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- The Obama-FDR connection
- An unlikely scenario for gold
- My favorite gold investment today
Today’s topic might seem
somewhat oblique to general investment strategy, but I think the ramifications
of this issue are kind of an 800 pound gorilla in the room.
Some very intelligent,
highly successful, amazingly talented gold investors routinely suggest that the
end-game for the dollar will be preceded by the seizure of gold assets by the Federal
Government.
If there’s a significant
likelihood that gold will actually become illegal, then all my suggestions and
research intended to help you find compelling gold investments are completely
off course. It won’t matter if I help
you find your next 10-bagger gold stock if the government seizes gold assets
and halts trading on such companies.
So I want to tackle this
issue head on.
This
undercurrent of worry in the gold investment community may be born from the
fear that history sometimes tends to repeat itself. Gold investor’s prudence in holding gold may be
punished by President Obama’s administration, should he choose to replicate the
policy of President Franklin Roosevelt and outlaw the ownership of gold. There’s no doubt that as the ‘Godfather of
liberal thought’ that Obama looks up to FDR, and certainly wishes to follow in
the footsteps of one of America’s
most popular presidents.
You can read FDR’s entire Executive
Order outlawing gold by clicking here. Pay special attention to Section 2.
It seems like a strange
Orwellian dream that in this country between 1933 and 1971 owning gold bullion
was illegal. The move was entirely evil,
but I completely understand why it was confiscated – the Federal Government
couldn’t inflate its currency to pay for war, public works and social programs
without first confiscating gold.
That was because all dollars
up until that point were convertible to gold – so if the Government simply
printed excess dollars, it would soon find itself running out of gold, which
could cause another run on banks, and might result in the complete destruction
of the currency.
It’s the very idea of
outlawing the ownership of something so innocuous and mainstream that I can’t
wrap my head around. For instance, if
tomorrow the government outlawed aluminum foil or sacks of barley under penalty
of fines and imprisonment, it would be just as strange.
To outlaw gold today doesn’t
seem to make much sense to me, especially since it wouldn’t directly enable the
government to pursue some other monetary policy. Outlawing gold would be strictly punitive,
and not very constructive. I suppose you
could make the same case that the War on Drugs isn’t very constructive and is
only punitive, but there’s no public perception that buying gold destroys
lives, so I don’t see the political upside for taking gold down the same road.
In the
same way that legislators in Congress are currently working on the final
version of a massive new bill to further regulate the derivatives markets, I
can imagine a time when it might be politically expedient to pass a bill
further regulating foreign exchange (ForeEx) traders, and maybe such a bill
would include language outlawing the exchange of Federal Reserve notes for
speculative assets such as gold?
I’m grasping at straws here
because I just don’t see how a ‘gold ban’ would work. The only thing a ban on gold would accomplish
at this point would be to make gold skyrocket in price. It wouldn’t strengthen the dollar unless the
Federal Government then turned around and sold all of its seized gold to
foreign banks – but at that point the dollar would be so worthless I don’t see
how it would really help all that much.
And logistically, I don’t
know how the Government could do it. The
kind of person who bought gold as a way to hedge against inflation and dollar
insolvency isn’t very likely to render their gold back to Caesar very
willingly, I imagine.
If you have any thoughts on
this topic, please share them by writing to me at [email protected].
I think
all gold investors view their gold purchases, at the very least, as a type of
hyperinflation insurance. Hyperinflation
is clearly the worst case scenario for the dollar, and there are plenty of
historical examples of what happens in countries that experience such
inflation.
The history of currency
destruction and the government response to it is surprisingly unmarred by
violence, coercion and marshal law. From
Zimbabwe, Hungary, Austria,
Germany, Argentina – history is replete with
countries that printed their currencies into oblivion. All of these countries attempted currency controls,
but these types of policies really don’t hold much water with a populace that
needs to eat. And typically, regimes in
power during hyperinflation don’t stay in power very long.
So to answer the question –
even in the worst case scenario, I think it’s highly unlikely that the Federal
Government would or could outlaw and seize private gold holdings.
As I said earlier this week, gold and productive gold companies are a
great long term hedge against inflation. I’m careful to
make the distinction between gold companies, and gold companies that are
actually able to get gold out of the ground. Most junior gold companies do not
produce any gold. That’s why it’s important to buy the best companies, with
solid balance sheets that have proved an ability to actually bring gold to
market.
Ian Wyatt, my boss and Chief Investment Strategist here at Wyatt Investment Research, recently put together a report
all about a small North American gold miner that’s currently selling for less
than $4 a share. They’re already producing gold. Last year they produced over
70,000 ounces of gold, and they have over 20 million proven ounces. At today’s prices,
that’s $25 billion worth of gold. But they’re only a $200 million company – so
as they continue to bring that gold to market, I expect shares to soar.
They really are the best junior gold miner in the market
today.
Buying this company today is the equivalent of buying their gold
reserves for $120 an ounce.
You can read more about this company by clicking
here.
Good investing,
Kevin McElroy
Editor
Resource Prospector