When people are fearful, they more likely to be duped by marketing ploys that, to be generous, stretch the truth. The general public’s lack of knowledge makes them more vulnerable to be steered toward merchandise that makes a higher profit for the seller, but may end up being a poor deal for the buyer. In the current global financial turmoil, I have seen the resurgence of high pressure sales tactics used on novice buyers of precious metals—the specter of “gold confiscation.”
As a quick summary, some coin dealers and coin marketing companies push customers toward collector coins which have a higher profit margin than outright bullion-priced gold and silver coins and ingots. They use the scare tactic that such numismatic coins are exempt from the possibility of “gold confiscation.”
On the surface, the spiel can sound compelling. These sales people refer to the 1933 “gold confiscation” without revealing that what happened that year was nothing of the kind. What did occur in 1933 was that the US government imposed a mandatory, fully-compensated, redemption of gold coins and gold certificates. The US government was required to pay full value for the coins and currency it received. This is the reason the feds did not want to have people turn in their coins and currency of “recognized collector value” because they would have been required to pay full value if such items were turned in.
At the time, virtually all gold coins traded at face value, so there were few coins that would have been considered as having recognized collector value. Virtually all of the $20.00 Saint Gaudens Double Eagles were not exempt from this mandatory redemption, for instance.
Once the redemption period ended, then the US government revalued gold from $20.67 to $35.00 per ounce. At the time, the profit from this price change was enough to fund 18 months of federal government expenditures.
Could the US government once again require that gold be turned in, whether or not there is any pretext of paying full compensation or not? It certainly could. The Treasury Department claims that it does not have the legal authority to do so, but there are various existing presidential orders or a new one could be issued which would permit the government to call in gold.
I consider the prospect of any kind of gold redemption or confiscation by the US government to be extremely remote. It comes down to a matter of common sense and economics. Please consider the following facts:
- The best estimates I see about compliance with the 1933 compensated gold redemption was that the US government only collected about 2/3 of what it could have received. The public was much more trusting of its government in those days, so I would not expect compliance to be anywhere near that high today.
- US citizens were prohibited from owning gold anywhere in the world from 1933 to 1974. It actually broke US law to own gold held at a Swiss bank. Therefore, when ownership became legal in 1975, very few Americans owned any gold coins or ingots, much less used them in everyday commerce.
- Even today, the estimates of how many Americans own gold for investment or insurance purposes range anywhere from 2% to 9% of adults. That is infinitesimal compared to most countries in the world.
- When I did a calculation several years ago, I concluded that, at most, the US government stood to take in 80 million ounces of gold under any redemption or confiscation scheme. To be overly optimistic, let’s say that today the feds may pick up as much as 100 million ounces.
- At roughly $1,250 per ounce, 100 million ounces of gold would only represent $125 billion.
- With the current federal expenditures running in excess of $4 trillion per year, US gold reserves would have to reach a stated value of gold of $6 trillion to have the same impact as occurred when the US government raised the price of gold in 1933.
- Assuming that the US government does hold the 261 million ounces of gold that it reports, and there is significant suspicion that some or most of that is no longer owned by the federal government, that would indicate, at most, that there would be 361 million ounces of gold reserves potentially available to cover $6 trillion in government expenditures.
- To cover 18 months worth of federal expenditures, at the minimum, would require that the price of gold be raised from $1,250 per ounce to $17,870 per ounce ($6 trillion divided by 361 million ounces)!
The US government simply could not call in gold and revalue it that much without destroying the value of the US dollar in the process!
Even further, depending on how you figure the totals, there is somewhere between $4 and $10 trillion of US dollars, US Treasury debt, and other US dollar denominated debt held by foreigners. Any move to force Americans to turn in their gold would be a blatant admission by the US government that the US dollar is extremely overvalued. I just cannot see any politician running the risk of having to quickly cash in trillions of dollars of foreign-held currency and debt (let alone think about what American citizens would also be doing) in order to acquire $125 billion of physical gold! Politicians are prone to making poor decisions, but it is difficult to imagine any of them being so foolish as to destroy the US economy in order to obtain an inconsequential amount of gold.
There are variations of the sales spiels used to persuade potential buyers that there really is a reason to worry about a future gold confiscation effort. In the late 1980s, a common line was that the US government considered any gold or silver coins or bars sold in the private sector for within 15% of its precious metal content to be subject to confiscation. That was predicated on a proposed Internal Revenue Service regulation in the early 1980s that tried to define a threshold where coin dealers would be required to file form 1099 with the IRS for purchases made from the public. This proposed regulation was never implemented, but that didn’t stop some dealers from citing this “evidence” of potential future gold confiscation for years afterward.
More recently, an updated version of this gimmick refers to actual regulations adopted to implement Section 351 of the USA Patriot Act of 1991. Coin dealers and jewelers are supposed to be on the lookout for terrorists where, if customers do more than an incidental amount of “bullion” transactions over a twelve month period, the merchants must adopt an anti-money laundering compliance program. Thereafter, the dealers must obtain positive identification of all retail and wholesale customers conducting transactions over a certain dollar threshold. Within these regulations, bullion is defined to include anything that trades up to 200% of its precious metal value. Whether or not this definition, used to determine whether a company is subject to a regulation, ever has anything to do with defining what would be exempt for a future confiscation, the truth is that many dealers using the marketing angle sell a large number of US $20.00 Liberties and St Gaudens Double Eagles at prices less than 200% of their current metal value.
If dealers are so concerned that owning gold could run the risk of confiscation, why don’t they recommend the purchase of silver bullion instead? After all, the fundamental supply and demand data for silver are much more favorable for silver’s future appreciation than for gold. Obviously, the answer is because that coin dealer makes a higher profit selling numismatic gold coins than silver bullion.
In my judgment, any coin dealer or marketer that ever mentions the specter of “gold confiscation,” especially if they do not suggest silver bullion-priced coins and ingots as an exempt alternative, indicates a company to avoid for any dealings. There are enough honest reasons to consider the ownership of numismatic gold coins without having to deceive unknowledgeable customers. Any dealer willing to lie about “gold confiscation” may also not be trustworthy in other parts of a transaction such as quality and competitive price.
As long as some coin dealers and marketers can boost their profits during the current financial tumult at the expense of their novice customers, I expect this marketing tactic to continue to appear. Don’t let your guard down.
Correction to the June 4 column.
In my June 4 column, one typographical error sneaked past all proofreaders. In the fifth paragraph, the third sentence should have read, “Individual statisticians at the BLS have acknowledged that the birth/death adjustment consistently overstates employment.” I apologize for the confusion.
Patrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes “Liberty’s Outlook,” a monthly newsletter covering rare coins and precious metals. Past issues can be found online at http://www.libertycoinservice.com/ Pat Heller is also the gold market commentator for Numismatic News. Past columns online at http://numismaster.com/ under “News & Articles”. His periodic radio interviews can be heard on WILS 1320 AM in Lansing, www.talkLansing.net, and on www.yourcontrarian.com.