I am going to lead off with an interesting email from one of our readers. He has concerns about owning gold. I shall attempt to answer his questions as honestly and intelligently as possible.
Hi David,
I joined your email list after hearing you on KWN, and I greatly look forward to your communication each day.
I was an equity analyst in the past and studied Warren Buffett’s value investing style very closely. It took me a while to get my head around gold and silver, but I finally came around.
I want to ask you about what I believe is the most important topic for precious metals owners – “game over” risk. One of the most important things I learned from studying Buffett is that the difference between great investors and the rest is not that the greats hit more home runs, it’s that they avoid big losses. Buffett would never buy a stock if there were even a 1% chance of it going bankrupt, no matter how great the upside. He trained me to think about the downside far more than the upside because the upside is fairly obvious – a great business will get revalued by the market, and in our case precious metals will go much higher to catch up to all the paper currency in the world.
But, what I see in the gold-bug community is the classic less-than-great-investor chatter. Everyone talks about their price targets – whether they are short-term bullish or bearish, most are very bullish long-term. In my Buffett-influenced mind frame, this is the wrong topic to be discussing. At this point in the game – because we know there is no turning back on this road of increasing debts and money printing – we precious metal owners need to discuss the downside risks: confiscation, nationalization and “windfall” taxes (as Jim Rickards believes we will face).
The most important question is: are we metals holders the smart-idiots in the game? We figure out the game but didn’t see the ultimate theft coming…that the government will need to back a new currency with gold, the nation’s gold in Fort Knox is not all there and they will take the gold from citizens who have it. Let me say that this measure will be VERY POPULAR with the masses because most people are in debt, and among those who have savings, only a tiny fraction own PMs. So, for the good of the nation, we gold owners may be the sacrificial lambs…and will be seen as un-American, or traitors if we oppose this measure.
Jim Rickards’ “windfall” tax would eliminate most of the benefit of owning the metals. Let’s not forget that our government is bankrupt and governments in this position look to take the people’s wealth to save itself.
Americans tend to point to the nationalization in 1933, and feel that’s the worst-case scenario – the government will give you something for your gold. If we look outside our borders, we find more instances of outright confiscation. My grandfather, for example, fled Armenia in the early 1900’s to escape the Armenian Genocide…and went to Romania, a great pace to live at that time. He became a wealthy man there but, after WW II, Romania became a communist nation and gold (the medium in which most wealth was stored) was confiscated. He lost everything, including his business and his home to the government…and was made an employee in the business he founded and a renter in his own home.
My point in telling this story is that in times of crisis/war, a country can turn into the opposite of what it was. Americans rarely entertain this possibility because of the “never in America” blinders. Well, I would bet over 98% of the Romanian population, pre-WW II, would have said the same thing.
I’m very impressed by the gold-bug community’s understanding of monetary history. I never knew what the gold bugs know while I worked in the investment business…and can tell you that most people responsible for investing retirement money have no clue about gold and fiat currencies. We are all babies of the financial asset bull market, which ended some years ago – it just hasn’t become clear to most.
But, I’m equally surprised at the complete lack of risk assessment in the gold community. I’ve read the books of Mike Maloney and James Turk…and they have just a few pages each on confiscation risk. It’s always an asterisk in the discussion. At this point in the PM bull market, I think we need to become adults and take our head out of the sand. The upside will take care of itself; it’s a futile discussion. Truly holding onto our purchasing power is now the main issue. This is our “inconvenient truth.”
I don’t have the answer. But, there’s a lot of brain power (genius in some cases) in the PM world and we should divert some of our attention from upside price targets to “game over” risks analysis…for the benefit of all of us. There is a scenario (i.e., confiscation) where you’d be better off owning the fiat currency. Let’s not be the smart-idiots in this game.
Finally, I find it interesting that Buffett speaks badly of gold and has said stocks are the best way to protect against inflation. Historic evidence shows stocks can protect against modest inflation, but not hyperinflation. Buffett didn’t become the richest man in America by luck…and his father was a huge gold proponent. Is it possible he knows confiscation or some form of “game over” risk is very likely…and he’s staying away from this land mine?
Again, I don’t have the answers. But I do feel I know what the important questions are…and gold’s price target a year from now is not one of them.
I’d greatly appreciate your thoughts on this issue…. and any ideas you have on getting the brilliant minds in the PM space to start thinking about these risks.
Thank you very much!
Patrick
Patrick,

You bring up several excellent points.

No one can guarantee you that there will not be some form of confiscation or windfall tax. No one can guarantee you that your dollar will buy much of anything either. In short, the guarantee you are looking for does not exist. I wish it did, but we all have to make an educated choice about our economic future, one sans a guarantee. Greater minds than mine have pondered these questions for decades and have decided that gold is still the best place to be. Jim Sinclair and Richard Russell, with a combined 80 years of gold experience, put gold on the top of their list of assets to own. Both are very stock market savvy but they both stress the importance in owning physical gold. Both understand that gold is the best form of money.

It’s interesting that you bring up Warren Buffet. Gold’s performance has crushed Berkshire Hathaway since 2001! Warren made his money by buying undervalued blue chip stocks in the 70’s when they were dirt-cheap. Big money is always made at the bottom of a market and when he started accumulating stocks, they were unwanted and undervalued. He is a smart man – when it comes to stocks, but he should have listened to his father when it came to gold. Buffet also sold all of his silver when the price was under $10 an ounce – not exactly a ringing endorsement of his understanding of precious metals. If Buffet would never buy a stock with even a 1% chance of becoming worthless then what about having all of your money in dollars? Do you think that there is a 1% chance that the dollar will collapse or be replaced? If your concern is the “downside,” I ask you to consider the downside of NOT owning gold! I don’t believe that Jim Rickards is telling anyone NOT to own gold. To the contrary, he and Gerald Celente are strong advocates of owning gold.

If gold is hit with a heavy tax, that means it rose tremendously (and the dollar collapsed) so at least your principal buying power was protected.

One thing to remember – gold was confiscated in 1933 because the dollar was gold-backed so the only way to increase the money supply was to increase the gold supply backing the dollar. The Socialist FDR-led government needed more dollars to implement their “work programs” in the early 30s, during a period of serious deflation/depression. Today, the dollar is backed by nothing (but debt) and the government doesn’t need gold in order to increase the money supply. In order for gold to be of a high enough “value” to our government to confiscate it, a new gold-backed currency would have to be in place or be about ready to replace the dollar. In other words, the dollar would have lost its “reserve” currency status. God help us if (when) this happens. I think we will see the handwriting on the wall and should be able to sell gold at much, much higher prices than we have now, and use the profits to buy stocks at what would then be very depressed prices. I am not advocating holding gold forever, but at least until it can be exchanged for dollars, which can be exchanged for other undervalued assets such as real estate and stocks.

If there is confiscation, it will be of the “low hanging fruit,” the gold held by the ETFs. That is where most of America’s gold now resides and as the price rises, the amount held by GLD, etc. would greatly increase. The government can (and will) take it, legally, as long as they adhere to the Constitution and the Eminent Domain Clause and pay the owners “fair value.” They will go after that large pile of gold and not waste their time knocking down doors looking for handfuls of coins that are scattered throughout the country. If they want that form of gold, all they need do is buy it for a price high enough to get people to willingly turn it in.

There is a lot of gold in the ground in Nevada and Alaska. That gold may well be nationalized, which is why I own very few gold mining stocks.

If the government has already leased out most of the gold (in Ft. Knox) then they have IOUs for it. They refer to that gold as being held “in Deep Storage.” Probably owed to us by Barrick. They will eventually get it back. The central bank manipulation scheme was mostly covert, off the books leasing, not outright sales.

You can start to worry if you see Germany and other countries demand their gold back from storage with the Fed. If we have none, we will probably refuse to return their gold. What will they do? Go to war with us?

Very few people turned in their gold in 1933. Those who had gold in bank safety deposit boxes lost it all. Do you think Gold Bugs will willingly surrender their gold in today’s anti-government environment? I doubt it. And if people will not willingly turn it in, the only way to entice them to let it go is to pay them MORE than it is worth, not LESS. And why wouldn’t the government take this course of action? They can print up as many billions of dollars as necessary to buy it all at $10,000 or $20,000 an ounce. I say the odds of this happening far outweigh the odds of an outright confiscation, which would be a total failure. Remember, gold sales are NOT reported to the government (yet) so they have no record of who has it or how much. This is another reason to get it now while you can do so legally and privately.

If you are looking for some form of “insurance” then check out The Permanent Portfolio. It has gold and bonds and other balanced assets. It will never be a home run for you, but then again you will never lose out if gold is confiscated, which I deem highly unlikely or if a punitive tax is enacted which is more likely.

Another great alternative is to buy platinum. Platinum will NOT be confiscated, and most likely neither will silver or palladium. Skip gold entirely if you are worried. Personally, I have 70% in silver and platinum and only 30% in gold.

Thank you for your well-reasoned email.