There has been a persistent fear
among both institutions and private owners of gold that, at some point in the
near future, their gold will be confiscated by their governments, as was the
case in 1933. For very different reasons, we believe that that danger
persists and is growing by the day. We feel that because gold is rapidly
returning to an active role in the global monetary system -as we have seen in
the gold/currency swaps within the Bank for International Settlements and in
the discussions on redefining gold as a Tier I asset right now--investors
should be aware of the conditions in which this would. We also indicate what
we feel to be a solid solution for protecting yourself against a gold
Gold Moves to Pivotal Role in Global Monetary System
In the past we've already discussed
the overall moves being made by a host of central banks to increase their
holdings of gold and how, in the developed world, the percentage of gold in
the gold and foreign exchange reserves stood at over 70% in the major four
developed nations. Here's a closer look...
The on-going acquisition of gold by
the emerging world and the firm grip on current gold holding by the world's
banks, show just how important a reserve asset gold still is and how it is
becoming increasingly important. Bear in mind too that the bulk of this gold
was bought in by these banks at around $35 an ounce. At the current level of
$1,670, the increase in value of gold from the 1960's when this gold was
bought has been nearly 48- fold, nearly 100% a year. Not bad for an
Tier I Asset Brings the Banking System to Gold
Gold's elevation from a Tier II asset
(where only 50% of its value can be allotted to the bank held assets in terms
of capital ratio) to a Tier I asset (where 100% of its value can be allotted
to the bank held assets in terms of capital ratio) is expected to be
implemented on January 1st 2013.
At this point, not only will central
banks want to hold gold but so will commercial banks. This brings into the
gold market a whole new demand feature, one that could prove a major driving
force in the market place. It institutionalizes gold again!
Before and not After a Dollar Collapse-to Shore up the System
of gold will dramatically changes the way it will be looked at by the powers
It doesn't require a dollar collapse
for this to happen; it will happen because of falling confidence levels in
currencies and the potential danger we might well face in the near future.
Just as the confiscation of gold in 1933 was done so as to rectify a major
fault in the U.S. monetary system in existence then and to prepare the world
for the conflagration of WWII, the return of gold now is for the positive
aspects gold can bring to shore up confidence in the current monetary system.
At that time, the gold price may well be encouraged to rise to such a high
level that confidence in the dollar and other key currencies will be
restored. This again, will enable the banking system to be used as a means to
a further unlimited expansion of credit. Gold's role will be to provide a value
anchor to currencies from then on.
In such an important role, can each
government allow its citizen's to affect the gold price as they want at any
time? Could such freedom affect gold's role in the system to become unstable?
It's more than likely that one or more central banks -perhaps acting in
concert?-- would want to remove its citizen's
privilege of owning gold once again, as a measure solely to keep the
gold market stable. We're not simply talking about manipulating the gold
price; we are talking about keeping the market price with a low volatility.
Please note that while several
countries may confiscate the gold of their citizens at the same time, you may
also see country after country act separately as the credibility of their
currencies become doubtful. This could reach all countries within the global
monetary system at one time or another.
The world as we know it cannot afford
a dollar or any major currency collapse and no government will willingly sit
idly by and watch it happen. They will do all in their power to avert such an
event. This means acting before it's likely to happen, while credibility
No Gold Standard but Gold "Floating" Up
We've lived in a world of currency
decay for a long time now and one in which we can no longer afford to see any
further battle of gold against currencies, started in 1971 by the closure of
the "gold window" by President Nixon. As we have seen in the last
three years, gold has begun to compliment currencies and facilitate their
liquidity and the lowering of risk in international loans. It has worked. We
expect that the monetary authorities have already made plans to capitalize on
this, and it is just a matter of time before the complete rehabilitation of
gold is complete.
We do not envisage a "Gold
Standard" system because this implies a fixed price of gold. Instead, we
see gold price that must 'float' in a stable manner; to achieve this,
however, central banks would need to be able to control the gold price to
ensure that stability. The price would have to rise dramatically to achieve
this, but under central bank control this could be done. Without such measures,
confidence in the global monetary system may well move to collapse on a
broad, domino-like front, the likes of which we have never seen.
And it's this objective that will
trigger central bank confiscation of its citizen's gold. There may well be
other stated reasons, but this will underlie them.
How Will Confiscation Be Instituted?
Expect no warnings
at all. Don't be surprised if such an event were preceded by denials. Most
likely it would happen over a weekend or public holiday so as to catch all
off-guard. This would maximise the gold caught in
the authorities net.
The objective of such legislation
would be to ensure that a nation could reap as much gold as possible into the
The first targets would be gold held -on behalf of
clients or the banks themselves-- by banks
In the States, the prime target would be the SPDR gold
Exchange Traded Fund, with more than 1,600 tonnes
of gold held by its Custodian, HSBC. For the sake of keeping its license (as
we see in the speed it pays heavy fines to regulators) it would simply hand
over that gold to the central bank. Expect their clients to be offered
market-related prices at the time or U.S. Treasury bonds in payment for the
gold. SPDR would then simply inform their clients of what happened, and
the fund's gold would be gone!
Next would be the private gold vaults within the
jurisdiction of the monetary authority doing the confiscating. Again, the law
would force them to hand over their gold to the authorities, backed up by the
relevant legislation or government order. And again, the haul would be
Next would be gold dealers and their clients, within
the jurisdiction of the confiscating authority. Again, the haul would be good
and easily attached. We attached the 1933 Gold Confiscation order here (pull
the corner of the document down to enlarge it). We would expect the penalty
of $10,000 to be a mind-blowing number by now?
Under the coming legislation [FATCA]
and possibly new supporting legislation, a declaration of assets, including
gold by citizens and institutions would likely be ordered.
Including Foreign-held Gold
You would think this could only apply
to institutions and individuals whose gold is within the jurisdiction of the
confiscating authority, but a look at the tenacity with which the I.R.S. has
taken on foreign banks hiding U.S. citizen's money overseas, shows that their
tentacles reach all over the world. U.S. citizens living and working overseas
-for as long as they have a U.S. passport-- are liable to U.S. tax. Any foreign
bank operating inside the States is liable to lose its license to bank inside
the U.S. if they don't cooperate with the U.S. monetary authorities. That's
why Swiss banks no longer want new U.S. clients. They have reviewed the
proposed FATCA legislation too and are getting ready for it now. So U.S.
citizen-owned, foreign-held gold remains vulnerable to any confiscation order
made inside the U.S.
Not to be Fought Outside U.S.
government of the jurisdiction where the gold is held will fight that?
Of course they will, if the matter is
taken to their courts by the U.S. authorities. But it won't be. Even
the mighty U.S. will not try to impose such a confiscation order on other
nations. They would be thrown out of court. Jurisdiction is everything! The
secret there is to bluster noisily enough to give the impression they would.
But they never would. No country has successfully tried to impose Capital or
Exchange Controls outside its jurisdiction just as no foreign nation would
attempt to enforce their laws inside the U.S.
Take a look at the successful tactics
the I.R.S. used lately. They took on foreign entities inside the U.S. but did
not venture outside the U.S. where they would be infringing those foreign
Forced Transfer of Ownership
The same would happen to individuals
and institutions with gold held outside their nation's borders. They would
simply impose the law on the owner of the gold, not the gold itself. It's
easier to force an institution or individual to transfer ownership of the
title to that gold to the government, with a gold market, price-related
payment being made to close the deal (in 2% Treasuries?) than to venture into
a foreign court on spurious ownership claims.
Likewise -where it remains directly
under the ownership and control of the individual-- extreme penalties for
non-cooperation would soon diminish the virtues of his gold.
is a way that has just been set up that we believe will provide a robust
one avoid gold confiscation without being penalized?
We know of only one set of structures
that can successfully overcome these obstacles. The writer, Julian D.W.
Phillips, has been working for some time to develop this set of structures.
It is Stockbridge Management Alliance Ltd. [SMA] [and he has an
interest in SMA] and its Guardian, the Ultimate Gold Trust [UGT].
It is finally in the early days of deployment.
How to Avoid the Confiscation
The first step is to have your gold held on your
behalf by such a structure. But holding it in an unallocated state is
insufficient. SMA holds client's gold in an allocated form (physically
separated from the Custodian's other gold) having bought it through one of
the very reputable members of the London Bullion Market Association, or LBMA.
client's gold is allocated and held on your behalf.
For security and anonymity, SMA gives each client a
private codename through which they can check their holdings within the
structure on a daily basis.
website has a page where clients check their holdings on a daily basis,
anonymously, via their codename.
The physical gold is held in a jurisdiction that will
not cooperate with the U.S. or any other country's imposition of such an
order against gold. Switzerland has such a reputation. When UBS was being
forced to hand over the names of its 45,000 clients, the Swiss government
intervened to prevent that and agreed that only around 4,500 tax evaders'
names were handed over, leaving 40,500 names undisclosed. The Swiss National
Bank has acted in a similar manner with other countries that tried the same
breach of Swiss Bank Secrecy Laws. Any attempt by any government to claim
citizens' legally-bought gold would receive a far more blunt answer from
them, I'm sure.
o SMA holds
client's gold in Zurich, Switzerland.
The gold must be held outside the banking system
because the banks will fall over themselves to obey government, even if it is
against their client's interests to do so. SMA hold's
client's gold in VIA MAT, a private Swiss Vault in Zurich.
o VIA MAT,
in Zurich is outside the banking system.
Clients can redeem their gold at any time. The only
exception is when the authorities of the jurisdiction in which they live,
have issued a confiscation order against its people's and institution's gold.
This is to prevent you being forced to transfer the ownership of your gold
to the government, under pressure. If you reside in a country where a
confiscation order has been issued, the possibility of such an event is very
high. If clients refused to cooperate and transfer their gold to the
authorities, they could certainly invite serious penalties.
o To this
end the Gold Bullion Certificates certifying your beneficial ownership of the
gold by SMA are non-transferable.
Most folks would liquidate their holdings or turn in
their gold, rather than "break the law" and suffer harassment by
their government. We have no doubt that the authorities would not
force a sale of the gold; otherwise such an order would apply to all its
citizen's foreign-held assets. So we believe that under such an order, the
Authorities would exclusively target client's gold holdings and not require
its sale. Their object would not be to get more [e.g.] dollars, but gold.
o This is
why SMA keeps client's right to sell their gold at any time.
In most structures where your gold is directly owned by
you, or your entity (of which there are some
very good ones) you still face the danger from your monetary authorities.
They may simply order you to repatriate it, threatening you if you don't.
That is why if you live in a country where a gold confiscation order is
issued, then there is little point in holding gold outside your jurisdiction,
if you still live there. Pressuring you to repatriate your gold would
be the easiest route for the authorities to follow.
structure would enable you to honestly say that you are not able to
repatriate the gold, while a confiscation order persists, in your country.
You may think that the Stockbridge Management Alliance
is itself vulnerable; however, this danger has been ameliorated by directly
contracting with the Ultimate Gold Trust, based in Geneva, to do whatever is
necessary to retain client's gold in Switzerland. Their contingency plans are
effective and will achieve this objective for the sake of the continued
holding of client's gold in Switzerland, while some of its client's gold is
in a jurisdiction under a gold confiscation order.
o Use of a
Swiss-based, guardian company, dedicated entirely to this objective, is
required to stave off any attempts by governments to attack the structures
holding client's gold.
Overall, this provides solid
protection for clients without putting them in harm's way inside their own
Julian D. W. Phillips
Standard or Money Supply Expander