Is Gold Confiscation Really Coming?

Hello and welcome back to Breaking the Dollar. As always, I'm your host, Everett Millman, and we are back from a pretty long hiatus on the show. And since we've been gone, interestingly enough, the gold price has rallied quite a bit. This past week we got up near eight-year highs, so the highest we've seen since 2012. And naturally, that means that gold is back in the news quite a bit.

People are once again paying attention to gold. Obviously, I like to see that, but that also means what I want to focus on this episode is a news story that seems to crop up every time the gold market starts to pick up some momentum. And it's just a story that won't die. I am talking about gold confiscation. Every gold owner's greatest fear that the government would step in and take your gold from you or outlaw the private ownership of gold. As I said, this story has been circulating for a very long time. It's kind of a common trope in the gold industry, but I want to explain why it's back in the news again, kind of address what I think about that and briefly discuss how we should be approaching or thinking about that idea.

So in recent weeks, one of the biggest hedge fund managers in Europe, a man named Crispin Odey, O-D-E-Y, he made a lot of waves by saying that he thought European governments were going to basically pass laws to make owning gold as a private citizen illegal. So in other words, the government would take everyone's gold and keep it for themselves. As I said, he is by no means the first person to suggest this as a possibility, but he is the most recent one and certainly the most prominent person saying this. Obviously, he has a reputation that precedes him, so his words carry a little more weight than if for instance it was me just saying that, hey, the government's going to come take your gold. So let's discuss why this is even an idea that's out there. There is some precedent for it.

So back in the Great Depression, one of the first things that Franklin Roosevelt did as president, one of his first acts in March of 1933 right after he took office was he passed an executive order that is commonly called the Gold Confiscation Act. Really it was executive order 6102. We have discussed it way back in older episodes of the show because it really was an incredible turning point in the history of gold. The US government was telling everyone that it was illegal, except with a few exceptions, such as rare collectibles or jewelry that was a family heirloom, something like that. Those types of gold you could still keep, but everybody's gold coins and gold bars had to be turned into the government. Now I always like to reiterate to people because that does sound certainly like an overreach of government authority, but they did compensate everyone. So they paid everyone per ounce the price of gold that it was pegged to at the time. So yes, the gold was taken away. Almost all of the gold in the country was hoovered up into the hands of Uncle Sam, but at least they paid everyone cash, right? So it wasn't quite as bad as it sounds.

Now if you are someone who invests in gold and wants to own gold, obviously you want the gold instead of the cash. So there is still a problem here. But that was the last time we saw something like that over 80, almost 90 years ago. Now the first thing that comes to my head is that obviously today the logistics of pulling off something like this, of the government carrying out the confiscation would be much easier, right? We have much better technology. Everybody's information and data is monitored and surveilled by the government now. So in other words, it would be much harder to hide your gold from the government in 2020 than it was in the 1930s.

Aside from that detail of the logistics of getting everyone's gold, I really don't think we should buy the hype of this idea whatsoever. Partly that comes from my experience of having heard these rumors and warnings about gold confiscation basically since I started working in the gold market. As I said, it's sort of the story that never dies and it tends to get brought up when the gold market is a little bit hot like right now. It does make sense given that the reasons the gold price has gone up so much are all about these emergency actions that the Federal Reserve and Congress are taking. They are printing money at an unprecedented pace. And of course we are still seeing one global crisis after another it seems from the pandemic to rising tensions between China and some of its neighbors. There's plenty of reasons that gold is going up. So again, this story is resurfacing. But so far I'm not buying it.

First and foremost, we're not on a gold standard anymore. Granted, a disproportionate amount of people do still believe that we are. Something like 40% of people do think that the dollar is still backed by gold although it is not. But besides the psychological standpoint, functionally gold does not back our money. So the incentive for the government to confiscate it really doesn't exist anymore. Sure that gold is valuable and the fact that central banks already do have gold reserves shows that governments want to own and hold some gold. But if the private ownership of gold was outlawed, in other words, only governments could have gold, that would be almost pointless in the absence of a gold standard. Okay, so they would have a lot of the gold, which is valuable and they could sell it. But if you're not backing your money with it, I'm failing to see what the advantage would be to confiscating all of the gold.

Look the government can, especially the US government because the dollar is the world's reserve currency, it can print money whenever it chooses. We have certainly seen that with the stimulus checks that have gone out to everyone. And anecdotally I can tell you that many people are just putting that money in the bank. If they are fortunate enough not to need to spend it, then they're just adding to their savings. That's really the same thing that would happen if the government hoarded all the gold. It would just be creating a savings account. Well, if they want to accomplish what they are doing right now, which is spending money, then the gold really doesn't help them. So the fact that we don't have a gold standard, we're not even on a semi-gold standard system or anything approaching that, that really invalidates the argument that the government would have much to gain from doing this. But let me acknowledge that I am saying this from an American, North American perspective, and I'm going off of our history with gold confiscation.

Mr. Odey, who is making this claim or warning about gold confiscation, his hedge fund is based in Europe. So I started thinking, okay, maybe there's some difference in the situation in Europe. Maybe it is actually more likely because the way the European Union and the European Central Bank operate is slightly different than our experience here in the United States. And so just in terms of trends in the gold market in Europe that I have seen, there are some interesting ways in which European governments are already doing a de facto version of this. No, they're not outright confiscating people's gold, but they are certainly incentivizing people not to privately hold gold when at the same time governments around Europe are by far the largest holders of the yellow metal. So for instance, the three largest economies in Europe are basically Germany, France, and Italy. Coincidentally, all three of them have the highest gold reserves in the region. They have some of the highest gold reserves in the world.

And I also know that in Germany, private citizens hold a ton of gold. It's something like 3,000 tons held privately by the German citizens, which is as much as the government or more. And so what we've seen recently is that gold shops in Germany have been limiting how much people could purchase at a time. I think the old limit was 10,000 or 15,000 euros and they cut it to 1,500 euros. So people in Germany were being restricted to basically buying one ounce of gold at a time. Again, that's not outright confiscation by any stretch, but it shows that the government is discouraging people from accumulating a lot of gold privately. Interestingly enough, this is one of those global macroeconomic dynamics.

Almost the opposite has been happening on the other side of the world in Southeast Asia and India. Lots of people have been forced to sell their gold and their gold jewelry in order to make ends meet during COVID. And it also happens to be true that in those markets, they are much more sensitive to how cheap or expensive the price of gold is relatively speaking. So with gold at these eight-year highs, they are very unlikely to buy and very likely to sell. So again, as I said, this is going on in a de facto sense. This is another case where natural trends that are already in place are causing people to give up a lot of their privately held gold. And then we see that flow into the hands of the government or big institutions. So basically what I'm saying is that underneath our noses, this pattern is almost going on on its own without any outright law passed by the government.

Nonetheless, my plain opinion is that the idea of a government-led gold confiscation is totally overhyped. It is something that's been talked about for decades and it has never happened. But I do think it raises interesting questions about our money that we would be better served to address. So the real thing I would be worried about is not gold confiscation, but this idea of bank bail-ins. A bank bail-in is when your deposit at the bank basically gets seized or frozen where the bank will not let you take your money out. And if we're talking about how possible or plausible is that we have a much more recent precedent to go off of.

During the financial crisis, this actually happened in parts of Europe, in particular I'm thinking of Iceland. Not to mention from a logistics standpoint, it's much more difficult to get physical gold out of someone's possession than it is to take their digital numbers on a computer screen from their bank account. That strikes me as much less far-fetched. That could absolutely happen at some point in our lifetimes. And that would also affect a much larger percentage of people. Far, far more people have a bank account than own gold. So something like a bank bail-in is what I would be much more worried about and I think is much more possible. And it does go hand in hand with what we're talking about when we get into the reasons that people want to own gold instead of having it in cash.

When you think about your money in the bank, your bank account with your local branch, that money in your account is essentially an unsecured loan to that bank. That's why they pay you interest for it. Now, it's a negligible amount these days, but nonetheless, you are loaning that money to the bank so that they can use it for their operations and loan it out to other people. With any loan, there is counterparty risk, there is the possibility that the other side of that trade or transaction could default on their obligation. And this is something we speak about a lot when we talk about the benefits of owning gold, is that it has no counterparty risk when you physically hold it yourself. You might bring up the fact that, well, we have the FDIC that ensures everyone's bank deposits up to $250,000, but it is only up to $250,000 per account.

And since we've been on the topic, as far as I know, they do not have something like the FDIC in Europe. Now I may be wrong about that, but even in the case of deposit insurance like we have in the States, it's only up to a certain limit. It is not enough to cover all of the money in bank accounts in the entire system. That is for sure. So in terms of how likely it is and how severe the outcome would be, I would be much more worried about bank accounts, bank balances than anybody trying to come and take your gold. Because as I said at the beginning, that really isn't going to do them a whole lot of good unless we decide to go back on a gold standard, which as I pointed out in past episodes is even less likely than everything we're talking about right now. Not impossible, but far, far less likely.

And finally, to kind of bring it full circle about what we are seeing in terms with the government taking control over the financial system or intervening in the financial system, we absolutely live in an era of maximum government intervention, especially into our money, but into basically every aspect of our lives. The amount of money being printed, the extent to which central banks are using their tools to try and manage interest rates and the money supply, it's all reaching the highest peaks we've ever seen. But what I want to reiterate is that they may be doing it with a lot of new tools, with different names, but governments and central banks are pulling from basically the same playbook. It's a very old strategy that has been around basically as long as money has existed. The only difference is that back in ancient times, they would simply debase the actual coins themselves. They would take gold out of the coins or they would issue new coins made of less valuable metals, but the process is the same. It is the debasement of currency. It is the government trying to control the currency when in fact the free market has always done a much better job at that and has always valued gold and silver in that regard. But unless we start seeing gold and silver coins become money again and be used as money, the whole idea that the government would want to come and take yours doesn't really stand up to scrutiny.

So that's it for this episode. I'm going to try and get some of this backlog in our email bag cleared out here, but I have a recent question that comes from Taylor in Worcester, Mass. Taylor asks, I see gold is up quite a bit in 2020. Why is my silver not up? That is a great question that I don't think I hear people ask enough, partly because a lot of the people who have been buying silver for a while are a little bit fatigued. They're a little exhausted that the price has stayed the same essentially for the past seven or eight years. But as Taylor's question implies, since gold is going up, why aren't we seeing the same thing with silver?

One of the big reasons is that silver does always lag behind gold in terms of time span. So in the last financial crisis, we saw that silver really rallied most intensely after gold had already done a lot of the climbing beforehand. And just in general, this is a common trend where silver really waits to see what the gold market is going to do before finding its footing. Secondly, there are some outside factors that affect the silver price differently than they affect gold. And I'm mainly thinking of the US dollar and the price of oil. So because silver is also an industrial metal, it is sensitive to movements in the price of oil because that will raise or lower the cost of production. Historically, silver has had about a 0.7 positive correlation to changes in the price of oil. It's a fairly strong relationship. So we even just noticed in the office that in the past few weeks, the price of oil rallied and at the same time, so did the price of silver. Gold was less dramatically affected.

So because there has been greater volatility in the oil market and in general silver is more volatile than gold, I think that's another reason that we haven't seen it catch up to the gains that gold has seen yet. But of course, eventually I do expect silver to mimic some of the movement we've seen in gold and to rally into the end of 2020 and into 2021. But those are some of the reasons that it tends to do so with a lag. But always a good question. So thank you to all the listeners out there. We appreciate you tuning in. Be sure to check out our next episode where I will be looking at the discovery of the Forrest Fenn treasure. If you've never heard of that, it's a really fascinating tale, so be sure to listen.