Lear Capital: Is There a Plan to Confiscate Gold?

The subject of gold confiscation is controversial to say the least. Yes, it has happened before under the guise of an Anti-Hoarding Act. In 1933, it was deemed necessary for government, not citizens, to hoard the gold in order to gain the ability to print more paper currency.

Once government had completed its harvest of as much gold as it was going to get, the value of a $20 gold piece was reset at $35 paper dollars. Immediately, government gave itself and those who kept their legally allotted amount of gold, a 75% return on investment.

So which was it? Confiscation or allocation! Would you make that deal if it were offered today? Congressman, now Presidential Candidate, Ron Paul says we should use our vast national gold reserves to settle some of our debts. But, at today's prices, around $1500 per ounce, our 8133 tonnes of gold reserves isn't even worth $400 billion dollars.

Conceivably, government would have to confiscate another 8,000 tonnes of gold and then quadruple today's gold price, just to pay off China who owns about $3 trillion of U.S. Dollar denominated debt. In 1933 each family member was allowed to keep $100 worth of gold coin at face value (5ea. $20 coins) as well as any coins deemed collectible. So, would you give up all but 5 oz. of your gold at $1500 an ounce if you knew the 5 coins left would be worth $30,000.

I suspect many would make that deal and as ironic as it may seem, the potential for gold confiscation to pay off national debt, may be the best reason to own at least 5 coins and as many coins deemed collectible as you can afford. This, of course, all assumes that a confiscation of gold would occur in similar fashion as it did 78 years ago.

Does a plan to confiscate gold exist? There is a growing trend to accept gold now as collateral against certain trades. J.P. Morgan is among them as well as the Chicago Mercantile Exchange. Is this the beginning of Round 1 of gold confiscation?

Let's examine what happens when gold is accepted as collateral against stock purchases. First, it unleashes liquidity. With a growing attraction to gold, some may see this as an opportunity to convert gold from an asset that provides no cash-flow to one that can produce dividend income. In effect, you would be mortgaging your gold just as people mortgaged their homes in order to buy stocks or other investments. As long as stocks keep rising all is good. As soon as liquidity dries up, however, . . . well do we really need to go through all that again?

To identify the danger of using gold as collateral to buy other investments, just consider Freddie and Fannie as a collection of little stashes of gold and see who owns all the gold when the investment you collateralized with it goes bad. Right now Freddie and Fannie rest on the balance sheets of the Fed as they have long been determined, not worth the paper they are printed on. So, it's simple! If you use gold to collateralize a stock purchase and stocks go down, you lose some or all of your gold depending on how far the stock falls.

So, is it a plot or just good business? From the brokers side of the trade it looks like pretty good business to me. Let's face it. Right now liquidity is tight. Tapping into people's gold stashes will loosen up cash for stock purchases. Then, taking collateral that typically has an inverse relationship to stocks puts you in a position where if stocks fall the collateral still covers the investment. If stocks rise, then everyone's happy. But, it's almost a guarantee that not every collateralized stock purchase is going to rise in value. Some people will lose their gold while the one who made the loan against your gold, gains your gold and loses nothing.

As far as being a plot to confiscate gold -- Let's just say those who lend against gold know they will end up owning more gold. And, those who put gold up as collateral against stock purchases will be willing participants just as millions willingly agreed to pay back more for their homes than the home was worth.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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