Going door-to-door looking for gold is hugely expensive, disruptive, dangerous, and politically suicidal. If the government is crazy enough to do that, which I think will never happen, it will have to choose between the polite method or nasty method of going door-to-door.
If the government is in a charitable mood during its new gold confiscation, it will simply send a single government employee to politely knock on the door of a suspected gold investor and ask him or her if they have any gold to donate to Uncle Sam. The gold investor, since he or she already ignored the gold confiscation order, will probably either say that no they don't own gold therefore the government's records are wrong, or that yes they owned gold in the past but they sold it at a loss a few years earlier. Or they might only surrender a token portion of their physical gold, a few coins out of a hidden cache of a hundred gold coins to make the government agent happy. A gold confiscation without teeth is meaningless, a charade.
But if the government chooses the nasty method with teeth, which is far more likely if it is in a surly enough mood to try a brazen stunt like a new gold confiscation in the first place, all hell will break loose in America.
Playing this deadly game, if the Feds suspect a gold investor of not surrendering gold, they will send in a jack-booted SWAT team of heavily-armed invaders wearing black balaclavas to hide their identities from the very American people who they have sworn to protect and serve.
To forcibly take down a gold investor's house to search for contraband gold, each house would probably demand a half-dozen elite agents or so in the entry team and another half-dozen agents to seal the perimeter and run support. They would kick down doors, throw in flash-bang grenades, and generally try to intimidate recalcitrant gold investors with an overwhelming display of government power. Because men and funds are limited, they could not search all suspected gold investors' houses at once but would have to do it slowly over years because of logistical constraints.
In maybe 10% of these forced entries in violation of the US Constitution, the federal agents would encounter a stubborn gold investor who was not only heavily armed but was prepared to defend his sacred private property rights with lethal force. The Feds would kick down the door to his home, a firefight would ensue, and of course the gold investor would be shot dead by the superior arms, marksmanship, and numbers of the Federal Gold Police.
But such atrocities could only happen a few dozen times across the US before public outrage grew red hot. Because the US government has spent three decades brainwashing the average American into believing that gold is nothing, that same average American will not be happy when a Federal Gold Police SWAT team executes their church-going, city-council member, businessman, and upstanding-member-of-society neighbor and friend just because they had some curious beliefs that led them to buy the garden-variety commodity of gold.
The very federal agents tasked with doing the forcible entry searches for contraband gold would soon become demoralized and refuse to keep doing them. They want to hunt dangerous criminals like drug dealers and terrorists, not little old otherwise law-abiding men who happen to have a peculiar affinity for gold. Most policemen and federal agents love America, their families, their freedom, and their honor just as much as civilians. A new gold confiscation would rip the federal agencies apart that were directly involved in the dirty deeds of enforcing it.
At first the mainstream media probably wouldn't cover these tragedies, but Internet coverage on alternative media sources would spread like wildfire and would ultimately force the issue into the limelight. Eventually, after dozens or hundreds of otherwise innocent Americans who did nothing more than refuse to give away their physical gold are murdered by elite Federal Gestapo agents carrying machine guns, public outrage will explode at the new police state and politicians' heads will roll, maybe literally. The foolish bureaucrats who ordered the gold confiscation fiasco will be run out of office and forever disgraced, if not put on trial.
If you think for a second that Americans won't care if a few dozen gold investors who refuse to surrender their gold are slaughtered by the government, remember the tragic federal sieges of Ruby Ridge and Waco. Both were cases of the federal government horribly abusing lethal force and innocents dying as a result, and the tragic consequences of these events still reverberate strongly throughout the US government and the American people alike many years after the atrocities. A new gold confiscation would create a horrible and tragic situation like the Ruby Ridge and Waco sieges multiplied a thousand times over.
The American people may tolerate the slow bleeding away of some of their freedoms over decades, but they won't tolerate the wholesale violent slaughter of otherwise upstanding citizens who simply won't comply with some crazy out-of-the blue gold confiscation order. The United States government is the servant and employee of the American people. Yes, Americans will let the government get away with many abuses, but dangerous lines certainly do exist which no representative-republic government dares to cross. Forcibly stealing private gold in a gold-decoupled world is one of them.
The bottom line on a future gold confiscation is that the probability of such an event is exceedingly low, probably less than 1%. And that 1% only exists in a time of total financial collapse in the United States, complete market Armageddon, in which there would be plenty of warning as the US financial system went to hell in a hand basket for months or years (think Japan) before the government, on the edge of collapse, made a last ditch effort to grab gold and reestablish a New Gold Standard to back a new gold dollar.
The Gold Confiscation Hydra is almost always unleashed by gold numismatics merchants who make their living by selling rare gold coins at much higher markups than gold bullion coins. Because of the vast changes in the structural US financial system officially decoupling it from gold since 1933, there is no defensible justification for a new gold confiscation that would fly in the United States or international markets. These same international markets, if the US government foolishly tried to seize private gold again, would instantly recognize a lethal structural problem in the US dollar and they would sell it like it was the end of the world, crashing the US dollar by maybe 50% in a matter of days.
As if the crash of the dollar and subsequent dismantling of much of the federal government for lack of operating funds was not enough of a deterrent for future tyrants, a future gold confiscation would have to be completely voluntary (in which case it would be meaningless) or else it would rapidly degenerate into a series of dangerous house-to-house invasions of which some would tragically turn lethal.
As the body count of otherwise innocent American citizens mounted, general American public opinion would explode in rage and demand an end to the killing for some irrelevant "barbaric relic" like the commodity of gold. After all, if the goofy gold investors want to own gold, the American public will reason, just let the gold investors cling to their delusions and own gold and stop the senseless slaughter that is creating a police state and pushing the US towards anarchy.
A new gold confiscation in the United States of America is so improbable as to not even be worthy of consideration for gold investors.
While I certainly know that I am no Hercules and have no chance in Hades of slaying the Gold Confiscation Hydra alone, I sincerely hope my humble thoughts add to the debate in some small way and help ultimately vanquish this troublesome recurring gold-confiscation-scare beast. It is nothing more than a numismatics marketing ploy, period.