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Posts Tagged ‘gold confiscation’
Gold vs. U.S. Debt
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I received an interesting piece of data this morning so I thought I would share it. The spreadsheet ultimately compares government debt with the amount of reserves in gold we have in the U.S. Treasury. The amount of gold owned by the treasury has remained constant for many years at 261,498,899.32 ounces. The really interesting figure is how much the price of gold would have to be per ounce in order to monetize the debt.
In 1980 the total amount of liquidity in the market was $1.4 trillion (that includes government debt, NYSE Market Cap, Corporate Bonds and M1) of that number the government debt total was roughly $80 billion. The 1980 high close on the spot price of gold at the time was $825 per ounce. If the government was to monetize the debt (pay it off) with gold in 1980 it would have only needed to do that at $297.90 per ounce. So in terms of gold to debt ratios, spot gold was overvalued at the $825 closing high.
In 1989 the total amount of liquidity in the market was $3.12 trillion, of that number the government debt total was roughly $144 billion. The spot price of gold at the time was $416 per ounce. If the government was to monetize the debt with gold in 1989 it would have needed to do that at $553.35 per ounce. So in terms of gold to debt ratios, spot gold was slightly undervalued.
In January 2010 the total amount of liquidity in the market is $25.8 trillion, of that number the government debt was roughly $12.4 trillion and rapidly growing. The spot price of gold is currently $1,110 per ounce. If the government was to monetize the debt with gold today, the spot price would need to be an amazing $47,239!
Since we know that wealth never disappears, it merely shifts location. And we also know that, so far in this trend that when investors have become nervous about cash they have shifted their wealth from cash, to stocks or bonds. When they get nervous about stocks they shift to bonds or cash. When they get nervous about bonds they shift to cash or stocks. Therefore, so far in this trend cycle, when investors get nervous they have been shifting from paper to paper. We also know historically, that ultimately this will change and the flight to safety will be to hard currency assets ie. Gold and Silver.
Number one, look at the amount of increased liquidity (money) in the market over the last 30 years, from $1.4 trillion to $25.8 trillion. That is a lot of money. I am not suggesting that all of that wealth will shift this way since it is most likely that once the flight picks up enough steam, those currently liquid markets will most likely become illiquid. But if the 80/20 rule applies that would be $5.16 trillion shifting in the physical metal direction. Almost twice the entire market cap in 1989! And remember, we’ve not taken into account all of the markets, just those four. Number two look at how much the debt has increased, we are in deep trouble here with no signs of stopping. Keep in mind that this number doesn’t include Social Security or Medicare which experts estimate to bring the debt to somewhere between $55 and $80 trillion and growing! And that debt must be addressed one way or another. Lastly look at the fact that if the government was going to monetize the debt with gold they would likely need to confiscate bullion in order to have a more meaningful total number of ounces since the government holdings have never been audited and studies done by GATA suggest we actually hold far less than what we say we have.
Since all the gold that has ever been mined is only 161,000 tons and fits into two Olympic sized swimming pools. You can guess the impact on gold if this $5.16 trillion wall of wealth shifts into physical metals. And since the physical metal has already begun to become scarce on the markets as the 2nd tier wealth began to shift from paper gold (ETF’s and stocks) into the physical. This would likely send rare gold coins to new heights as money would flow into this asset class.
Gold ETF’s
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A gold ETF is an exchange-traded fund that tracks the price of gold. Gold ETF’s can be found on major stock indexes. One example is SPDR gold trust with the ticker symbol GLD; it is traded on the NYSE. The intention of these funds is to allow investors to invest in the price action of gold. Many of these ETF’s are not backed by gold, or are backed by only a very small amount of gold. The intention here is to speculate on the value of the spot price only. ETF’s will not give you the same protections that owning physical gold will.
How safe is it to own gold ETF’s in today’s economic climate? There are a few items to consider. Bear in mind ETF shares are not actually backed 100% by physical gold, but a combination of gold and a mechanism of derivatives. The actual amount of physical gold an ETF holds is rarely disclosed and covertly disguised in a labyrinth of accounting figures. Try asking a stockbroker what percentage of the ETF is physical gold, and furthermore if you wanted your gold, would you ever get it?
There is also counterparty risk involved in owning gold ETF’s. For example, in September 2008, shareholders in ETF Securities backed by AIG were unable to trade popular commodity securities, due to concerns over the future of their backer AIG. Banks and brokerages actually stopped making markets in the Exchange Traded Commodities (ETCs) backed by AIG, and sold by ETF Securities (ETFS). Consequently the price of the stocks also plummeted over 50% due to the concerns for AIG’s future.
Also remember the physical bullion used to back whatever portion of an ETF is confiscatable by the government. The U. S Government did in fact confiscate gold in 1933 due to extraordinary economic conditions. Should the current economic crisis reach that point again and the government again confiscates gold, the wealth insurance you need most will be taken away.Gold ETF’s can be more expensive to hold than physical gold. With physical gold there is a one-time fee. As opposed to ETF’s where there are many fees starting with one-time fees to buy and sell and annual fees like management expenses, insurance expenses, regulatory fees, exchange fees, accounting expenses, marketing expenses, legal expenses and storage expenses.
Gold ETF’s will give you exposure to the price action of gold, which is great for speculation purposes. What it can’t give you is the safety and security of owning the physical metal itself. Keep in mind physical gold will still give you access to price action.
Those people who decide to buy and own physical gold, their stored value remains more stable than those who own ETF’s. As the value of the dollar decreases, it takes more dollars to buy an ounce of real gold. The “share price” of actual solid gold does not deteriorate as a result of any financial meltdown. Indeed the value of these gold holdings is very likely to go up, and the gold price will continue to increase with the addition of more people seeing it as a safe haven in these stressful times.
Here are some examples of Gold ETF’s traded today:
Ultra Gold ProShares UGL
E-TRACS UBS Bloomberg CMCI Gold ETN UBG
PowerShares Global Gold & Prec Metals PSAU
iShares COMEX Gold Trust IAU
ELEMENTS MLCX Gold TR ETN GOE
UltraShort Gold ProShares GLL
SPDR Gold Shares GLD
Market Vectors Gold Miners ETF GDX
Market Vectors Junior Gold Miners ETF (GDXJ)
The Great Gold Confiscation of 1933
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The 1920’s were good for most Americans. The stock market was thriving and most citizens were employed and happy. The stock market ended in frenzy in 1929 on what is now Called Black Tuesday. All of the prosperity of the 1920’s was virtually erased and many Americans were left broke and unemployed. The Great Depression then ensued and eventually Americans looked to Washington for help.
Back then the United States was on a gold standard. What that meant was the U.S. could only print one dollar for every 1/20 of an ounce of gold it had in reserves. Therefore in order to inflate the economy, in other words “to bail it out,” the government needed to be able to print more money and flow it into the hands of the banks and consumers. Because the dollar was pegged to gold the only way this could be done was to increase its gold reserves. Thus the confiscation of all privately owned gold in the U.S. was cooked up under executive order 6102.
The executive order stated that all gold coin, gold bullion and gold certificates needed to be turned in to a Federal Reserve Bank or Branch. If this order was willfully violated, that person could suffer up to 10 years imprisonment or up to a $10,000 fine or both. The depository institution that received the gold was instructed to pay the value of the gold in the equivalent paper currency or coin.
After the government confiscated gold they could now print more dollars. The catch here was that they paid people in paper dollars then immediately devalued the U.S. dollar and increased the value of gold. So not only did citizens have to turn in their only true safe haven, but they also were given paper dollars in return that were then devalued.
Many experts today believe that the falling dollar will once again be pegged to gold and that privately owned gold will once again be confiscated. The only gold that was protected from confiscation was coins that were of numismatic value (coins having a recognized special value to collectors of rare or unusual coins). This emphasizes that all portfolios should contain some U.S. rare gold coins, as they were not confiscated in the past.
How To Determine The Value of Your Gold Coins
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Gold has been mankind’s most desirable asset for more than 5,000 years. It freely circulated as everyday money – except during times of great economic turmoil – from the time of the Ancient Greeks and Romans right up to 1933. Until that year, the value of the great majority of gold coins was the same as their face value. That meant a $20 gold coin could be freely exchanged for 20 one-dollar bills. And 20 one-dollar bills could be exchanged for one $20 gold coin. It was a two-way system that promoted a stable value for our money.
That era ended in 1933. As part of his effort to re-inflate our economy from the depths of the depression, President Roosevelt recalled all circulating gold coins in the well known gold confiscation under executive order 6102. He had his Treasury Department melt them and send the newly formed ingots to Fort Knox for storage. Then Roosevelt revalued gold, in a series of steps, from its pre-1933 value of $20 to $35 per ounce.
Literally overnight, a $20 gold coin contained more than $20 worth of gold. Owners of the limited number of coins that survived the federal recall order, primarily collectors and overseas banks, wondered how to determine the value of their gold coins. Were they only worth their gold value, or would the government’s efforts turn once-common issues into scarce and rare dates?
Today we know the answer to that question. The government’s massive melting of our circulating $1, $2.50, $5, $10, and $20 gold coins created hundreds of rarities out of coins with original mintages that suggest easy availability. Here’s one example: the Philadelphia Mint struck 2.9 million $20 gold coins in 1931, one of the higher mintages of the 1907-1933 series. Based strictly on its original mintage, the 1931-P should be easily available and not too expensive. Thanks to the government’s melting, all 1931-P $20 gold coins are rare and extremely valuable.
Speed forward to 2009. All U.S. gold coins minted before 1933 are worth FAR more than their face value, and many are worth FAR more than their bullion (metallic) value. That’s true because the number of collectors of U.S. gold coins of the pre-1933 era has expanded tremendously. At the same time, the available supply of these coins has remained relatively unchanged. Because rare coin market values are set by the interaction of supply and demand, the long-term value of pre-1933 U.S. gold coins has shown a distinctly rising trend.
So how can you determine the value of your pre-1933 U.S. gold coins?
We live in an age of tremendous availability of information. Early in the last century, collectors and investors were content to determine their gold coins’ value by following (and interpreting) auction results. In the late 1940s, publishers began offering a once per year guide book that listed values for every U.S. coin. Then monthly publications were introduced, providing ads and estimated market values. Then weekly coin newspapers, filled with articles, auction results, and market commentaries, were established. Today we have all of these sources, plus the information on the Internet.
All of these sources, when you know how to use and interpret them, are extremely valuable. All of these sources can help you determine the value of each gold coin you own. But none is perfect. Each has its own quirks and its own idiosyncrasies.
When buying your coins you are paying retail and when you sell you are receiving whole sale. Therefore, the single best way to determine the retail or wholesale value of your pre-1933 U.S. rare gold coins is to have your trusted advisor perform a portfolio review. Retail values can vary significantly and your broker/dealer should have a buyback policy that will help you determine the value of your gold portfolio.
How to Trade Gold in Today’s Market
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There are many ways to trade gold in today’s market. There are paper gold investments and the actual physical gold itself. Physical gold offers the most safety because he who controls the asset has the power. Examples of paper gold would be ETF’s (electronically traded funds) like GLD which is owning one share of the spot price of gold per ounce. One could also purchase gold mining stocks which participate with the gold market tangentially.
There are two ways to trade in the Physical gold market. These are bullion gold and numismatic gold, which is also called U.S. rare coins or growth gold.
Bullion in the U.S. is anything minted after 1933. It can come in coin form or bar and ingot form. Examples of coins would be American Eagles or Canadian Maple Leafs, most countries have their own bullion coins that they mint. Bars or ingots would be what you would see at Fort Knox for example. Bullion can be stock piled in an IRA or can be acquired for storage in one’s home. It is reportable with a 1099B form in certain instances and is considered to be confiscatable.
U.S. rare gold coins were minted from 1795 to 1933. These coins are a completely private position in gold. They are non-reportable, meaning there are no 1099B forms filed by the broker/dealer upon the sale of them. They are also considered to be non-confiscatable due to the exemption during the last gold confiscation in 1933. These coins also tend to outperform bullion. In fact if we study PCGS charts we can derive that mint state rare coins have outperformed bullion close to 4 times to 1.
As you can see there are quite a few ways to trade gold in today’s market. One should always consider their goals and apply a strategy to meet those goals. Even when acquiring gold. In addition one should think of gold as a long-term strategy of conserving and building wealth.
Values of Gold Coins Depend on Rarity - Key Date Rarity Coins
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Key Date Rarity Coins are those coins that are hard to locate or find due to low surviving populations from the original mintages. The survival rate is what is important here. The age and original mintage will not impact the value of the coin as much as the survival rate or number of coins known to exist (population).
U.S. coins from 1795-1933 are no longer being minted, in fact the original die is destroyed once a particular coin is done being minted. This prevented replication. Current populations are what determine if a particular coin is a key date rarity. In 1986, the advent of PCGS (Professional Coin Grading Service) and NGC (Numismatic Guarantee Corporation), which are independent third party grading companies, track these populations. They examine each coin through a system of standards recognized internationally to determine the quality and authenticity. This grade is then recognized internationally. PCGS and NGC publish population reports which can be tracked by individuals at any time. In fact when these companies started publishing population reports, some coins that were thought to be rare were discovered to be quite common.
Two official government gold confiscations in 1834 and 1933 helped eliminate most of the coins minted from 1795-1933, thus making them more appealing to investors and collectors alike.
When determining if a coin is a key date rarity, one must compare populations of a particular coin to populations of more common coins. Populations in a specific grade of 1-10 or even 10-100 would be considered very rare when compared to the most common coin in the St. Gaudens type. Over 126,000 are known to exist in just the mint state 64 grade.
One of the most well known cases of building a portfolio of rare gold coins that we know of is that of Harold S. Bareford an attorney from New York. Mr. Barford accumulated his collection between 1945 and 1955 reportedly for $13,832. He later sold his collection in 1978 for $1,287,215.
Will Gold be Confiscated Again?
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The last time gold was confiscated was in 1933 under Franklin Delano Roosevelt. This occurred during the Great Depression while the U.S. was dealing with a monetary and banking crisis. The confiscation occurred under executive order 6102, which gave citizens a small window of time to turn in their gold or suffer a $10,000 fine, a 10 year prison sentence or both.
The real question is can this happen again? Many experts agree that it is very possible. The main concern is that we are facing similar circumstances that we were dealing with during the Great Depression. Gold was confiscated in order to stabilize the monetary system. The gold was confiscated at $20.67 per ounce and the government revalued it at $35 per ounce shortly there after, thus giving the government a 69% gain. After the government had all of this extra gold from private citizens it enabled them to print more dollars and put liquidity into the economy.
There has been a lot of talk about the dollars weakness lately. If the U.S. losses its status as the worlds reserve currency, we may need to return to a gold standard in order to give the dollar strength again. It is likely then that the government would confiscate gold and revalue it at a level that would be commensurate with our level of debt.
The U.S. in 1950 used to own around 68% of the worlds gold reserves. Now it owns less than 28%. This is not enough to bolster the dollar in any meaningful way. So the question remains. If the dollar collapses, will the government again confiscate gold like they did in 1933?
This is why owning rare gold coins are crucial to any gold portfolio. They were excluded from the last gold confiscation and experts feel they would be again due to their status as a collectable.
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