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The issues facing the developed
world’s financial systems are ones of liquidity and solvency, among
others. The assumptions of liquidity levels proved horribly incorrect! The request
of the IMF to lift their resources from $380 billion to $980 billion and the
currency swaps between the U.S. and Eurozone confirm that (these may still
prove inadequate). Many markets, which reserve managers had considered to be
deep and liquid, proved to be the exact opposite with assets-selling only at
a large discount. This was even true of some AAA-rated assets, showing that
credit ratings offered no effective guide to liquidity. Many central banks
had to rely on bi-lateral currency agreements with other central banks,
principally the US Federal Reserve.
The situation is heading for even
stormier waters on both sides of the Atlantic. But true to history, the gold
market remained liquid throughout the financial crisis. This was the case
even at the height of liquidity strains in other markets –a reflection
of the size, low market concentration, and flight to quality tendencies of
gold. As we said earlier: the Swedish Riksbank used its gold reserves at the
height of the crisis to finance temporary
liquidity assistance.
A look at what we have said so far in
this series answers the question that gold confiscation can really happen,
but the question of when and under what specific conditions remain. We look
at this now…
Confiscation of Citizen’s Gold
To
get the issue in perspective, gold as a financial asset –providing
liquidity as cash should do but doing so globally—is strongly on the
rise, irrespective of its price. A look forward into 2012 points to deeper
and more confidence-destructive financial crises, if not worse than we have
seen in 2011. With the problems being structural and so far inadequately
addressed, expect to see some deep damage done to the developed world’s
financial system and most likely its banking system. Gold as a financial
asset may provide a safety net as well as the means to repair national
currencies. All the world’s currencies are interlinked, and banking
systems are telling us that gold has already swung into action to provide
financial relief. But it will need to see a very large expansion of this role
if it is to defer or rectify these crises.
In a crisis the price of gold becomes
irrelevant, it is the number of ounces you have that counts!
That’s
why the surplus earning worlds central banks are buying gold at the expense
of currencies, particularly the U.S. dollar. We would go so far as to say
that all the world’s central banks are very aware of the need to
continue to use gold in the monetary system and more pertinently, that that
role is growing, much as they hate that prospect.
Should
the crises continue to grow this way, we have no doubt whatsoever that
governments will consider confiscating their citizen’s gold.
There’s a point in a decline in currency confidence where this is
inevitable! Expect that developed world, central bankers have laid down
contingency plans for just such an event.
Should
they do so, it will likely be done at a weekend when markets are closed and
when their citizens will not have time to take action to prevent such a
confiscation. It will be overnight, and gold will be gone. As in 1933, the
penalties for not handing over personally owned gold will be draconian. Gold
held within a nation confiscating their citizen’s gold in the
country’s banks will be handed over without reference to the clients
themselves first.
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