In a government debt crisis, is there a possibility of precious metals being seized? Professional gold bug Nick Barisheff examines the history and likelihood of government confiscation or expropriation of privately-owned gold, silver and platinum.
If we experience a debt crisis, as many economists believe is inevitable, many people believe that their holdings of gold and silver bullion will be confiscated, just as in the United States in 1933. This article reviews the probability of confiscation and compares it to other more likely measures to generate government solvency.
An appropriate starting point when addressing concerns about gold confiscation is to define the word ‘confiscation’. Merriam Webster says it means “to seize or buy as if by authority” and “to seize without compensation as forfeited to the public treasury”.
Almost without exception, it is expropriation that is the actual risk, not confiscation. Confiscation, as in forfeiture, is usually the result of theft, treason, insurrection, war or genocide. Expropriation means “to take (property) of an individual in the exercise of state sovereignty” (Merriam Webster). The key difference between confiscation and expropriation is the appropriate compensation of the individual for the transfer of his or her property.
For the person thinking “I’m not convinced that a confiscation won’t happen, I’ve heard that the United States confiscated gold in 1933,” this is hearsay, not the truth. To put the events of 1933 into context, consider that, from 1900 until 1933, a U.S. dollar was convertible into gold at a ratio of $20.67 per ounce, even through the depths of the Great Depression. Because of the hardship of the Depression, there were bank runs and bank failures and, as people lost all confidence in the U.S. dollar, gold could not be obtained for its fixed price.
Recognizing that lack of confidence in the dollar was an enormous problem, and with the government’s hands tied regarding printing additional currency to alleviate the currency shortage and lack of dollars in circulation, then-President Franklin Roosevelt took drastic action, and did three things. He eliminated the convertibility of the dollar into gold, making the ownership of gold coins and bullion illegal for U.S. citizens anywhere in the world; after obtaining all the gold he was likely to get, he changed the fixed price of gold to $32.32; then later changed it to $35, a nearly 70 per cent devaluation of the dollar.
It was illegal for Americans to own gold privately
When the ownership of gold coins and bullion became illegal, U.S. dollars were tendered at Federal Reserve member banks when citizens surrendered their gold. This was intended to be and worked as a marginal increase of the U.S. gold reserves. This in turn allowed an increase in dollars that could be printed.
This was a legal expropriation. The full dollar value of gold provided to those citizens at the time of surrender was $20.67—the official exchange rate. This was certainly unpleasant, given the threat of steep fines and 10-year jail terms for failing to comply.
Afterward, the U.S. dollar was devalued to $35 per ounce, but it was still far from confiscation without compensation. In Canada and other western countries, no confiscation or expropriation has ever been enacted, and the U.S. expropriation did not apply to silver and platinum.
In practice, this accomplished the following ‘desirable’ result from the perspective of the administration: with the devaluation of the dollar against gold, more dollars could immediately be printed legally within the parameters of the gold standard. This additional printing alleviated the desperate shortage of currency in a time of dire need.
The 1963 Milton Friedman and Anna J. Schwartz hypothesis (A Monetary History of the United States 1867 – 1960) stated that the “rapid rate (of growth of the money stock) in three successive years from June 1933 to June 1936 . . . was a consequence of the gold inflow produced by the revaluation of gold plus the flight of capital to the United States”.
“Treasury holdings of gold in the U.S. eventually tripled from 6,358 tonnes in 1930 to 8,998 tonnes in 1935 (after the Act) then to 19,543 metric tonnes of fine gold by 1940,” the authors said.
The current U.S. government holdings of 8,133.46 tonnes of gold bullion would be worth about $326.9 billion if valued at today’s $1,250 dollars per ounce. On the books it is still valued at the final fixed price of $42.22 per ounce, as it was during President Nixon’s era, or a touch over $11 billion. Estimated private holdings of 47 million ounces represents a modest $58.5 billion. Contrast these numbers with epic U.S. deficit spending, whereby in August 2016 alone we saw $107 billion in deficit expenditures, and the futility of a gold expropriation becomes clear.
Increasing taxes the most likely revenue source
All of that being said, could a gold expropriation happen today, and if not, what could happen today?
As we have seen historically, increased taxation is always the go-to for a government seeking to increase its revenues and reduce its deficit. Language such as seeking to ‘increase taxes on the rich’, ‘closing loopholes’ and ‘repatriating overseas corporate profits’ have all been in the news during the 2016 U.S. presidential campaign, with a side offering of promises to ‘eliminate government waste’ and ‘reduce entitlements’.
In this regard, the likely adjustments would be to the tax regimes currently in place. For example, increased taxation of the ‘Carried Interest’ benefit that hedge fund managers most often use would yield $18 billion over 10 years per former President Obama’s 2015 tax proposal; and an adjustment or elimination of mortgage interest deductibility may increase revenue by $70 billion a year.
Finally, it would be a simple matter to limit or cease to increase the annual contribution amount to tax-advantaged savings plans (IRAs or 401(k)s (the equivalent of Canadian TFSAs and RRSPs, respectively)), which may generate further revenue.
Significant options also include the potential action of a rule for tax-advantaged pensions and retirement accounts to include an allocation to government bonds.
With an aggregate sum of $24.9 trillion, a legislated redirection of 10 per cent of those funds into Treasury bills would realize a revenue contribution nearing $2.49 trillion to the federal coffers. Any of these taxation actions would raise significantly more than could possibly be generated by a civil gold expropriation.
Can government programmed spending be reduced?
Finally, what is most necessary is also the most difficult to achieve: a reduction to entitlement spending. The new president has been reported to be working to implement the Republican Spending Committee budget plan, a plan to eliminate $8.6 trillion of program spending over 10 years. Time will tell.
At this point, the conditions are not similar to those leading up to 1933. Today there are effectively no limits on the amount of money that the Fed can create. The Fed is not limited by the gold reserves.
The government’s next step is not likely to expropriate your gold. The volume of private gold in the U.S., at 47 million ounces, is very small, representing approximately 19 days of deficit spending. Note that the government would still have to pay full value for any private gold it expropriated before selling it to generate any revenue.
Factoring in the cost of administration and political backlash, an expropriation would almost certainly be a negative-yield activity at the current market value.
Steps to confiscation
There are many steps and options that have to occur before an action of confiscation, which is illegal and outright theft. This is specified in both the United States Constitution (Annotation 15 to the Fifth Amendment) and in Canada, under the Charter of Rights and Freedoms.
In the worst-case scenario, where the government aims to expropriate your gold, you will be duly compensated, as is the case for any expropriation of property.
Other financial assets that only exist digitally or on paper will have become worthless beforehand due to market gyrations. With this in mind, accumulate your precious metals now, and as frequently as means allow.
The worst-case scenario for gold and silver exceed the best-case scenarios for all other classes of financial assets and tax strategies when push comes to shove.
In all of the debt and deficit scenarios, the federal government is required to raise additional revenues to help satiate its boundless appetite to tax and spend the wealth of its citizens.
Gold is a time-tested method to protect your family and assets against financial market crisis and political risks, devaluation, deflation and inflation, or worse.
The inescapable fact is that there are not enough precious metals for everyone to exit the fiat currency debt trap and inevitable default. If the wealth of your family is within the fiat system, you do not want to be looking to buy precious metals after the price has risen. Acting early is beneficial; it will help ensure your protection against dramatic losses.
The reasons for accumulating gold have been established; the risks of not owning gold are clear. For added comfort, investors should include silver and platinum, which have many commodity applications as well as monetary attributes. This makes them less likely to be expropriated than gold.
Depending on your level of wealth, you can also consider diversifying your precious metals holdings geographically. For example, Bullion Management Group offers storage in London Bullion Market Association-member non-bank vaults in Canada, Hong Kong, Singapore, Dubai, Zurich and Panama. Preserve wealth through the true qualities of gold: liquidity, no counter-party risk, and independence from management skills. Make the most important decision, which is to get started.
Nick Barisheff is the founder, president and CEO of Bullion Management Group Inc., a company dedicated to providing investors with a secure, cost-effective, transparent way to purchase and hold physical bullion. BMG is an Associate Member of the London Bullion Market Association (LBMA) and an Associate Member of the Responsible Investment Association (RIA).
This is an edited version of an article that was originally published for subscribers in the April 7, 2017, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846