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Gold Confiscation: Straws in the Wind

by David Galland, Managing Director, Casey Research

In the emails that our readers at Casey Research send our way, questions and concerns about the possibility of gold confiscation rank high.

My somewhat standard response is that, yes, it’s possible, but that we should see straws in the wind well before it happened… allowing us to take measures to protect ourselves.

While I don’t want to make too big a deal about it, there have been clear signs of late that the U.S. government is taking an unhealthy interest in your gold.

My recent article “I Smell a VAT” touched on one such straw. The relevant point being that, thanks to a regulation slipped into the healthcare legislation, coin dealers – and all businesses, for that matter – will have to begin reporting any purchases of $600 or more from anyone, including clients selling back their gold.

While I think the overriding intent is to pave the road for the implementation of a value-added tax (VAT), there’s no question that the legislation simultaneously paints a target on the back of the free trade of precious metals.

Then, a couple weeks ago a friend sent me a copy of Mother Jones, an a unapologetically “progressive” mouthpiece with a cover story titled “Glenn Beck’s Golden Fleece.”

And friend and correspondent Lowell sent along an article with an embedded video link to an lengthy ABC News “investigation” by Clintonista George Stephanopoulos that picks up on the Mother Jones story.

Now that you’ve watched the video – and if you don’t, some of what follows won’t make any sense – I’d like to share some observations based on personal experience.

About Coins

Years ago, I headed up the publishing division of a company (that will go unnamed) with a separate division selling coins. I was there when the coin business started, and while not involved, was impressed at its rapid growth in the heady days of the 1970s gold bull market.

Then something happened. While the founder was a strong advocate for hard money and sincere in his intent to do the right thing by his customers, as the coin business grew, he increasingly recruited “professional” managers to run the firm – hired guns whose sole focus was boosting the bottom line and, by so doing, their bonuses. And the business hired more and more “professional” salespeople – the sort of folks who know how to squeeze a client good and hard.

As the company’s sales soared, fueled by hard-hitting marketing, the founder’s good intentions began to weaken under the onrushing flood of cash that began to wash in. In time, the entire conversation at the coin division switched from “What’s good for the customer?” to “What coins can we sell with the biggest mark-up?”

On those occasions when I was invited to comment on what was going on, I did what I could to argue against the corporate culture that had developed, but my impassioned and increasingly angry fights with the managers of the coin division couldn’t win out over the millions in profits being made. As much as I enjoyed my job, the situation became so degraded, I had no choice but to resign. 

Now, let me be clear. The company broke no laws and, in fact, did nothing that I suppose most businesses on to a good thing might not do; marketing was generating lots of prospects, and the sales force was selling.

The problem was that the product line had moved from selling highly liquid government-issued gold and silver bullion coins to selling illiquid “modern rarities,” an oxymoron if there ever was one. Whether “proof” Mexican silver dollars, “treasure” coins, or privately minted commemorative coins, the one thing you could be sure of was that the mark-ups were huge.

Which meant that, in the absence of an active collectors market – which, when it comes to “modern rarities,” just doesn’t exist, and never will – the coins were very unlikely to ever provide a reasonable return on investment, let alone be a good asset to preserve capital. Quite the opposite, they were almost certain losers.

Buyer Beware

In the ABC video, you’ll hear a sound bite from a client of Goldline who spent $5,000 on “collectible” coins, saying that he wanted to buy bullion, but that the sales guy “kinda, sorta talked me into buying these other coins.” Soon thereafter the buyer decided to sell those coins and, when he did, he took a 42% loss. Which, he points out, was a big hit to his net worth.

You can probably spot all the things wrong in that paragraph, but I’ll do it anyway.  

First, the disgruntled former client says he was looking to buy bullion coins, but the sales guy switched him to a “collectible.” Whose fault is it that he allowed himself to be swayed? Quoting Nancy Reagan, when dealing with a salesperson, often times the best thing to do is “just say no.”

Second, if taking a loss of about 42% on an investment of $5,000 really hurts his net worth – he shouldn’t have been buying illiquid coins in the first place.

Third, buying any “collectible,” or pretty much any asset, at full retail and then turning right around and selling it, is invariably a sure-fire ticket to a quick loss.

Finally, who is to say that the coin dealer that bought the coins off the client didn’t lowball him? That, too, is part of generating a profit in the coin business.

While I feel sorry for the former Goldline client, he really can’t blame anyone but himself for that loss. He didn’t do his homework or stick to his guns when the salesman tried to move him up to a higher-margin product line.

As for the company, I don’t know them, but I do know that they spend a lot on marketing and celebrity endorsements. It doesn’t take a genius to figure out that money has to be recouped from somewhere – specifically, the clients. Which is why I strongly suspect that, yes, the company’s salesmen are especially aggressive. And that they try very hard to load their clients up with high-margin coins.

Let me recap some lessons from this article, and based on my own brush with the business.

First, if you’re going to become a coin collector, don’t think you can stumble into it and enjoy any measure of success. Do your homework – then do some more – before actually laying out your hard-earned cash. Fortunately, there are a lot of useful resources out there for you to rely on… pricing guides, auction results, and numismatic groups, to name just a few.

More important, however, is that if you are not going to be a collector, then stay away from anything but U.S. or Canada-minted bullion coins, or bullion bars issued by the widely acknowledged mints such as Johnson Matthey.

Will the bullion products be exempt from confiscation, should it come to pass? No. But trying to avoid confiscation by dealing yourself into a large loss right out of the box by overpaying for an illiquid pseudo-collectible is just silly… no matter what the sales person tells you.

What’s in the ABC Video That Should Concern You

While imminent confiscation isn’t really addressed in the ABC exposé of Goldline, there were some things that caught my eye as worthy of further reflection.

The first was the contention by the appropriately named NY congressman, Anthony Weiner, that it was ludicrous to suggest that the government could ever just confiscate a person’s gold. Excuse me? Deep breath. If the Weiner were to repeat that contention to my face, the conversation might roll out something like this…

“What!?! Did you actually just say what I think you said?”

“Why, yes, David, I did.”

“Are you kidding?”

“Why, no, David, I am not.”

“So, a government that can invade countries on false pretenses… arrest people and throw them into prison camps and hold them indefinitely without trial… whisk suspects off to foreign countries to be tortured… hit targets in sovereign nations on the other side of the globe with missiles fired from drones… declare imminent domain to take private property in order to give it to a hotel developer… confiscate homes because someone on the property, maybe not even the owner, is caught with a marijuana cigarette… freeze the bank accounts of anyone suspected of a crime, then not let them use their own money to defend themselves… offer known criminals, murderers even, ‘Get out of jail free’ cards if they testify against someone else… but they wouldn’t confiscate gold? Oh, and by the way, Roosevelt already did it once, you moron!”

“Who are you calling a moron? Security, we have a problem.”

Another deep breath. Pat hair back into place and resist urge to apply my forehead to the keyboard.

But enough of Mr. Weiner.

The second thing that should concern you – and the EVP of Goldline tossed Stephanopoulos a soft pitch down the middle on this one – was when he mentioned that his salesmen have instructions to “advise” their clients on the best sort of coins to buy. Paraphrasing Stephanopoulos, “But your people aren’t licensed as investment advisors, are they?”

No, but I suspect that, if this witch hunt continues, they may soon have to be.

Especially because a congressional committee has been set up to investigate this serious matter. Surprise, surprise, the co-sponsor of the committee is none other than Congressman Weiner. Apparently he was chosen for this particular bit of dirty work. While all of this may be nothing more than grand standing and bare-knuckle politicking, any time Congress gets involved, pretty much anything can happen; keep your eyes open for a fresh assault on the gold coin industry.

And, finally, the thing that probably concerns me most is that, whatever else he is, Glenn Beck is a highly visible and apparently effective critic of the current administration. Having failed to knock him off the air by unleashing a well-financed boycott that chased away many of his advertisers, it appears the Democrats are now pursuing their vendetta against Beck by attacking the business practices of the show’s largest sponsor. No matter what your opinion is of the man, this sort of determined government-backed assault should make your antenna go up. 

Is Goldline an angel? Based on my experience with the industry, probably not. But in this case, I’m not sure that that matters as much as that they sponsor Beck’s show.

A Final Word – on Confiscation

Do I think confiscation is imminent? No.

But I do think that the straws in the wind point to yet more regulation. This could ultimately place gold dealers under the watchful eye of the SEC or some other Frankenaucracy that emerges out of the new financial reform legislation.

I am not a fan of regulation – even if it sounds like a good idea. For instance, to protect the ignorant from predatory salesmen. My rationale is that this is not a perfect world and never will be. Humans can and will find a way around every rule (witness the fact that Madoff, the former head of the NASDAQ, was able to scam billions off clients). Therefore, the sooner the citizenry learns that they have to rely on their own common sense – and actually educate themselves – before reaching for their wallets, the better. Having an implied government blessing over every transaction does nothing but create a false sense of security.

But that’s just my particular, and some think peculiar, world view. Back in the world we live in, any new regulations will, if nothing else, assure that any private transactions between you and your favorite coin dealer will become a thing of the past. The new reporting requirement on purchases of over $600 pretty much makes that a reality.

With this new layer of reporting in place, should the sovereignty come to the conclusion that it, versus you, should be in possession of your gold – they’ll know whose door to knock on.

Of course, we can’t know if and when such a thing might occur… but to pretend it can’t is to be naïve or, in the case of Weiner, disingenuous.

In my article, “I Smell a VAT,” I touched on some ideas for how you might protect yourself from a possible gold confiscation (none of which involved buying overpriced coins.

There is one other option I didn’t mention – expatriate. Many of the happiest people I have met in my life have their passport from one country, residency in another, and money/gold in a third.

As David says, getting your money – and maybe yourself – out of the U.S. is one of the smartest strategies to protect your wealth from the long and ever-growing arm of the government. Click here to read our new report on the 5 best ways of internationalizing your assets.

Endeavour Provides Operational Update and Announces Corporate Name Change to Endeavour Mining Corporation

Endeavour Mining Corporation is pleased to announce that at its annual general meeting held today, shareholders approved a resolution to change the name of the corporation from Endeavour Financial Corporation to Endeavour Mining Corporation to reflect the Company’s transformation into an operating gold mining company

The name change takes effect today and the corporation’s shares and warrants will continue to trade on the Toronto Stock Exchange, with the common shares trading under the symbol EDV.

Endeavour Mining is well positioned to pursue its gold production growth plans. The Company has positive operating cashflow from its 90% owned Youga gold mine in Burkina Faso, approximately US$180 million of cash and access to a US$100 million Acquisition Facility. In addition the Company has a highly skilled management team with a demonstrated company-building track record and an ability to respond quickly to market opportunities. The Company intends to aggressively grow primarily through acquisitions to become an intermediate gold producer.

Acting as the controlling shareholder Endeavour Mining has successfully implemented the turnaround of the Youga gold mine over the last year. Comparison of gold production during the first three months of Endeavour control (October to December 2009) with the most recent three month production results (June to August 2010) shows a 20% increase from 6,379 ozs to 7,667 ozs per month with a 29% reduction in the average cash cost per ounce from US$694 to US$495 during these periods.

Endeavour’s mining operations are now focused on improving efficiency and productivity to further reduce operating costs at Youga. In Côte d’Ivoire, the corporation has received authorization to commence an additional 20,000 metre drill program at the Agbaou Gold Project. Endeavour’s project development team is carrying out engineering and technical studies to refine the Agbaou Feasibility Study.

Neil Woodyer, Chief Executive Officer commented: “We have applied our financial and operational skills to stabilize production and continually improve the mine performance. Restructuring Youga’s project debt facility coupled with replenished working capital has had
positive impacts on the operation, ensuring more consistent performance. Operational changes, which include combining the drilling and blasting and mining contracts under one contractor have simplified and streamlined the mining operations leading to stability in the
operation. In addition, Endeavour Mining has restarted exploration activities at the Youga mine site and at the adjacent Ouaré and Bitou projects in Burkina Faso with the primary objective of increasing mineral resources and reserves, in order to extend the current mine
life. The Youga mine plus our financial resources provides a strong base for future growth.”

Endeavour Mining will re-launch its updated corporate website at www.endeavourmining.com in the near future.

CONFERENCE CALL WITH MANAGEMENT — Wednesday, September 15, 2010, 11am EST.

As announced on September 8, 2010 — Management has scheduled a presentation for Wednesday September 15, 2010 that will be webcast by V-Call at 11:00am Eastern Standard Time and can be accessed from the Corporation’s new website at www.endeavourmining.com or by calling the operator at 201-689-8567 or toll free 1-877-407-0782 prior to the scheduled start time. The call will be archived for later playback on Endeavour’s website until September 15, 2011.

Mr. David Laing, P. Eng. and Senior Vice-President, Mining of Endeavour, is the Qualified Person who has reviewed and approved the mining technical information including in this news release.

Endeavour Completes Sale Crew Gold & Conf Call

Endeavour Financial Corporation is pleased to announce that it has completed the previously announced sale of 46,203,403 common shares of Crew Gold Corporation representing a 43% interest to Severstal Gold for US$215 million in cash.

As announced on September 8, 2010 — Management has scheduled a presentation for Wednesday September 15, 2010 that will be webcast by V-Call at 11:00am Eastern Standard Time and can be accessed from the Corporation’s new website at www.endeavourmining.com or by calling the operator at 201-689-8567 or toll free 1-877-407-0782 prior to the scheduled start time. The call will be archived for later playback on Endeavour’s website until September 15, 2011.

Nine Bullish Arguments for Gold

By Frank Holmes, Sept 10

Dr. Martin Murenbeeld, chief economist for Dundee Wealth Economics and one of the smartest gold minds around, recently released his latest chart book – hundreds of useful visuals to help him tell the gold and commodity stories.

Dr. Murenbeeld also outlines his nine bullish arguments for gold.

  1. Global fiscal and monetary reflation – The world’s major economies have taken on extensive amounts of debt to keep their economies afloat. The struggles of Greece and other nations in Western Europe haven’t gone away. The U.S. has spent hundreds of billions of dollars in stimulus money and is still losing jobs.
  2. Global imbalances – The dollar has benefited from the troubles in other countries in its role as a relative safe haven. “Relative” is the key word – roughly $10 trillion is expected to be added to the U.S. federal debt burden through 2019 and the U.S. trade imbalances are huge. These trends stand to weigh on the dollar and support gold’s safe haven status over the longer term.
  3. Global foreign exchange reserves are “excessive” – Global foreign exchange reserves have expanded exponentially in just the past few years, reaching $8.17 trillion in April 2010. Meanwhile, the gold reserve ratio has dropped significantly since 1980.
  4. Central bank attitudes to gold – Under the current central bank selling agreement, only the International Monetary Fund has been a seller of gold. Latin American countries, who were net sellers of gold up until 2002, are now buying gold again. India purchased 200 metric tons from the IMF in the fourth quarter of 2009, setting a floor under gold just above $1,000. China has increased its gold reserves from 395 metric tons in 2001 to 1,054 metric tons as of the end of the first quarter—a 166 percent increase in less than a decade.
  5. Gold is not in a bubble – Gold’s run has been slow and steady. As I mentioned last week, we’re not seeing large price spikes that are typical with bubbles. The chart below illustrates just how different gold’s current bull run has been from previous ones. A key difference today is that we’re seeing greater affluence in the developing world, where people have traditionally turned to gold to store their wealth.
  6. Mine supply is flat – World mine production is about 2,500 metric tons—roughly 25 percent higher than it was in 1990—but net mine supply is less than it was 20 years ago. Dehedging, increased scrap supply, lower grade discoveries and higher replacement costs will continue to constrain supply. We’re already seeing this affect the marketplace. During the second quarter of 2010, gold demand rose 36 percent year over year, while supply was up just 17 percent.
  7. Investment demand – Investment demand in the second quarter of 2010 more than doubled compared to the same period in 2009, and accounted for more than half of total global demand. Investors bought the most gold since the first quarter of 2009, at the depths of the Great Recession.
  8. Commodity price cycle – Commodity price cycles tend to last multiple decades. Going back to 1800, the shortest gold cycle is 10 years and shortest copper cycle is 14 years. The current bull cycle began in 2001.
  9. Geopolitical environment – Historically, gold has performed well in times of political and financial turmoil. Gold hit an all-time high (inflation adjusted) in 1980 amid the Iran hostage crisis and the Soviet invasion of Afghanistan. Today’s geopolitical climate is also volatile given the ongoing wars in Iraq and  Afghanistan and the pursuit of nuclear arms by Iran and North Korea.

 

With these nine factors, Dr. Murenbeeld makes a strong bullish case for gold and others seem to agree. A Bloomberg survey of 29 analysts last week reported that they see gold prices averaging $1,500 in 2011—a 20 percent jump from current levels.

Does the Fed Ultimately Control Interest Rates?

By Michael Pento, September 13, 2010

In forecasting the consequences of current economic policy, many pundits are downplaying the risks associated with the surging national debt and the rapid expansion of marketable Treasury securities. Their comfort stems from the belief that a staggering debt burden will be manageable as long as interest rates remain extremely low; and, as they believe the Fed is in complete control of setting rates across the yield curve, they see no danger of rates ever rising past the point of comfort. Those who subscribe to this fairy tale forget that, in real life, there are many more hands on the interest rate steering wheel.

The Congressional Budget Office estimates that the 2010 deficit will exceed $1.3 trillion and total US debt now stands at $13.4 trillion (92% of GDP). That’s a lot of debt that needs floating. Yet, the 10-year note is yielding 2.8%– which is 4.5 points below its 40-year average of 7.3%! Experience teaches that even moderately long-term investors should be expecting rising rates. Regardless of the extreme and obvious misalignment of fundamentals and bond prices, the mantra from the dollar shills remains firm: “The US dollar will always be the world’s reserve currency, and the US bond market will always be regarded as the safe-haven depository for global savings.”

With interest rates having been so low for so long, it’s understandable that many people have forgotten that central banks are not ultimately in control of interest rates. It is true that the Fed can be highly influential across the yield curve and can be especially effective in controlling the short end. But, in the end, the free market has the last word on the cost of money.

Although the Fed has certainly created enough new dollars to send prices higher, recessionary forces are, for now, disguising the evidence of runaway inflation. But when inflation finally erupts into the daylight, it will be impossible for borrowing costs to stay low. No one can realistically be expected to loan money below the rate of inflation. To attract buyers, the Treasury will have to offer a real rate of return.

Since our publicly traded debt level is increasing while our personal saving rate is not, we must inevitably rely more and more on foreign creditors to purchase our bonds. The problem is that the Chinese have been net sellers lately, and the Japanese saving rate is chasing ours down the tubes. Europe is also clearly suffering through their own sovereign debt issues. If not the Fed, who then will buy?

At this point, many economists breathe a sigh of relief. Since the Fed has no investment objectives, it could care less how much it loses by buying low-yielding Treasuries. Given that the Fed has an unlimited supply of dollars to buy such debt, it could simply choose to pressure rates lower indefinitely, so long as that policy stance is deemed necessary for a weak economy.

I concede that the Fed can always place bids for US Treasuries, and keep those rates low, but does that mean all debt markets will follow suit? Will private banks continue to offer rock bottom mortgage rates if housing defaults soar or inflation rises? What about the corporate bond market and municipal debt? Can the Fed order a bank to loan to a company at a rate the bank does not find profitable? The only way to keep rates in all debt markets in line would be for the Fed to buy all kinds of debt, not just Treasury debt. Such a policy has never been considered, let alone attempted, by any major economic power.

And what will our foreign creditors think about such a strategy? Anyone with the ability to move investments outside the US dollar would clearly do so, to avoid the wholesale debasement that such an inflationary policy would create. Once you take the argument to its logical conclusion, it is plain to see how futile, ignorant, and dangerous an attempt to hold all rates down would be. Americans can only hope Fed Chairman Bernanke isn’t as foolish as his groupies.

Ask any historian of Germany, Argentina, Bosnia, or Zimbabwe why interest rates skyrocketed during their respective battles with hyperinflation. Why were their central banks unable to control borrowing costs?

In the end, central banks can only temporarily distort the savings and demand equation. The more the Fed prints, the higher the eventual rate of inflation will be. If mainstream pundits truly believe the Fed can supplant the entire public and private market for debt indefinitely, then I don’t want to be around when that fantasy inevitably becomes a nightmare.

This article is written by Michael Pento 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: