Could Gold Confiscation Happen Again? - 1 September 2009
Why gold-as-money is not a good thing for gold owners...
WE PREVIOUSLY STATED that gold ownership was made illegal in the United States on 1st May 1933, writes Julian Phillips of Gold Forecaster. (See US Gold Confiscation to catch up...)
http://goldnews.bullionvault.com/gold_confiscation_090120093
What we did not tell you – and what we correct now – was that US citizens, under Order 6102, were allowed to own up to $100 in Gold Coin (then around 5 ounces). Today that would be worth under $5,000 – a mere token gesture to real gold owners.
The get-out clause acted as a tiny 'escape valve' to the general body of citizens, and did not detract from the fact that effective gold ownership was abolished. So that we fully understand the attitude of governments to gold (which remains real money in times of crisis) we add this paragraph:
Congress could easily revoke the privilege again. In fact, at no time during this century has the US government recognized the right of private gold ownership. The Trading with the Enemy Act, which President Roosevelt invoked in 1933 to restrict private gold transactions, remains law. Although private ownership of gold in the United States was legalized on August 15, 1974, the power to confiscate gold remains in the hands of the President. The President still retains the right, under the Emergency Banking Relief Act, to "investigate, regulate or prohibit...the importing, exporting, hoarding, melting or earmarking of gold" in times of a declared national emergency.
It is highly unlikely that either the Courts or Congress would successfully argue that confiscatory powers are not implicit in the Emergency Banking Relief Act if a currency crisis or other fiscal emergency prompted the President to, once again, nationalize gold.
The 'privilege' to own gold is not a right. It was restored to US citizens on the 15th August 1974 (and not in 1971, when President Nixon floated the Dollar against gold and stopped foreign central banks from converting US Dollars to gold. That was a separate). It is pertinent to the thinking behind this series, to understand why these moves were made.
The entire exercise was to move gold away from the core of the monetary system, for it could not be controlled by governments – not even the most powerful of them, the United States. For government to have control of money they had to seize its issuance away from the measuring line of gold. In the opinion of the United States, and then the International Monetary Fund (IMF) and then all governments worldwide, money had to be simply an un-backed I.O.U. drawn on sovereign states. Gold thus had to be discredited and sidelined to make this happen convincingly. And it worked!
As the world moved out of the post-war recovery period into a global growth period, the US Dollar was devalued, then floated against gold, and the need for a change in the system of foreign exchange arose. Previously, under the Bretton Woods post-war deal, all major currencies were redeemable for Dollars, and the Dollar was then redeemable for a fixed quantity of gold. But as the relationship broke down, the need for gold was, effectively, eliminated from the system.
President de Gaulle and his fellow European leaders, amazingly, complied with this, after years of exchanging the $s spent in the country for gold drawn from Fort Knox in the US. They were prevented from changing their US Dollars into gold when US gold was made unconvertible. No doubt the huge advantages of controlling one's own money systems, nationally, appealed to all governments. So for the first time in history, gold left the system as a medium of exchange and currencies were issued with no backing whatsoever.
Gold is thus money no more. How could this have happened? Well, the Dollar had to be put into a position where it was indispensible. The US had dominance over oil supplies through the Arab oil suppliers. The world was stunned to see the oil price rise from $8 a barrel to $35 a barrel alongside the running price of gold. Oil was priced only in the US Dollar. The 'cold war' was still on, so Russian oil supplies were not as important then as now. It was the Opec oil cartel that dominated the oil price and these governments had to rely on the US for their security. Their oil interests became the vital interests of the US. The concept of oil priced in any other currency was removed by the US as the Persian Gulf came under the protection of the US.
Had Russia tried to take any protectorates from the US, it would have brought the world to the brink of nuclear war. Anybody who used oil needed to buy US Dollars first. Thus the Dollar met the requirements of a medium of exchange and spread the world over. Who needed gold after that?
It is only now, nearly 40 years later, that a tiny number of buyers pay in Euros for their oil, not enough to topple the Dollar. Certainly Opec will only switch payment currency when they can feel secure without the protection of the United States. And they will only change that pricing if they can dominate demand more fully. This can only happen once China is next to the States as a global economic force and insists on using the Yuan to pay for their oil. Until then they will continue to have sufficient of the US Dollar to pay for their oil in Dollars.
The need for gold was eliminated by its exclusion from international finance and as a direct alternative to the Dollar. So what if the Gold Price went from $42.35 to $850 during the decade after Nixon's decision? Gold was relegated from its monetary role to a private investment medium. The effect of the rising Gold Price was emasculated in the system as the Dollar became an absolutely necessary medium of exchange.
Gold was money no more, but it was still considered to constitute a danger to the Dollar's credibility. Hence gold sales from the US first, followed by gold sales from the IMF, as they used these gold sales to elevate the Dollar (and the notional "basket" currency of the Special Drawing Right – unsuccessfully to date) over gold, as money. They were successful, but the running Gold Price still reflected the falling value of currencies.
As no government really wanted gold out of the system completely (they continued to hold onto their reserves of gold, after all) but still wanted the Gold Price to drop back into insignificance, they followed a path of accelerating gold supplies through loaning bullion to Gold Mining firms in a process that allowed miners to make money as the Gold Price was falling. This in turn accelerated sales, so the Gold Price fell from $850 to $295 and the threat of central bank sales grew until 1999 and the first "Washington Agreement".
But at the turn of this century, through these central bank gold sales agreements, it became clear that gold was not down and out. The cap on the central bank sales of gold (then, as now, at 400 tonnes per year) reassured the market that there would be no more than a containable amount of gold sales each year. Bear in mind that to the central banks, the price of gold will only be really relevant in the extreme days that may lie ahead, not before then.
When those extreme days come, the price of gold will be secondary to the amount each central bank holds. Then the prospect of confiscating its citizen's gold will become very attractive again. The plain fact that it has happened before makes it possible it can happen again. It is wise to make sure that you are not vulnerable to such an act.
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Julian D.W. Phillips, 01 Sep '09
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JULIAN PHILLIPS – one half of the highly respected team at GoldForecaster.com – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.
First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.
There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.
