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As concerns mount that there is
another financial crisis in the offing and the gold price rises, American investors
worry increasingly about whether the US government will confiscate their
gold. The precedent was set by President Franklin Delano Roosevelt, who in
1933 forced all of America’s gold owners to sell their bullion to the
Federal government at the official price.
However,
the situation today is very different from that of 78 years ago. At that
time, gold was the primary currency, the dollar being tied to it at $20.67
per ounce. But today, the Fed and European central banks strongly deny that
gold has any monetary role at all, and argue instead that it’s just a
hangover from the past: “that barbarous relic” as Keynes called
it. Its confiscation would be an embarrassing admission that gold, after all,
is money.
Nevertheless,
as paper currencies continue to lose credibility, the temptation for any
government to seize its citizens’ gold to enhance official holdings
must be growing. Americans today, however, are unlikely to meekly accept
confiscation the way they did under Roosevelt. And nowadays, you may be
American, but your gold is not necessarily held at an American bank: it is
just as likely to be in London, Zurich or Hong Kong.
The wording
of a compulsory order is all-important. Confiscation requires the gold itself
to be surrendered, which presumably would be the objective if a government is
to add to official holdings. If gold ownership is merely banned, it is a
different matter. A bullion bank holding gold in an unallocated account would
almost certainly be unable to deliver physical gold if required to do so by
the American government, but it would be able to close out the account for
cash. And there is the thorny question of derivatives, which hardly existed
in the 1930s. All futures and options trading would cease, and contracts for
forward delivery would be cancelled, possibly with serious financial
consequences.
The
international nature of gold would probably require all G10 or even G20
members to agree to similar actions against their own citizens. It seems
unlikely that all governments would agree to this, unless they all had their
backs hard against the wall. Switzerland, an associate member of the G10,
would almost certainly face a referendum and be unable to comply. The G20
also includes China, India, Saudi Arabia and Russia. It is extremely unlikely
that these countries will be prepared to confiscate their citizens’
gold to appease the Americans.
Just the
mention of these names alerts us to the dangers of a confiscatory move by the
US. It would make the Chinese and Indian middle classes instantly wealthier
than the average American, measured by gold ownership – an interesting
thought when paper currencies are losing credibility. On balance, a repeat of
the Roosevelt confiscation seems unlikely. But there is one thing we can be
certain of, and that is that the risk of silver confiscation is more remote,
so perhaps that is the safer metal to own.
Alasdair
McLeod
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