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The Confiscation Con

By Peter Schiff, December 2

If you’ve spent enough time in the gold community, you might be under the impression that the most imminent threat to the average American isn’t terrorism or unemployment, but rather gold confiscation. Starting with the fact that FDR confiscated gold during the last Great Depression, and continuing to the quite accurate forecast that we are headed into an even Greater Depression, unscrupulous coin dealers have been pushing investors to buy expensive “numismatic” or “collectible” coins that they claim would be protected from government seizure. The only problems are that the original motive for confiscation no longer applies and the “protection” offered by major coin dealers wouldn’t actually help you keep your gold.

The tyrant’s order

In 1933, President Roosevelt issued Executive Order 6102, prohibiting the private holding of gold and requiring US citizens to turn over their gold bullion or face a $10,000 fine ($167,700 in today’s dollars) or 10 years imprisonment.

For private citizens, the order listed the following exemption:

Gold coin and gold certificates in an amount not exceeding in the aggregate $100 [about 5 troy ounces at that time] belonging to any one person; and gold coins having a recognized special value to collectors of rare and unusual coins.

Seizing on this “rare and unusual” language, many coin dealers try to convince unsuspecting customers that regular bullion coins are not safe, and that it is worthwhile to pay extra for “numismatic” or “collectible” coins that would be exempt from a Roosevelt-style confiscation.

Call the mythbusters

The reality is that almost all coins sold as “numismatic” or “collectible” by our competitors are really quite ordinary coins sold at high mark-ups to make these dealers extra profits. If we were in 1933, these coins would absolutely not fall under the definition of “rare and unusual.”

True numismatics are extremely rare or one-of-a-kind coins that collectors purchase for their historical and aesthetic qualities. These coins might retail for $100,000, while only containing $1,400 worth of gold. Most dealers charge a huge premium, so the coin may have to appreciate 30-50% before the buyer can even hope to make a profit. It is a speculative endeavor, and one that is likely to get even riskier as the US descends further into economic depression.

True numismatic coins, like pieces of high art, do well in good times, when people are getting richer and adding to their collections. In bad times, collectors are forced to sell because they need cash. With many collectors in the same boat, prices plunge. Even if the value of the gold in the coin rises, the gold content is only a small fraction of the coin’s value. Since premiums are contracting, the value of the coin falls. So, if you are buying gold due to fear of an economic collapse, you should buy bullion, not numismatics.

Why was gold confiscated?

In 1933, when Roosevelt issued his infamous order, the United States was still on a gold standard, meaning every 20.67 paper dollars could have been “redeemed by the bearer on demand” for a troy ounce of gold. Since Roosevelt had many public works projects to finance and also may have wanted to quietly lower real wages to drive employment, he confiscated gold and then devalued the exchange rate to $35/oz (at this point, the only people who could “exchange” were foreign governments). Thus, Americans instantly saw a 40% drop in value for the dollars they held, and the government’s profit was sequestered in something called the Exchange Stabilization Fund, which could be used by the President at whim without Congressional approval. Pretty nifty trick, huh?

It’s important to note that confiscation was necessary to Roosevelt’s plan because we were under a gold standard. Gold at that time was widely held throughout the population. If Roosevelt had devalued the dollar without confiscation, then whatever savings Americans held in gold would have been immune from this hidden tax. Furthermore, many Americans likely would have redeemed whatever paper dollars they held in fear of another devaluation. This could have wrecked the dollar’s viability as a currency.

These rationales no longer apply. In the aftermath of Roosevelt and Nixon’s dismantling of the gold standard, gold is no longer currency. Most Americans hold their savings in dollars and it is the only legal tender (which means it must be accepted in payment of all debts). Thus, President Obama and his buddy Bernanke don’t need to confiscate gold to devalue the dollar and finance excessive spending. In fact, the Fed has more than doubled the monetary base since the financial crisis started.

What, me worry?

The only reason to fear confiscation is in the case that the federal government is in default and needs the gold in order to pay off its creditors. But if it comes to Washington simply stealing our assets at whim, then why would gold be the only target? At that point, real estate, stock and bond certificates, and vehicles would be much easier to seize. Gold has been prized throughout history for its high value-to-weight, making it easy to conceal and trade under tough political conditions. Consider: you could store enough gold to care for a small family for six months (approx. 9 ounces) on the inside of a belt buckle.

Remember, if Washington chooses the confiscation route, we’re talking about a situation of pure pandemonium. When governments begin abrogating property rights in that fashion, the entire market mechanism ceases to function. We saw this in the Great Depression as Hoover and then Roosevelt relentlessly attacked private property and contracts.

If the situation really gets this bad, you aren’t going to trust some government agent with the intelligence of your average TSA officer to judge whether your coins are “numismatic” enough to be exempt from confiscation. The best protection in this case would be to have your gold stored safely at home or off-shore (not in a safety deposit box at a bank, where it is more likely to be seized).

Even in the heat of Roosevelt’s confiscation scheme, government troops did not break into people’s homes. The singular (failed) prosecution under the order took place when a New York lawyer tried to withdraw 5,000 troy ounces from Chase Bank. Ironically, all the gold actually collected by the Treasury was willfully surrendered in a wave of misguided patriotism, while many “law-breakers” simply kept their gold – which is why some old coins escaped the Treasury’s furnaces and are still around today.

Shop smart

The bottom line is that unscrupulous dealers use the threat of confiscation as a scare tactic to get you to buy gold coins at mark-ups well above the spot value of the metal they contain. While investors buy physical gold for many reasons – lack of counter-party risk, financial privacy, portability, et cetera – it is principally a store of value, a way to protect your wealth from the relentless devaluation of fiat currencies. Your goal as a buyer is to get the most gold possible for your money, from a dealer you trust. The dealer should make the process transparent and easy to understand, and deliver a genuine product at the agreed-upon price.

This article is written by Peter Schiff of Europac and with their kind permission, O B Research has been privileged to publish their work on our website. To find out more about Europac, please visit:

Pragmatic ECB Squares the Circle

By Axel G Merk, 2 December

The one thing worse than a fire in a building is a fire in a building when emergency exits are bolted shut: a panic in the market is exacerbated when liquidity dries up. It appears the European Central Bank (ECB) embraces this view: in today’s press conference by ECB head Trichet, he re-iterated a number of times that non-standard measures are there to permit appropriate transmission of standard measures. In plain English, this means that whatever emergency support is given to the market is a) temporary in nature and b) designed to allow monetary policy and thus economies to function.

Some observers are disappointed that the ECB “only” announced an extension of its full allotment refinancing facilities until Q1/2011. However, that’s incorrect: Trichet went out of his way to state that the ECB will do “whatever it takes” without using those words: the measures taken will be “commensurate to what we observe any time to what we see as disruption.” Policy will be “back to functioning normally when we are back to normal functioning.” When asked specifically whether the ECB would do whatever it takes, he indicated there is no limit on the the bond purchase program (Securities Market Program, SMP), although he emphasized that any bond purchases are always sterilzed.

By not giving a specific target on the bond purchase program, the ECB is as pragmatic as possible. If the ECB were to have a “bazooka” type of announcement as demanded by some market participants, such a bazooka would be bound to fail as any limit might be tested. Instead, by merely stating the ECB will adjust to the acuteness of the situation, the ECB has the flexibility to choose the water pistol or bazooka, as may be applicable. In our assessment, Trichet feels very strongly that price stability is best maintained by not explicitly threatening with a bazooka.

It’s also apparent that Trichet doesn’t see a quick and easy fix. To restore confidence, governments must show that they mean business. As such, the ECB, in our assessment, is most reluctant to intervene too heavily in the markets, as that would take the pressure off policy makers to follow through with reform.

It’s also worthwhile pointing out that Trichet did not say the risk spreads in the markets are too high. Trichet continues to respect the market, well aware that a small group of economists do not know better than the market as a whole. If peripheral countries want to pay less for their debt, they have to pursue credible policies.

While there were no specific announcements on further monetary easing, Trichet mentioned that the risks had shifted somewhat to the downside with regard to economic growth. We see this also as laying the foundation to justify further intervention in the markets.

In the meantime, there were questions raised about the cost imposed on strong countries, such as Germany, to bail out weaker ones. Without a doubt, there is a price to be paid for solidarity. We assess the dynamics playing out as healthy, even if the process at times creates shockwaves in the markets.

In action beyond the ECB press conference, what we see as very positive is that Southern European countries in particular continue to sell bonds even in this environment. To attract buyers, bonds must be issued during good and bad times, otherwise we may see a replay of what contributed to Greece’s downfall: when bonds are only sold during good times, the buyers of such securities are bound to lose money and lose interest in participating in the next auction. Spain issued bonds today at a high yield, but with very high demand; that’s the sort of activity required to restore order to the markets.

In summary, central banks throughout the world are showing that they will do whatever it takes. It’s just the ECB has a more restrained approach than the Fed; the ECB approach may lead to comparatively weaker economic growth in the short-term, but possibly to more structural reform and a stronger euro.

This article is written by Axel G Merk of Merk Investments LLC and with their kind permission, O B Research has been privileged to publish their work on our website. To find out more about Merk Investments, please visit:

China Gold Imports Soar Almost Fivefold on Inflation

China’s gold imports jumped almost fivefold in the first 10 months from the entire amount shipped in last year as concern about rising inflation increased its appeal as a store of value, said the Shanghai Gold Exchange.

Imports have gained to 209 metric tons compared with 45 tons for all of 2009, Shen Xiangrong, chairman of the bourse, told a conference in Shanghai today. The country is the world’s largest producer and second-biggest user.

Bullion soared 27 percent this year and is set for a 10th annual gain as the dollar dropped and investors sought a store of value on concern that the trillions of dollars governments are pumping into the global economy may debase the value of currencies. China has pledged to use price controls and may raise interest rates a second time this year to slow inflation that rose in October to the highest level since 2008.

“People there need to buy gold to hedge against inflation as the country’s tightening monetary policy drives investors from stocks and properties to gold,” said Hiroyuki Kikukawa, general manager of research at IDO Securities Co. in Tokyo. China’s demand will continue to grow, making the country one of the top importers together with India, he said.

Gold demand in China gained in the first half as government measures to cool the property market and falling equities spurred investment, the Shanghai Gold Exchange said July 7. About 70 percent to 80 percent the imports in the first 10 months were made into mini-gold bars, which Chinese investors like to hold, Shen said.

Inflation Expectations

China’s consumer prices jumped 4.4 percent in October, the fastest pace in two years, and above the government’s full-year target of 3 percent. China’s central bank raised interest rates in October for the first time since 2007 and ordered banks on Nov. 10 and Nov. 19 to hold more money in reserve.

“The expectation for higher inflation has fueled great interest among investors to hold physical gold, which led to higher imports,” Shen said.

Bullion for immediate delivery rose 0.4 percent to $1,393.40 an ounce at 3:10 p.m. in Shanghai after yesterday touching $1,397.50, the highest price since Nov. 12. The metal reached a record $1,424.60 an ounce on Nov. 9.

China’s investment gold demand may reach 150 tons this year, up from 105 tons last year, Albert Cheng, managing director of the World Gold Council’s Far East department, told the conference in Shanghai. That compares with 3-4 tons 10 years ago, Cheng said.

Investment Demand

“The investment demand we estimate already reached 120 tons in the first three quarters, and it usually spikes in the fourth quarter,” Cheng said. Global investment demand for gold of 1,901 tons last year exceeded jewelry consumption of 1,759 tons for the first time in three decades, according to London- based researcher GFMS Ltd.

Sales of gold products such as bars by China National Gold Group Corp., owner of the country’s largest deposit of the metal, jumped as much as 40 percent in the first half, Song Quanli, deputy party secretary at the company, said July 7.

China’s central bank in August said that it would let more banks import and export gold and allow overseas companies more access to trading. Gold demand growth in China will likely be supported by rising disposable income levels and the country could surpass India as the world’s biggest bullion consumer, Deutsche Bank AG said Aug. 6.

Relaxed Rules

China’s plans to relax gold trading rules may boost demand and increase trading volumes on the Shanghai Gold Exchange, the bank said.

Gold imports this year by India have already exceeded 2009 levels as consumers boost jewelry purchases, the World Gold Council said Nov. 17. Imports totaled 624 metric tons by the end of the third quarter, compared with 559 tons in all of 2009, according to the London-based industry group today.

“A possible interest rate hike in China won’t damp Chinese investor interest in gold,” the Shanghai exchange’s Shen said. “Even if China adds 50 basis points, it would still be a negative interest rate environment given inflation is running at more than 4 percent.”


The Precious Metals Power Higher

By James Turk, December 1

Both gold and silver demonstrated some spectacular performance yesterday, climbing 1.4% and 3.8% respectively from the previous day’s closing price.  November is the eighth month that gold has risen this year to generate its 26.5% year-to-date appreciation.  Silver has also risen eight months this year, and so far is up a stunning 67.5%.

We can reasonably expect some more big moves higher, given how tight the market for physical metal remains.  Physical metal cannot be conjured out of thin air like national currencies and paper representations of gold and silver.  Mine production cannot be turned on overnight to increase the supply of newly mined metal.  It takes years to build a mine.  So where is the supply going to come from to meet the ever-growing demand for these two precious metal safe havens in a world wracked by sovereign debt worries, volatile currencies, banks loaded with dodgy assets and politicians who are placing with their serial bailouts never-ending burdens on the backs of taxpayers?

There is only one source to meet this demand – the physical gold and silver must come from their already existing aboveground stock. 

To achieve this end, higher prices are needed to entice holders to exchange the physical gold and silver they now hold to instead own a national currency.  But will they be sufficiently enticed to sell?  After all, the proceeds from their sale are on deposit in a bank, which like most banks is probably loaded with risky assets. 

Further, in contrast to the safety of precious metals, their bank deposit has risks and earns near zero interest income, which clearly is not enough to offset the risks.  The integrity of deposit insurance is questionable because the assurance is being provided by an overleveraged and insolvent government.  In any case, their deposit is only guaranteed by the reality the bank will be bailed out with taxpayer money or newly printed currency created out of thin air by the central bank. 

So ask yourself, are you willing to exchange your physical metal for dollars or euros or any other currency?  I wouldn’t, and most people reading these reports understand that the metals remain undervalued, so they wouldn’t either.  We are what the market calls “strong hands”.

I am often asked when it will be time to sell the gold and silver we are now accumulating as our savings to get us though the crisis as it continues to unfold in the years ahead.  I always respond that the end of this bull market will not be like the one that ended in January 1980.  When gold and silver eventually become overvalued at some future date, you won’t “sell” your metals; you will “spend” them. 

In other words, I expect that because national currencies are being so badly mismanaged, many will collapse – including the dollar, which was the conclusion of The Collapse of the Dollar that I wrote with John Rubino in 2004.  As a consequence of the dollar and many other national currencies collapsing, so little confidence thereafter will be placed in any government’s management of a currency that few if any national currencies will exist.  This watershed event will mark the end of the world’s reckless experiment foolishly started in 1971with fiat currencies backed by nothing. With the inevitable failure of national currencies, gold and silver will be the currency of choice.

This article is written by James Turk of Goldmoney.com and with his kind permission, O B Research has been privileged to publish his work on our website. To find out more about Goldmoney, please visit:

Mounting Calls for ‘Nuclear Response’ to Save Monetary Union

By Ambrose Evans-Pritchard, 30 November

As Europe’s debt crisis spreads ever wider, the EU authorities are coming under intense pressure to move beyond piecemeal rescues and resort to radical action on a nuclear scale.

Spain’s former leader Felipe Gonzalez warned that unless the European Central Bank steps into the market with mass bond purchases, the EMU system will lurch from one emergency to the next until it blows up.

Alluding to Portugal and Spain, he said a third country will need a rescue as soon as “January or February”, and fourth soon after, at which point it will “contaminate the whole of Europe and get out of hand”.

“If the ECB bought just a third as much public debt as the US Federal Reserve is doing, we could stop the speculation,” he said.

Willem Buiter, chief economist at Citigroup, said Greece, Ireland and Portugal are all insolvent already, and Spain is close behind. The combined rescue needs of these countries is likely to exhaust the EU’s €440bn (£368bn) bail-out fund, which in reality has just €250bn in usable money.

“Once Spain needs assistance, the support of the ECB will be critical. As the sole source of unlimited liquidity and as an institution that can take decisions without the need for political or popular approval, it is the only institution that can take actions of sufficient size and with sufficient speed to stave off major financial instability,” he said.

Dr Buiter said the rescue packages for Greece and Ireland put off the day of reckoning. At some point creditors will have to take their punishment. While Europe is now the epicentre of the debt crisis, concerns may ultimately spread to Japan and the US. “There is no such thing as an absolutely safe sovereign,” he said.

He said the ECB would have to continue propping up the banking systems of crippled eurozone states – whether it liked it or not.

So far, the ECB has purchased just €67bn of Greek, Irish, and Portuguese bonds after being instructed to intervene by EU leaders in May.

A German-led bloc of hawks on the board has recoiled from going further, fearing moral hazard and arguing that the ECB is being drawn into a role that properly belongs to fiscal authorities. It is unclear whether the policy is strictly legal under the Lisbon Treaty. It is already facing a challenge at the German constitutional court.

However, the EMU debt markets risk spinning out of control. Bond spreads surged to fresh records in a string of countries on Tuesday. The 10-yield reached 7.3pc in Portugal and 5.7pc in Spain, levels that can quickly set off debt spirals.

There was a whiff of systemic contagion as Belgian yields blew through 4pc, drawing unwelcome attention to a country that has not had a government for five months and appears to be sliding towards Flemish-Walloon dissolution.

“The big change is that Belgium has gone from being the weakest of the strong group to the best of the weak group”, said Koen Van de Maele from Dexia.

Most alarming is the surge in Italian yields to 4.7pc, raising fears that the world’s third biggest debtor, with more than €2 trillion of outstanding bonds, could be drawn into the maelstrom.

Peter Westaway from Nomura said Rome’s woes will force the ECB to act at its meeting on Thursday. “We think the increase in Italian spreads has had a major impact on markets and will prompt the ECB this week to begin purchasing mainly Spanish and Italian bonds in significant amounts, for as long as it takes.”

Arturo de Frias, from Evolution Securities, said the eurozone will have to move rapidly to some sort of fiscal union to prevent an EMU-break up and massive losses on €1.2 trillion of debt lent by northern banks to the southern states.

“Our gut feeling, we are now witnessing one of the biggest tug-of-war games ever: a ‘European Union bond’ is needed in order to save the euro.”

“Angela Merkel will not sign on the dotted line until there is a lot of blood in the bond markets and she is seen as having absolutely no choice. The market will keep selling until the yields of Spanish and Italian bonds (and perhaps Belgian and French also) reach sufficiently horrendous levels. The question is: what is the ‘sufficiently horrendous’ trigger level: 6pc yield for Spain? Or 7pc? Perhaps 8pc?” he said.

Fiscal union – with a euro-bond, de facto EU treasury, and debt union – is a vast political step. There is no popular support in Germany for what amounts to the end of the nation state, and Mrs Merkel has not made any move to prepare the ground. It would require a fresh EU treaty, agreed by all EU members.

It is just as likely that Germany will conclude that having absorbed its fellow Germans in the East at exorbitant cost, it cannot undertake the same burden for an area six times the size.

No German citizen was given a vote on whether they wished to give up the D-Mark, and they were given a pledge of honour by their leaders that the euro would never lead to the circumstances now facing their country. The politics of EMU have turned very sour.