Financial Resource

Article by Henry Bootz

Firstly, a little background in case you didn’t know.What J.M. is referring to above is the 1933 Executive Order (pictured to the right) issued by U.S. President Franklin D Roosevelt (FDR), which effectively outlawed the ownership of gold bullion for US citizens. They were required to turn any gold bullion and coins (collectible coins were excluded) into the Federal Reserve under penalty of, what was for the times, a massive $ 10,000 fine or 10 years imprisonment.

The effect of this law change was it allowed the US government to devalue the US dollar over the next few months against gold, having increased the US Treasuries gold hoard. The idea was basically to force people into spending their paper money and thus end the depression. It just happened to be at the expense of the citizenry and as a result of theft but hey, government will be government.

There’s plenty of information on this across the “interweb”. If you want to learn more just Google “gold confiscation”. Also James Rickards new book Currency Wars is perhaps one of the best summaries of this period and is highly recommended as a history lesson.So where does New Zealand stand on Gold confiscation?

Firstly there was no gold confiscation in New Zealand at the time of FDR’s Executive Order in 1933. Why was this?

Well, Britain left the gold standard in 1931. New Zealand (along with Australia) had, prior to 1931, already left the Gold Standard, so it could be argued that there was no need for the government to confiscate gold as it had been removed from the NZ monetary system already. They were free to devalue their currency as the likes of France had done in 1925 and as Britain later did in 1931.

So for starters we have got history on our side in that there has not been a confiscation of gold here in NZ to date.

Secondly, unlike Australia, which already has a gold confiscation law in place but not enacted (as per this recent Daily Reckoning Australia article), no such law exists here in NZ.

But the fact that it doesn’t exist currently of course doesn’t preclude it from being written in to law at some point in the future. But it would at least mean there would be some warning with any luck. Whereas in Australia, it would merely take a stroke of the pen from the Governor General to enact the existing provision.

The difference between now and the US G-man’s theft of gold in the 1930′s is that the dollar was still gold backed in 1933. So taking it from the people enabled the US Government to devalue their currency following the confiscation with the stroke of a pen, and the people then had no recourse. They could no longer take their dollars to the bank and swap it for gold. Today Governments the world over are free to devalue their nations currency to their hearts content without needing to confiscate gold.

Another difference is that citizens today would seem to have a lot less trust in government than they did in the 1930’s. Whereas by all accounts most people followed along with FDR’s Executive Order, perhaps today with the internet and social media there would likely be a backlash of sorts against such a move. (Although this is perhaps balanced out somewhat here in NZ by the fact that holders of gold still seem to be pretty few and far between).What else might the G-man resort to?

This article on SovereignMan.com discusses 3 things that the government may do to discourage gold ownership:

Step 1: Just make gold ‘harder’. To buy. To transport. To own.

Think about the changes we’ve seen over the last two years; government-regulated exchanges are continually hiking their gold margin requirements, increasing investors’ burden to buy.

On the physical side, the US government buried some insane regulations deep within last year’s healthcare bill. The new rules required a mountain of paperwork such that anyone who purchased a single ounce of gold from a coin shop would have to submit a special 1099 form to the IRS.

(The rule was later modified under intense pressure from various lobby groups, but it still gives you a good idea of what these people are thinking…)

Then there’s the new Dodd-Frank legislation that makes it nearly impossible for US citizens to trade securities and commodities from overseas accounts beyond the reach of the federal government.

Then there’s the Liberty Dollar debacle in which the US government used obscure counterfeit laws to seize millions of dollars of silver coins that were owned by the firm’s customers!

Then earlier this year, the Financial Crimes Enforcement Network (FinCEN) issued new guidance requiring that US taxpayers who hold gold in certain offshore financial accounts report such holdings on their annual FBAR. Conveniently, this ruling put up a barrier for Americans to use GoldMoney.

Step 2: Plant seeds of doubt [via economists and media]…

Step 3: Tie gold to terrorism. Plant evidence.

However the counter balance is that in New Zealand gold does pass under the radar significantly more than in the USA. There is no capital gains on gold unlike the USA, and there’s no GST on pure gold or silver bullion either. Plus none of the instances mentioned in the above SovereignMan.com article have occurred in New Zealand.

But if New Zealand continues to run budget deficits of the current magnitude it’s likely the NZ G-man will look at where else it can get some revenue.

So there is always the possibility of a tax on “excess profits” or some such law whereby the Government gets it’s pound of flesh based upon any “gains” in gold. In fact, if Labour had been elected in the recent election, their proposed capital gains tax would have likely also affected gold and silver.What about silver confiscation?

Another consideration is that silver was not confiscated in 1933. Although according to this article a year later it did…

“Silver also suffered the fate of gold. On August 9, 1934 a Presidential Proclamation ordered all silver bullion surrendered to the Treasury within 90 days and a 50 percent tax was levied on any profits from the sale of silver. The sellers were paid 50.1 cents per ounce.”

However silver certificates in the USA could still be redeemed for silver up until 1964. So in the event that gold was confiscated in the future, you could argue that silver may well be at slightly lower risk than gold.Other options to hedge against confiscation?

You could consider holding some numismatic or collectible coins as these were excluded from the 1933 Executive Order. The downside is these sell often for a large premium over the spot price of gold, so you will pay for this hedge against confiscation. Plus of course if it were to happen there’s no guarantee numismatic coins would not be targeted this time.So , what are the odds of an NZ government gold confiscation?

Who knows really? The odds are the government will need to grab more revenue in the future, as it seems unlikely they are prepared to cut spending significantly. This revenue grab could be through higher taxes, higher inflation, and who knows what else?

But given the current low rate of people holding gold here in New Zealand, it would perhaps be more likely they would go after “wealthy” property investors with a new tax. After all the government did just that last year with a rejig of property depreciation rules.

So in summary, like most everything these days it’s anybody’s guess. Making financial plans can be difficult when the rules are not set in stone. If we had to make a guess with a gun to ours heads we would say the odds would be against it.

But, either way we believe we’re better off having some gold (and silver) than not. As the risks of not having any gold (e.g. currency devaluation, sovereign debt, negative real interest rates, etc), seem much higher than the risk of holding some. And if we didn’t act because of a possibility in the future then it’s likely we’d make no decisions in this life!