EDITOR: | June 29th, 2016 | 3 Comments

Gold — forget confiscation, but worry about taxation

| June 29, 2016 | 3 Comments
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If you start to hear financial authorities talk along the lines that “gold is a problem because it’s being used to finance criminal activities” or “gold is damaging the economy” then alarm bells should ring — because that signals confiscation of gold is on someone’s mind. That is the message from Liechtenstein-based fund Incrementum. The firm’s gold experts, Ronald-Peter Stoeferle and Mark J. Valek, have issued another the In Gold We Trust annual updates.

Confiscation of gold is an obsession of some gold adherents, and is no doubt at least in the subconscious mind of many other investors. And while we all know about the Roosevelt move in 1933 to ban private ownership of gold, Incrementum reminds us that that event was by no means unique.

That said, Stoeferle and Valek don’t see such a move on the horizon. Unlike in 1933, gold now has no official monetary role. (But I would chip in here and note the reference to criminal activity: this is the very argument now being mounted to abolish high-value notes, like the €100 bill or the $100 note, a move seen by some as the thin end of the wedge in that it would be the first stage in the phasing out of cash as a means of transactions and so give governments more control of the financial system).

Incrementum does see a threat to gold from governments in other ways. In all the historic cases, the confiscations took place before the global monetary system’s ties to gold were cut completely in 1973 by President Nixon. “As gold no longer plays this important role, a gold ban is nowadays less important from the perspective of governments and therefore also less likely,” says the report.

But don’t breathe easy just yet.

“However, what is becoming ever more likely in view of governments’ rising need for revenue is more taxation of gold trading,” Incrementum argues. “Governments certainly have the option to lower the attractiveness of investing in gold in this way.”

And you would not put it past them: the Federal Reserve seems to have been waging a war on gold for years, fearful that too many people might look at the yellow metal as a good deal more reliable than fiat currency created out of nowhere.

(While hating the thought of gold as money, any such move would be seen as official recognition of gold’s historic role.)

Incrementum argues that, even in the event of a gold ban, it should not be expected that governments would be able to confiscate it all. “If one want to be on the safe side, one can purchase gold in forms that have traditionally often been exempted from bans, such a numismatic coins or smaller denominations,” the analysts suggest.

But there is no doubt that the fear of confiscation is embedded in the psyche of many investors. Indeed, the Incrementum report quotes Howard Buffett, son of Warren, that “when you recall that one of the first moves by Lenin, Mussolini, and Hitler was to outlaw individual ownership in gold, you begin to sense that there may be some connection between money, redeemable in gold, and the rare price known as human liberty”.

The most notorious example, as mentioned recently by my InvestorIntel colleague Graeme Irvine, was the Emergency Banking Act of 9 March 1933 that, among other things, empowered the US government to confiscate gold coins, gold bars and gold certificates held by the population “under the precondition that this was necessary for the protection of the US currency system”, as Incrementum puts it.

The penalties were stiff: you could be fined up to $10,000 ($190,000 in today’s fiat currency) or sent to prison for up to 10 years. Yet only about a third of the gold was handed over and a black market in the metal flourished.

What I did not know, and what is spelled out in the new report, was that it would get worse. Dwight D. Eisenhower expanded the ban on gold ownership to cover metal held abroad by US citizens. Then John F. Kennedy prohibited the ownership of numismatic coins minted before 1933 and required that all gold coins held abroad by US citizens had to be repatriated.

If you thought that was the only example, though, get ready to be surprised.

Gold ownership was prohibited by the Weimer Republic in Germany in 1923, in France in 1936, in India in 1963 and in Great Britain in 1966 (the last triggered by rising industrial gold demand and the associated increase in the scarcity of gold).

On a more positive note, Incrementum is maintaining its gold target of $2,300/oz by June 2018. “Gold is back!”, it begins the report. We have just seen gold with its best quarterly performance in 30 years.

And, the analysts note, in an era of negative interest rates while gold may still not pay interest, unlike cash it can be said the metal does not cost interest.


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Comments

  • Graeme

    Though it’s usual to quote gold in US dollar terms, for most people it’s the local price of gold that affects them. Which is why the EUs troubles are likely to generate gold bullion and coin demand for many months to come in the UK and Eurozone. The continuing Brexit uncertainty will keep both the GB Pound and euro as weak currencies for months ahead if not years. Gold will continue to rise in both currencies. In local terms on Dec 31 2015, the UK price of gold was about GBP 716. After the Brexit stock market rout, it was trading slightly above GBP 1000 on Tuesday. If Italy’s banks need a bail-in by their bondholders and depositors, I expect to see a run in the eurozone to reduce bank deposits with some transfering into bullion accounts.

    June 29, 2016 - 2:21 AM

  • Jeff Thompson

    In the United States, transactions of gold and silver bullion are already subject to the 28% federal capital gains tax, being classified as a “collectible”, in the same category as a work or art. It would not be a surprise to see gold and silver mining stocks, currently taxed at the 15% rate for long-term holdings (greater than one year) and the much higher “ordinary income” rate for short-term holdings (less than one year) also be increased to match or exceed the 28% bullion tax rate, which itself would be an easy target.

    No one ever thinks about just axing a sizable chunk of the vast array of nonsense government programs that are soaking up all of this tax money instead, it’s always about introducing new forms of taxation or raising existing tax rates.

    June 29, 2016 - 7:03 AM

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