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As a general rule, the most successful man in life
is the man who has the best information
Current Federal Reserve System chairman Ben Bernanke believes a simple recession was turned into the Great Depression by
the Federal Reserve of the day not doing enough while the money supply contracted 31 percent
between 1929 and 1933.
This reduction in the money supply was caused by no less than three
bank runs between late 1930 and March 1933. Bank deposits formed 92 percent
of the money in circulation at the time and 10,000 banks failed with the loss
of $2 billion in deposits.
"The Fed failed to inject enough money into the system to sustain the
desired minimum level of monetary aggregates. Because it failed to do this,
the public run on banks resulted in a contraction in the money supply, which
caused the Great Depression." Milton Friedman
Bernanke, a monetarist like Friedman, believes if the Fed had provided
enough money to the large banks and bought US securities then these banks
would never of fallen. Bernanke is, today, putting
what he believes to be the fix for our current economic woes into practice:
·
giving money to the banks
·
cutting the prime interest rate the Fed charges
commercial banks
·
buying treasuries
The Federal Reserve is providing liquidity and increasing the money
supply.
So why didn’t the Feds of the time simply increase the money
supply by turning on the printing presses much like Ben
“helicopter” Bernanke is doing
today? Well, at that time the US was on the gold standard and the amount of
credit the Federal Reserve could issue was limited by the Federal Reserve Act
which required 40% gold backing of Federal Reserve Notes, paper money,
issued. Back then if you had $10 in your pocket, you knew, that somewhere,
there was $4 worth of gold backing that “promise to pay” in your
wallet.
But the Fed’s back was up against the wall, they were running
out of room to issue more notes. They had almost hit their issue limit on
credit that could be backed by the gold in their possession – they
needed more gold to issue more credit.
Their need was made worse because during the bank runs Federal Reserve
paper money had been exchanged for Federal Reserve gold. Since the Federal
Reserve was already hitting its limit on allowable credit, any reduction in
gold in its vaults had to be accompanied by a greater reduction in credit.
Something had to be done.
On April 5, 1933, President Roosevelt signed Executive Order 6102
making the hoarding of gold certificates, coins and bullion illegal. This
order, by confiscating Americans gold, increased the amount of Federal
Reserve owned gold thereby making an increase in the availability of Federal
Reserve Notes or credit possible.
The reason gold was confiscated back then
doesn’t exist today. Today no country is on the gold
standard (the US cut the last ties to gold in 1971) and the US Federal
Reserve’s ability, or any countries ability, to create credit, print
money, is no longer tied to how many ounces of gold a country has.
The flip side of
this unfettered creation of money is inflation - and this is of course
exactly why someone might want to own gold and silver. But there is
something potential gold buyers need to be aware of.
The
Scam
Its true gold was
confiscated in 1933 – but now you know the why and you also know that
the reason for confiscation back then doesn’t exist today.
So the next time
you read an article about how your government is going to confiscate your
gold – all of it except rare collector numismatic coins - track it back
to its original source. Too many times you will find that it has, as its
originator, a gold numismatics merchant. The patter is always the same
– “Your gold is going to be
confiscated, buy rare collector coins because they won’t be confiscated.”
Gold numismatics were not confiscated in 1933. Order 6102 specifically
exempted "customary use in
industry, profession or art.”
The same paragraph also exempted "gold coins having recognized special value to collectors of rare and unusual coins."
The US
Constitution's Eminent Domain Clause says - "nor shall private property be taken for
public use, without just compensation." When gold bullion was
confiscated compensation payment at the official gold price of $20.67 an oz
was considered just, after all, that was the price of an oz of gold.
But the
confiscation of rare gold coins, called numismatics, would have been stealing
private property. Legally just compensation would have had to been paid but
for that to happen each gold numismatic would have had to been individually
graded and priced – a huge and expensive time consuming task the
government was unwilling to take considering the small amount of gold that
would have been recovered.
So let’s
revisit - “Your gold is going to
be confiscated, buy rare collector coins because they won’t be
confiscated.” We know the reasons Americans gold bullion coins were
confiscated but gold numismatics weren’t. For today’s gold
buyers, who still fear confiscation, the problem is: are the coins some gold
dealers want to sell you actually gold numismatics and for a gold bullion
investor – versus a coin collector – are they worth buying?
Unfortunately the answers are maybe not and no.
Gold numismatics are rare collectors gold coins that trade at high premiums
to their intrinsic gold content value. These coins are extremely rare, or
one-of-a-kind, that collectors
(there’s that qualification again) purchase for their historical and
aesthetic qualities.
Gold merchants can
sell rare gold coins for a healthy markup, sometimes as much as 25 percent
and more. The fierce competition in the gold bullion coin market often limits
profit margins to maybe 3% over the spot price of gold.
American Gold Eagles, the Canadian Maple Leaf and
South Africa's Krugerrand are all examples of gold
bullion coins. Their value is derived entirely from their gold content. They
are universally recognized and the value of these coins is easily verifiable.
The reality is that too many coins sold as
"numismatic" or "collectible" are ordinary gold bullion
coins sold at high mark-ups to make fear mongering dealers extra profits.
If you want to own
gold, the safest way is to buy one, or a mix, of the three gold bullion coins
listed above, pay the 3% above spot and quit worrying about confiscation.
Gold numismatics are not a store of value nor a
better safe haven in a meltdown situation than gold bullion. Think about all
the money you’ll save. Maybe you’ll buy some silver!
Conclusion
Gold bullion coins
are a better store of value then gold numismatics - if social order breaks
down and a collector needs to trade one of his collectables he’s going
to receive the exact same amount of goods that I would receive using gold
bullion. That’s because the transaction will be valued based on gold
content and purity, not historical and aesthetic qualities.
Investors buy
physical gold because it is a store of value - a way to protect your wealth from
the relentless devaluation of fiat currencies – and a safe haven in
times of turmoil. Your job as a retail investor, if you believe in gold and
the ongoing devaluation of fiat currencies, is to buy as much potable,
divisible gold with your dollars as you can. Buying gold numismatics is not
the way to do this and buying gold numismatics that aren’t…well
that’s being taken advantage of, to put it politely. Is this con game on your radar screen?
If it isn’t,
and you’re a gold buyer, it should be.
Richard Mills
Aheadoftheherd.com
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