We couldn’t decide whether to write about this subject in Money Morning or in our new free eletter, Pursuit of Happiness.
So we’ve come to a compromise. We’ve decided to write about it here and then post it to the Pursuit of Happiness website too.
To be honest, this subject matter could fit in either spot. It’s a matter of financial freedom and personal freedom.
It’s also a subject that could make your editor unpopular around our office. But we’re used to being unpopular, so we can live with it.
Anyway, you decide, because what we’re about to say could have an important bearing on how you build and secure your wealth…
One of the hottest topics in contrarian investing is whether the world’s banking system will return to either a gold standard (where currency is backed by gold), or a gold exchange standard (where a currency is priced against another currency, which is backed by gold).
In the end, we think one of those will happen. History tells you that gold and silver have been the money of choice for thousands of years.
But history tells you something else. And this is the thing many gold investors don’t talk about.
History tells you that governments will always try to fiddle with the money supply in order to pay for votes and wars.
In order to fiddle with the money supply, the government needs control over the money supply. Most importantly it needs legal tender laws. Legal tender laws create a money monopoly that makes it illegal for people and businesses to transact in a competing currency.
And they also mean people and businesses must by law accept the legal tender currency.
The problem for governments with gold-backed money is that it’s harder to wage wars and pay for votes. That’s why at every time through history that a nation goes to war, it’s not long before it openly or covertly abandons the convertibility of paper money to gold.
So, how likely is it that the Western world will return to a gold money standard? Well, it’s both likely and unlikely at the same time…
What makes it unlikely is the fact that Western economies haven’t been on a gold exchange standard for 40 years. And no Western nation has been on a genuine gold standard since before World War II.
Even the US dollar wasn’t a genuine gold standard under Bretton Woods, because US citizens didn’t have the right to convert their dollars into gold.
In short, crazy politicians, central bankers and bureaucrats have done a darn good job of demonising gold for at least 80 years…if not longer.
That means it’s hard to see the general public urging for a return to a gold standard. Think about it, if you play a word association game with most people and say the word ‘gold’, the first word they’ll say in reply is ‘rich’.
People still see gold as a rich person’s investment.
That’s why we’ll make this cautionary point: if the world’s central bankers and politicians start talking about a gold standard, don’t celebrate it, take it as a warning.
In previous times when the state abandoned gold, many people owned gold and silver. Although the government may have suspended convertibility of paper money to gold, it was hard to outlaw the ownership of gold.
That changed in 1933 when US president Franklin D Roosevelt issued Executive Order 6102. This order outlawed ‘the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates within the continental United States’.
But even by then, 20 years after the creation of the US Federal Reserve, and 15 years after the monetary inflation of World War I, paper money was already well established.
Bottom line: if the US government could easily confiscate gold while most of the population still had a concept of sound money, don’t you think it will be much easier when 99% of the population has no concept of sound money?
That’s what makes a return to gold likely.
And remember, the Australian government, central bankers and bureaucracy prepared for Aussie gold confiscation over 50 years ago…long before the paper-money credit boom of the 1970s, 1980s and 1990s…
Australia’s 53-Year Gold Confiscation Plan
Part IV of the Banking Act 1959, specifically addresses the conditions where the Australian government can order the confiscation of private gold.
Section 42 notes:
In other words, when the Governor-General says so.
Right now, Part IV of the Banking Act isn’t in effect. But it’s a ‘sleeping clause’. In other words, it’s not in force until ‘the Governor-General is satisfied that it is expedient so to do, for the protection of the currency or of the public credit of the Commonwealth…’
What we’re getting at is this. If any government proposes a return to a gold standard, it will be under the government’s terms.
And because returning to a gold standard would involve devaluing the currency (leading to a higher nominal gold price), governments would only do this after it has confiscated private gold.
That’s exactly what happened in the US when that beacon of liberal thought, Franklin D Roosevelt, confiscated gold from the people. He gave them dollars in return of course. But then the rascal immediately devalued those dollars by 40% compared to the value of gold.
What a great guy. What a hero. What a crook.
Divide Your Gold to Conquer the State
So our advice is this. Yes, hope and urge for a gold standard. But you and our colleagues should be careful of what you wish for. Because if we’re right, the government would first direct the Governor-General to invoke Part IV of the Banking Act 1959. This would compel you to hand in your gold.
We don’t think this will happen yet…in fact it may not happen for years. That means you’ve still got plenty of time to think about how you can keep your gold from the government’s grasp.
The words ‘hole’ and ‘shovel’ spring to mind. But you should also look at other options such as a safety deposit box…or even asking trusted family members overseas to take care of some of your gold and silver (make sure you really trust them).
Put simply, it’s time to think about dividing your precious metals in order to conquer the inevitable government grab for your wealth.
As we say, it won’t happen yet, but it’s definitely something to start planning for anyway.
From the Port Phillip Publishing Library
Special Report: After the Bust
Daily Reckoning: A Safer Than Super Investment?
Pursuit of Happiness: Why Lost Super Is Government Theft of Personal Property
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Written by Kris Sayce
Kris Sayce is Editor in Chief of Australia’s biggest circulation daily financial email — Money Morning. (You can subscribe to Money Morning for free here).
Kris is also editor of Australian Small-Cap Investigator, his small-cap stock research service, where he provides detailed analysis on some the brightest, smallest listed companies on the ASX.
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