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As
part of a series we first look at this question: "If the U.S. decides to
confiscate gold in the future, what impact might that have on Gold Shares and
the COMEX Gold Futures prices?"
We
assure you, this is not a fatuous question. Is it possible you
may well ask under what circumstances did this happen in 1933? [We will answer that more fully in a later part of the series]. What we can confirm is that in 1933 the U.S.
government banned the ownership of gold by U.S. citizens and purchased all
but rare gold coins from the U.S. Public They did this, at $20 an
ounce. Two years later they revalued gold to $35 an ounce, a 75%
revaluation. So, there is a precedent! [In a later part of the series, we will examine the reasons
behind this first confiscation and compare these with today to see if we can
expect the same in the months to come?]
So we
continue this part on the basis that a confiscation will take
place. And we further assume that the rare gold coins [trading at
a large premium to the gold price] are excluded. This means that
high caratage gold bars and coins trading at close to the gold price will
have to be handed over to the Fed and sent to a place like Fort
Knox.
Gold
Share Markets
It
may sound strange to say this, but investors in gold Exchange Traded Funds
will concur but gold shares have little to do with the gold price, except to
define what a gold mining company will earn from its gold
production. Buyers of gold shares don’t expect to influence
the gold price when buying gold shares. They are buying equities
only, with all the risks of any corporation. The way the gold
price affects them is through the price received over the space of the half
year and year when the results are published. This makes the average
gold price of prime importance to these shares. Of course there
are many who based on their forecasts of the average gold price will discount
this average and reflect it in the price of the shares. Many
believe that gold shares are six months ahead of that average.
Now
imagine a regime where U.S. owned gold is confiscated. It may
well be as last time that the gold is paid for at a fixed price.
It may well be that gold mines in the U.S. are paid that gold price and no
more. Then the average gold price achieved from that mine will be
the new “fixed” price of gold. One will then be able
to measure the earnings of a gold mine and allow some part of the price for
the risks attendant on a corporation [management, balance sheet, etc].
Gold mines, where the gold price earned is entirely different from that
inside the U.S., will trade at different levels commensurate with these
different gold prices. [We will discuss different global prices
in a later part of the series]. The price of gold mining
company’s shares will therefore be very different than those in the
U.S. It could be that foreigners will buy U.S. gold mines shares
to get a higher price or U.S. investors will buy foreign gold mine shares to
get their higher gold prices? There will be a separation of the two for
sure.
We do
expect that investors of any kind will continue to be allowed to invest in
gold mines no matter where they are in the world. If foreign gold
mine shares are trading at different price and higher ones at that, then the
U.S. will benefit to the extent that dividends flow into the
country. You can be sure that the U.S. will encourage
this. After all the objective of a confiscation of gold will not,
at this stage, be to restrain foreign investment, but to bring gold into the
hands of government. It all depends on what Capital or
Exchange Controls attend the confiscation of gold.
Futures
and Option markets
This
is where life changes for an investor. If there is no free gold
market inside the States [due to the continuous purchase of gold by the U.S.
Fed] there will be no gold market on which to base the futures and option
market inside the States. Perhaps the U.S. regulators will feel
that that is an unavoidable cost justified by the reasons they confiscated
the gold in the first place.
But
the financial world is far too sophisticated to allow such a draconian
result. We have absolutely no doubt that London or Paris or
Shanghai or Moscow or TOCOM will step into the gap and widen their own Futures
and Options market in gold or accept new business into their already
established futures and options markets. After all, many, many
foreigners buy futures and options on COMEX. Where will they
go?
Will
U.S. investors have access to these markets?
Again
we have to understand why gold will be confiscated in the first
place. It would seem likely that the acquisition of gold will be
their purpose, no other, so why prevent U.S. citizens from going overseas to
invest in a futures and options market when they can go to invest in any
other markets there. It is possible that at some stage the
U.S. would instruct that U.S. owned gold held abroad be repatriated, forcing
delivery first. But this would be at a later stage only, we feel.
The
only reason this would not be allowed would be because full scale exchange
Controls would have been imposed on U.S. investment overseas.
Usually these are not prevention measures but added cost
measures. In the U.K. in 1971 two types of currencies were used,
one for international trade and one for international investment [Dollar
Premium] . At its worst the international investment currency
stood at a 31% discount to the ‘commercial’ currency.
This translated into the export of around 50% more Pounds for investment than
for commerce. The U.S. could experience this in a $ meltdown.
Julian
D. W. Phillips
Gold/Silver
Forecaster – Global Watch
GoldForecaster.com
Also
by Julian D. W. Phillips
Is your
wealth effectively structured to avoid the pernicious effects of the
regulatory climate that we have moved into? It should be and we can help you
to do so professionally and within the law. Please contact us for any help
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Legal Notice / Disclaimer
This document is not and should not be construed as an offer to sell
or the solicitation of an offer to purchase or subscribe for any
investment. Gold Forecaster - Global Watch / Julian D. W. Phillips /
Peter Spina, have based this document on information obtained from sources it
believes to be reliable but which it has not independently verified; Gold
Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina make no
guarantee, representation or warranty and accepts no responsibility or
liability as to its accuracy or completeness. Expressions of opinion are those
of Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina only
and are subject to change without notice. Gold Forecaster - Global Watch /
Julian D. W. Phillips / Peter Spina assume no warranty, liability or
guarantee for the current relevance, correctness or completeness of any
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