At one point we thought we were alone in believing that eventually we would see a confiscation of citizen's gold in one or more countries. Then we saw the confiscation of deposits in Cyprus in line with a "bail-in" policy. While this was a banking measure in line with the normal liquidation of a company, it was endorsed by most nations thereafter. The greatest impact was seen on investors worldwide who had never thought that such events would happen.
Thereafter we saw several well-respected commentators and researchers say that we should not dismiss the concept of gold confiscation too quickly. This came from no less a group than Casey research. Then Lawrence Williams of Mineweb, one of the best gold websites, showed that the subject could be alive when he mentioned that if China confiscated its citizen's gold, it would hold a level of reserves close to those of the U.S. It is clear to most gold commentators that China is seeking to maximize its gold reserves and has been encouraging its citizens to buy gold themselves. It has 'liberated' its gold import system and encouraged the country-wide development of its gold distribution system. As a result, its citizens and government are the most gold-acquisitive nation on earth and have overtaken India in its gold buying. This is particularly important to the subject as they prepare for the convertibility of the Yuan ahead of its role as one of the globe's reserve currencies.
No Repeat of the 1933 Gold Confiscation?
Of course there are many observers who belittle the probability of gold confiscation citing the reasons that precipitated the gold confiscation in the U.S. of 1933 as not applying today. And they are right. The deflation at that time and the banking crisis it precipitated was an entirely internal matter for the U.S.A. Today quantitative easing has done the same job inside nations. In the Eurozone similar policies have been followed attempting to ensure neither its member nations nor its banking systems collapse under its own credit crunch. The electronic printing press has expanded the money supply the same way that the devaluation of the dollar against gold did then. Critically, confidence in the euro or the dollar has not collapsed as badly as it did in 1933-35 and the young euro has survived well too.
Mineweb also reported the article in Zero Hedge by Tyler Durden where the subject of the confiscation of gold was re-visited recently (http://www.zerohedge.com/news/2013-08-04/did-china-just-fire-first-salvo-towards-new-gold-standard). Add to this the Charleston Voice re-visit of the 1933 U.S. gold confiscation pointing the way to its repeat.
Today the reasons for the confiscation of gold will be very different. Just dwell for a moment on why the concept of China and its citizens investing in gold so heavily. The Chinese support the state more so than any other nation we know of. We would expect such a confiscation there to be very effective in getting gold out of the people's hands and into 'official' reserves. So why would a nation want gold for non-internal uses?
A paper commissioned by the World Gold Council from the OMFIF (available on www.gold.org website) gives a very clear background to gold's role in a future multi-currency monetary system. So let's look at the potential environment for gold in the future and why.
If you listen to the recording of President Roosevelt's speech (Audio mp3 of Address) you will see that the government of the day was primarily combating a loss of confidence in the banking system. It also wanted to get control of gold out of the hands of the public and into the banking system/government. One of the key points used by the President to garner confidence was the statement that new money was issued against "good assets". The key to today's money value remains confidence. If the loss of confidence today spread to the U.S. dollar or even the Treasury market, then a new crisis would rupture, not just the U.S. monetary system but also the global monetary system.
Is that likely in the future? Well, why is China buying gold even more than India?
One of the lessons 'the powers that be' have learned is that it is a mistake to wait for a crisis to unfold before they act. For instance, some gold dealers believe that gold will only be confiscated once the dollar has collapse (as confidence collapsed in 1933). But there is no Federal government governing the world. Different nations in the global monetary system have to address a global currency crisis that targets individual national currencies in a global context. So an Indian Rupee will not find any nation or monetary body resolving their international currency credibility. They will have to convince the nations of the world that their currency does have the necessary "good assets" to retain their own currency credibility. As the OMFIF report pointed out, gold will serve a pivotal role in this regard.
With China getting close to launching the Yuan onto the world stage, you can be certain that their monetary specialists have extrapolated all the possible scenarios that will accompany the free convertibility of the Yuan. And from these they will have planned their future moves to combat any fracture of monetary stability. They are fully aware that their interests will clash with those of the U.S., and that the Yuan will clash with the dollar, sap some of its global power -- at least -- and that the developed world could well act against the Yuan in some way or another. Consequently the accumulation of gold by the Chinese will add considerable weight to the credibility of the Yuan, internationally, as it will do to the developed world's currencies at the moment, tacitly.
The Chinese are a people who will obey and support their government's actions in the future. They have been well trained since the Cultural Revolution of 1965 to do so and can feel the benefits of doing so in their own country now.
If the Chinese government decides to confiscate its people's gold, it will make it clear that it is in the nation's interests to do so - as President Roosevelt did in 1933. And as was the case in 1933 we see the Chinese government compensating their people in a manner that at the time will satisfy them - perhaps issuing notes against the gold confiscated?
You the reader will have to contemplate whether your government will find a defence of its own currency at that time in gold too. If the Chinese go that road, it is doubtful that almost any national currency will be able to avoid going the same road too. To emphasize that point, it is likely - in line with the many swap agreements made in the last couple of years by China with its trading partners -- that there will be a time when Chinese exporters and importer will invoice or expect to be invoiced in the Chinese Yuan and not the U.S. dollar! Will this mean that the U.S. will have to sell dollars and buy Yuan to conduct business with China? Will other nations avoid the U.S. dollar and deal direct in the Yuan with China?
If either of these events happen, then the U.S. dollar will come under pressure and may well need its own gold to act as support in eventual dealings. Certainly many other less prominent nations will face similar pressures.
In Part II we will look at when gold confiscation is likely to happen as well as just how large a force the emerging world will become in terms of global wealth and its presence in the global gold market.
Part III looks at what to expect in this structurally changing global monetary environment and just what you can do about keeping your gold then.
Hold your gold in such a way that governments and banks can't seize it!
Enquire @ admin@StockbridgeMgMt.com