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During Miles Franklin’s first educational Webinar last week (replay link HERE), our Q&A queue was so long, we had to answer most of the questions in follow-up reports (read HERE and HERE).  By far, the most oft-asked question related to the potential for gold confiscation by the U.S. government, a topic I have discussed ad nauseum for several years.

I do not want to turn this RANT into a discussion of confiscation per se, but suffice to say such an event appears unlikely.  Not only does it makes little sense for the U.S. government to do so, it would be near impossible to enforce.  When FDR decreed gold confiscation in 1933, the U.S. was still on a gold standard, so more gold was required to enable the government to print money to, in their erroneous minds, escape the Depression.  Today, there is no gold standard, thus confiscating gold would have no practical purpose.

Moreover, very little gold is actually owned by U.S. citizens – certainly not enough to make a dent in America’s gargantuan debt load, and the simple act of decreeing confiscation would be seen worldwide as a denouncement of the dollar, and validation of gold, as MONEY.  Moreover, barely any gold was actually confiscated in 1933, with not a single prosecution for violating the confiscation law, Executive Order 6102.  In today’s world of high-tech home security, armaments, and global depositories, it is difficult to envision a scenario of home invasion, international investigation, and enforcement of such a draconian action, particularly if catalyzed by plunging fiat currency values.  Not to mention, how would the government know who actually owns gold, as nearly all transactions are non-reportable?

That said, I thought I would proffer an alternative scenario, the brain-child of the aforementioned Andy Schectman.  In the event of a currency emergency – and subsequently, insatiable global demand for PHYSICAL gold, he believes the SPDR Gold Trust, i.e. the GLD ETF, could be legally commandeered by the government, per the terms of its ambiguous prospectus.  I am 100% in agreement, as long-time readers know I have written on the dangers of GLD for years, as in the August 2011 RANT below.  In fact, I devote a significant portion of my current presentations to warning of the grave risks of owning GLD and SLV.

Ranting Andy: “Outing” GLD and SLV, and “Inning” Alternative Forms of Gold and Silver Investment, Including Mining Companies

I have long believed these criminal securities were created by the government specifically to divert bullion investment into a PAPER security with “rules” so vague, it would be impossible to prosecute its custodians in the event of a default of the underlying PHYSICAL gold and silver.  These funds are never audited, and the fund custodians (HSBC for GLD and JP Morgan for SLV, two of the world’s shadiest banks) have discretion to lease out said metal, making it impossible to know the funds’ true, unencumbered holdings.  That said, GLD and SLV clearly hold material inventories of PHYSICAL gold and silver, although impossible to know how much.

In the case of silver, ZERO government inventory exists, as nearly all the world’s silver has been consumed by industry.  It is widely estimated that no more than one billion ounces of investable silver is available worldwide, and if that is the case, the 310 million ounces purported to be held by SLV represents roughly one-third of the global supply, by far the largest stash anywhere.  That said, even 310 million ounces is worth just $10 billion at today’s prices, the same amount the government prints each hour, and thus, hardly a candidate for confiscation, particularly as silver is required for numerous, critical industrial applications.

As for gold, approximately 30,000 of the estimated 180,000 tonnes of gold mined throughout history is purported to be held by Central Banks, the largest of which is the U.S.’s so-called 8,134 tonnes.  I maintain my belief that most American gold has been leased, swapped, or surreptitiously sold over the past 15 years to support the dollar’s value, and frankly, distrust many of the figures in this table, particularly the IMF’s 3,101 tonnes, in my view nothing more than double-counted “pledges” from member-nations such as the United States.  However, suffice to say that even if the U.S. did own every ounce of that 8,134 tonnes, it would only be worth $450 billion at today’s prices, just one-third of the $1.3 trillion 2011 fiscal deficit.

World’s Largest Gold Owners

Country

Tonnes

U.S.A.

8,134

Germany

3,743

IMF

3,101

Italy

2,702

France

2,684

GLD ETF

1,278

Switzerland

1,161

China

1,054

Russia

960

Japan

843

Netherlands

675

India

614

ECB

553

For the purpose of this RANT, I was more interested in posting this table so you can see the supposed holdings of the GLD ETF, at 1,278 tonnes worth a measly $70 billion.  In the context of the $1.3 trillion 2011 deficit – with another $1.3 trillion deficit projected for 2012, I’m not sure why we’re even discussing confiscation.  After all, if 1,278 tonnes doesn’t make a dent in the U.S.’ chronic, exponentially-growing debt problem, how would the measly private holdings of American citizens make a difference?

But let’s just say gold is revalued to $15,000/oz. in today’s (non-hyperinflated) dollars, a highly unlikely scenario as by that point the global financial system would have surely collapsed, unleashing government printing that would put Weimar Germany to shame.

But again, hypothetically, if gold were $15,000/oz, GLD’s 1,278 tonnes would be worth $615 billion, assuming GLD was not shut down by runs on its inventory, which it surely would long before gold reached $15,000.  Would the government consider GLD an attractive confiscation candidate?  True, by that point MONEY PRINTING would likely have caused the national debt to soar to $50 trillion, or $100 trillion, or more, making the $615 billion appear a pittance.  Do you see where I’m going with this?

That said, the point I am making is that – outside the myriad reasons it would makes NO SENSE for the government to decree confiscation –the ONLY viable confiscation target of material size is the GLD ETF, which would be as easy – and LEGAL – as essentially any operation the government has undertaken.  All one needs to do is glance at the “Risk Factors” section on pages 6-12 of the prospectus to understand the broad powers of the custodians to decide when to terminate the fund or prevent holders from redeeming shares for PHYSICAL gold.

SPDR Gold Trust (GLD) Prospectus

I could list all these risk factors here, but they are available in the prospectus.  Rather, I want to focus on the two below, clearly bestowing the right for the custodian to arbitrarily redeem shares for cash or prevent you from redeeming shares for PHYSICAL gold, using the term “emergency” as a catch-all to cover nearly all situations.  I can assure you government decree would fall under the category of “emergency,” and make it “unlawful” to exchange shares for PHYSICAL gold.

The Trust may be required to terminate and liquidate at a time that is disadvantageous to Shareholders.

Redemption orders are subject to postponement, suspension or rejection by the Trustee under certain circumstances.

…(2) for any period during which an emergency exists as a result of which the delivery, disposal or evaluation of gold is not reasonably practicable, or (3) for such other period as the Sponsor determines to be necessary for the protection of Shareholders. In addition, the Trustee will reject a redemption order if the order is not in proper form as described in the Participant Agreement or if the fulfillment of the order, in the opinion of its counsel, might be unlawful.

Writing about the dangers of GLD and SLV (which, by the way, has the same risk factors as GLD) is nothing new for me.  However, Andy’s theory that they may have been specifically created as “vehicles of eventual confiscation” is, and I agree this is a possibility, albeit a slim one as it makes NO SENSE for the government to attempt such a maneuver.  Either way, the only way confiscation would even be discussed would be if gold and silver were soaring and the dollar plummeting – hence, hyper-inflating – at which point every man, woman, and child would prefer the risk of their gold being confiscated over that of holding worthless dollars.

PROTECT YOURSELF, and do it NOW!