Gold Confiscation - What Do We Really Think?

In September, I received an email from the Senior Vice-President of the Anglo-Irish Bank (Austria) AG asking about the possibility that physical gold ownership in the United States could be banned, and gold confiscated, just as it was in the 1930s.  I responded that, given an inflationary meltdown, “gold confiscation could become relevant as a way for the U.S. to bolster a collapsing dollar with gold, given the fact that we no longer have enough gold to do so in any meaningful fashion without gold confiscation.”

However, in response to the specific questions about the possible exercise of the President’s power to confiscate gold, I said that, “It is very unlikely that the legislative provisions enabling gold confiscation would be used again here in the United States.”

Given all that has happened since September 9, 2008, the date of the letter, do we still feel the same way?  Do we still believe that gold confiscation is “very unlikely?”

No, the world has changed for the worse with shocking speed and, given the modern equivalent of the Great Depression, far stranger things could happen than gold confiscation. 

Since September 9, we have seen the nationalization of Fannie Mae, Freddie Mac and AIG; the socialization of the auto industry; the disappearance of the investment banking industry; a $700 billion Bailout with more to come; the bankruptcy of Lehman Brothers; the “breaking-of-the-buck” of the supposedly rock-solid money market funds; the largest bank failure in history; the implosion of global stock markets; the collapse of home values, retail sales and consumer sentiment; the biggest fall in industrial production in 34 years; and an unprecedented shattering of confidence in both commodities and financial assets. 

The lack of trust that is at the root of the financial crisis is not only directed at banks, but also increasingly toward the world’s policymakers.  Central bankers and government officials are being confronted with crises on a scale not seen in their lifetimes.  President Bush addressed the nation and encouraged the American people to have confidence in the economy during a “deeply unsettling period.”  The next morning, the Dow lost nearly 700 points in the first five minutes of trading.

As the market does its daily job of balancing fear and greed, it becomes increasingly apparent that fear predominates.  Individual investors are abandoning anything with the slightest hint of risk, and the extent of the collapse may have scared investors away from stocks for a long time to come. 
 
U.S. financial institutions are toppling like tenpins and confidence in those institutions has never been lower.  Investors are pulling huge amounts of money from money market funds, hedge funds, stock mutual funds and bond mutual funds as market turmoil leads to unprecedented levels of redemptions.  Those withdrawals can lead to a vicious circle in the markets, as the funds sell holdings to return money to clients, depressing prices even further and creating even more redemptions.  Moreover, because they use so much borrowed money, the amount of potential asset sales for many of the funds is far larger than the redemptions themselves.  For example, J.P. Morgan estimates that an outflow of $150 billion from U.S. hedge funds will lead to asset sales of about $400 billion.  Even when money stays in hedge funds, it doesn’t necessarily stay in the stock market.  According to Goldman Sachs, hedge funds have recently put as much as $400 billion into cash and cash equivalents.

Only Treasuries, gold and rare coins have escaped the selling panic that has gripped the markets.  Shortages of gold are being recorded at refineries and mints around the world, and the historic demand for physical gold has forced the U.S. Mint to cease production of popular gold coins and to supply other bullion coins on an allocation basis.  Because of the inflationary impact of the Bailouts, Merrill Lynch predicts that gold will hit $1500.  Other analysts believe that $1500 is the floor, not the ceiling.

How bad can things get?  Secretary of the Treasury Paulson talks of the current crisis being potentially worse than the Great Depression.  Alan Greenspan told congress that the financial meltdown had left him in a “state of shocked disbelief.”  Gold confiscation has happened before, the enabling legislation still has legal effect today, and it is certainly possible to envision economic circumstances that could prompt the President and Congress to act in such an extreme fashion.  Once again, the day could come when even your gold could be taken from you.