As budget battles rage, it's likely we will begin to hear more and more about some of the intricacies of the President's 2012 budget proposal. One such detail grabbed some attention months ago, then critics and pundits alike, temporarily put it aside. Now, the issue has resurfaced.
Within the proposal we find that President Obama would like to impose a new 5% royalty on gold mined from public land. The royalty, which is basically a fancy word for tax, would be paid to the taxpayer - in other words, collected by government. The argument in support of such is centered on the fact that royalties are collected on oil extracted from public land at a rate of 12.5% to 16.7% of the value of oil produced. So, why not collect it on metals too? Yesterday, a Fox News report put the amount at about $18 per barrel of oil.
The entire program is shrouded in controversy. Maybe this explains why it is cheaper to import oil than produce it ourselves. Who wants to be a partner of the U.S. Government in domestic drilling if it only means more tax and less profit.
Now, it appears, this will also be the fate of gold miners who extract gold from public land. Nevada produces about 80% of our gold and so it is Nevada mines will bear the greatest expense. If I had to speculate, I think the proposal will pass. Nevada and Harry Reid seem to be outnumbered on this one. It is projected that $3 billion will be collected over a 10 year period. Obviously, if gold prices rise, the amount of royalty/tax collected, would increase.
What will this do to the gold price? One would have to believe any added cost would be passed on to the consumer. Hence, the price of an ounce of gold would rise. Silver and copper are also targeted. Herein lies another argument against gold stocks and for physical gold. If mining costs go up profits go down.
If you already own gold, good for you. It could well be that pre-royalty gold is the bargain of the century. It's kind of like pre-confiscation gold back in 1933. If you were smart enough to keep your legal allotment of gold, once government confiscated the rest of it, those who kept some of the gold they owned prior to confiscation were rewarded with a 75% profit in dollar terms. Government took the gold at $20 an ounce and then once they possessed the majority of what existed, they raised the price to $35 an ounce. Clever eh?
Let's face it. A royalty is just another tax and taxes are a form of confiscation. So, it appears, the first step to confiscate gold has been taken. A baby step, perhaps, but a step nonetheless and yes the budget still has to pass. It's almost clever. If you tax future production you are basically laying claim to a portion of whatever is still in the ground. In turn that drives up the price of what you already own, that being our strategic reserves in Ft. Knox.
I have always found it intriguing that our central bank or government never talks about gold. Other central banks are buying like crazy but we never hear a peep from our central bank. Some think we don't have any gold and are calling for an audit of Ft. Knox reserves. Others believe, when the time comes for drastic measures, government will once again confiscate private gold holdings to help solve a debt problem. It would be blatant theft for any government to encourage citizens to own gold, only to one day confiscate it.
Will the outcome drive gold prices higher? Is this just the first step toward another gold confiscation act? Stay in touch with the issues at LearCapital.com where you will get regular breaking news and special gold reports.