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Investment News and Research / Blanchard Economic Research Unit

Gold Confiscation: Will it happen again?

“The longer-term outlook for the dollar is unquestionably more bleak than at any time since it assumed its role as the world’s reserve currency.”

— John Embry,
Investor’s Digest, March 4, 2005

Have you ever heard so many dire predictions for the dollar?

Have you ever heard them from such credible sources?

For the first time, Warren Buffett is betting against the U.S. dollar. Given the worsening trend, it is necessary to diversify out of the dollar or, as Buffett puts it, “to build an ark.” Paul Volcker, the former head of the Federal Reserve Board, says that unless America changes course there is a “75 percent” chance of an economic crisis in the next five years. Steven Roach, Chief Economist at Morgan Stanley, predicts that America has no better than a 10 percent chance of avoiding “economic Armageddon.”

A recent study by Professor Maurice Obstfeld, an economist at the University of California, Berkeley, and Professor Kenneth Rogoff, of Harvard, a former head of research at the International Monetary Fund, warns that the dollar may dive by more than 40 percent. As Professor Rogoff puts it: “The world is set to jump off the top of a waterfall without knowing how deep the water is below.”

Even Alan Greenspan, perhaps the most circumspect Fed Chairman of all time, says that, “Given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur.”

In 1933, in order to stabilize the monetary system, President Franklin D. Roosevelt, under Executive Order No. 6102, confiscated all privately owned gold in the United States. Could it happen again?

The flip side to a weak dollar is a rising gold price.

All other things being equal, gold will continue to climb higher as the dollar moves lower. Today, just as in 1973 when gold began its last, big bull market, gold and the dollar are competitors, riding opposite ends of an economic seesaw.

Gold languished in the 1980s and 1990s and was replaced by the dollar as the standard against which all things financial are measured. In the coming decade, as the dollar suffers one of the great meltdowns in monetary history, gold will reclaim its place at the center of the global financial system. Gold’s value, relative to most national currencies, will soar.

However, the monetary crisis that could make your gold extraordinarily valuable may also create the very situation in which the government would return to some version of the gold standard, which would require that central banks enlarge their stocks of gold and increase the gold price. Central bank revaluation will make your gold holdings far more valuable, but will not do much for your net worth if the revaluation occurs after your gold becomes the property of the United States Department of the Treasury.

Could It Happen Again?

The problem is that the very circumstances that could make your gold so valuable could also result in its being taken from you. In 1933, in order to stabilize the monetary system, President Franklin D. Roosevelt, under Executive Order No. 6102, confiscated all privately owned gold in the United States. Could it happen again?

In a compelling book entitled The Coming Collapse of the Dollar and How to Profit from It, 2004, authors James Turk and John Rubino ask about the consequences of a dollar collapse:

“So as we drift into yet another currency debacle, one question that should be on all of our minds is How will Washington respond? Will it freeze prices, as did Nixon? Confiscate our gold like FDR? Prevent us from moving our savings to safer foreign markets and buying foreign currencies? Or come up with some ingenious new kind of expropriation, one tailored to the modern financial world?”

Turk and Rubino say that there is no answer at this point, because no two currency crises are exactly alike. However, it may be important to consider the reason why confiscation or expropriation is even relevant: the fact that, if it eventually became necessary for the U.S. to bolster a collapsing dollar with gold, we no longer have enough gold to do so in any meaningful way. As our debt and deficits have soared, and as more and more dollars have been created, U.S. gold reserves have disappeared. In 1950, the United States Department of the Treasury owned 68.2 percent of the world's total gold reserves. Today, the Treasury owns less than 28 percent.

Private Gold Ownership

People who scoff at the suggestion that the government might restrict private gold ownership should remember that many other countries have restrictions on (or absolute prohibitions against) private gold ownership. They should also remember that, in 1933, Franklin Delano Roosevelt dealt with a monetary and banking crisis by confiscating all privately owned gold; paying for the gold at $20.67 per ounce; immediately devaluing the dollar by 40 percent; and setting the price of gold at $35.00 per ounce. At a single stroke, Roosevelt increased the government's gold assets, stabilized the monetary system and increased wholesale prices by more than 33 percent. However, he also inflicted losses of 40 percent on gold owners and stripped them of the gold that they saved to insure their financial futures.

For a copy of the Complete Gold Confiscation Report,
call a Blanchard and Company, Inc. Consultant today at 1-800-880-4653.

Expert Insights from

Donald W. Doyle, Jr.,

Chairman and CEO

Neal R. Ryan,

Vice Pres. and Director of Economic Research

 
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