The Truth about Gold Confiscation

 
on December 02 2011 11:47 AM

One question that is raised again and again by customers of ours is whether or not the gold they buy can be confiscated by the government. Here’s the short answer: we have no idea. For a more detailed explanation, read on!

Almost every gold buyer you talk to has a strong opinion on the confiscation issue. Some bullion buyers are convinced that confiscation is a ridiculous concern reserved for conspiracy theorists and militia members. Other seasoned gold bugs swear by coins they consider to be non-confiscatable, as they are certain that the government will eventually come for their gold. The truth is that both sides of this argument have merit, and the choice of which type of gold to purchase is a very personal decision. All coin companies (ourselves included) make more money selling collectable coins than they do selling bullion. Auto dealers also tend to make more money selling Ferrari’s when compared to Hondas. If you’re going to buy collectable coins (in which I am a big believer), do it for the right reasons. After all, resale values on Ferraris are a bit higher than they are on Hondas, and this is not because President Obama is going to confiscate your civic.

Let’s take a quick history lesson on the mother of all gold confiscations: The 1933 executive order of Franklin Roosevelt. At a time when monetary instability was growing rapidly (not to dissimilar to the crisis developing today), President Roosevelt issued an executive order confiscating gold bullion and making ownership of gold bullion by private citizens illegal.

When he did this, he exempted “coins with a recognized value to collectors”. All other forms of gold bullion were made illegal and it was ordered that they be turned in to banks for conversion to cash. The vast majority of gold owners obeyed the mandate and received face value (about $20 per ounce) for their coins. Gold was subsequently valued at about $35 per ounce, turning a handsome profit for the treasury.

All in all, about $1.6 billion worth of gold was confiscated by the US government. Gold ownership was made illegal, and exactly zero prosecutions resulted from the executive order. In the end, most people turned in their gold as they were instructed, and no real enforcement took place beyond that.

Now there are numerous theories as to why the government chose to do this. Conventional wisdom was that they were attempting to support and anchor volatile currencies in a time of worldwide economic depression. At the time, the dollar was still backed by gold, making this a plausible argument. As James Turk and John Rubino point out however in their book The Collapse of the Dollar, this argument doesn’t really hold water due to the fact that they could have accomplished the exact same thing by simply devaluing the dollar to $35 per ounce from $20. This would have had the exact same effect without the hassle of organizing the confiscation. Instead Turk and Rubino suggest that making gold ownership illegal was a step in the right direction for a government bent on wealth redistribution. Everyone knows that gold is the one instrument of wealth which is most difficult to track, tax, take, and redistribute. Thus making hording of gold illegal is a very helpful tool of class warfare.

That said, the reasons behind the confiscation can be debated endlessly but do not serve much of a practical purpose so far as modern day gold buyers are concerned. What does make sense is to try our best to assess the likelihood of a future confiscation. To be perfectly honest, anyone who tells you a gold confiscation is likely is probably trying to sell you something. The reason we say that is because there is simply no way to know if this could ever happen again. It’s worth noting that since the US Dollar is no longer backed by gold, the likelihood has to be relatively low that any confiscation would occur for the purposes of currency revaluation. This is not to mention the fact that there are simply too many US Dollars floating around out there to back them with gold at any reasonable rate. We’ve heard numbers thrown out there as high as $50,000 per ounce as the price if all US Dollars were to be backed by gold. Thus if you believe gold was confiscated to prop up the Dollar, you probably don’t have much to worry about. If you subscribe to the James Turk rational that gold was confiscated to make wealth redistribution easier, you may consider taking a closer look.

Now let’s discuss this whole issue of coins that were exempted. Again, if anyone tells you one coin is “non-confiscatable” you should consider this claim with great caution. The thing about executive orders is that they tend to fall in line with what the executive wants to order! Thus there is no guarantee that any specific coin would be exempted in the event that another confiscation occurs. There are however, some important considerations which make some gold products much more attractive confiscation targets than others.

It’s likely that FDR did not exempt “coins with a recognized value to collectors” out of the kindness of his heart or out of any affinity for his boyhood coin collection. The real reason is probably tied up in the legal history of eminent domain. In short, the fifth amendment of the US constitution provides that citizens cannot be deprived of property without due compensation. Further case law narrows the definition of compensation to be the fair market value of the item or items being confiscated. This presents a serious problem when considering confiscating rare coins. The act of assigning and paying fair market value for millions of collector coins on an individual basis would be next to impossible for a government bureaucracy. In short, it’s easy to confiscate bullion because its value is essentially the spot price of gold and nothing more. You want to confiscate collectable coins on the other hand? Let the lawsuits fly.

In the end, we would love to tell you with certainty that there is or isn’t another gold confiscation in store. The truth is that you’d be just as well off going to your local psychic and asking the same question. We have no idea, and neither does anyone else. On the other hand, we can make an educated guess that if gold were to be confiscated again it would be much more difficult for them to confiscate rare coins than it would be to snatch up the bullion.

One thing we can say with relative certainty is that purchasing rare coins simply for the purpose of protecting one’s self from confiscation is probably not the right move. There are many, many advantages that rare and semi-rare coins provide from an investment standpoint. Personally, I think the scarcity, buoyancy, and profit potential of many rare coins makes them a much more attractive buy than common gold bullion. Confiscation, like many other issues, can be a consideration when choosing products. How much of a consideration you make it is really up to you and depends on how likely you think it is for the government to take this extremely drastic action. That said, it wasn’t too long ago that mandated health care was seen as a drastic action that was out of reach for even the most liberal politicians. Today, it’s a reality.

In the end, investing is a very personal undertaking and every gold buyer should weigh these considerations and make an informed, personal decision. Learn the facts, do some research, and make a plan. If confiscation is really a concern for you, maybe consider putting at least a portion of your investment in collectable coins and a portion in bullion. Diversification never hurt anyone. As with all things, be wary of someone who is telling you anything with certainty. Like most things, whether gold will or will not be confiscated again is a question for the crystal ball. If you have a line on good quality crystal balls on the other hand, buy up as many as you can. That is an investment on which you can’t lose!

Mike Getlin is Executive Vice President of Merit Financial, home to America's fastest growing physical gold IRA company. Please send comments or questions to meritprofiles@gmail.com.

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