Political Ignorance on the Value of Gold Bullion

There I was on the weekend, sitting down in one of the après bars at Falls Creek ski field, resting my weary snowboard feet.

As any skier/snowboarder will tell you, that first day back on the mountain is brutal on your feet.

While I was giving my poor tootsies a break, I decided the perfect way to distract myself from the pain was to read the paper.

Or at least the digital version on my smartphone.

It was all the usual weekend banter: football scores – snore – or what some fancy TV show housewives – bore! – were up to.

Scrolling down, I found this headline: ‘Gold fraud: $550m scam hits gold industry’.

Oh really?

It turns out the ATO is starting to wake up to what’s been a giant loophole for gold bullion buyers.

According to The Age, two mysterious men would fly around the eastern states of Australia buying gold bullions and coins, sometimes spending up to $100,000 at one dealer, writing:

They’d move from dealer to dealer in a capital city, eventually collecting enough bullion to fill a carry-on suitcase. With dozens of gold traders in Melbourne, Brisbane and Sydney, there were plenty to choose from.

This was early 2015. After their week-long buying spree, they’d disappear again, only to do the same thing the following month.

You see, these two men – among hundreds of others, by the way – are taking advantage of complete political ignorance when it comes to gold.

When you buy investment grade gold – such as bullion – you don’t pay GST. Yet dealers have to pay you GST when you sell them scrap gold. Scrap gold is any sort of second-hand gold. Old jewellery, for example, is scrap gold.

In fact, an investment grade bullion bar can be made into scrap gold fairly easily too.

These two men would fly around Australia, buying freshly minted bullion, a couple of kilos at a time. They’d smash it up, melt it, or just make it look a little less shiny, take it to a legitimate bullion dealer, sell them the ‘scrap’ gold, and receive 10% GST from the bullion dealer.

Bam! And there is the ‘fraud’. Although it’s not new. Since the introduction of the GST, it hasn’t applied to new investment gold purchases.

The problem for the government, though, is that the scale of these transactions is growing.

Personally, I feel the likes of GST on bullion reflects the government’s complete ignorance of the value of bullion.

They don’t see it as money. They don’t see the value gold has in the monetary system.

In fact – especially in Australia – gold is a valuable export to China. Just like iron ore. But outside that, the government sees no real value in it.

I’ve long argued that illicit substances would be legal if the government could work out a way to tax them. Just look at the constant increases on alcohol and cigarettes.

However, as gold prices rise, I wouldn’t be surprised to see this loophole close.

Gold gets ready for the bull run

As I write this, gold is currently trading at US$1,355. It’s fallen from US$1,370, which it traded at last Friday. In saying that, the spot price of gold in US dollars is up 28% for the year.

A few factors have caused this. The Federal Reserve Bank’s lack of action with rate hikes helped gold to ‘turn a corner’. However, the Brexit has renewed investors’ faith in the shiny metal.

While gold is still a long way off its 2012 price range, the shiny metal is poised to break through resistance levels. Once gold pushes through US$1,370, the next leg of the gold bull rally will begin.

It’s entirely possibly the metal will push past US$1,450 by the end of this year.

Spot gold price (US dollars) five-year chart

Source: Goldprice.org
Click to open new window

Jim Rickards, the strategist of Strategic Intelligence, says governments worldwide are doing everything they can to increase their gold purchases. They just don’t want you to know about it:

Russian and Chinese gold buying programs have been underway for years. They serve multiple geopolitical purposes including as a hedge against dollar inflation. Gold reserves also form a foundation for a future non-dollar system based on gold, Special Drawing Rights or a hybrid. Importantly, gold is a liquid asset that cannot be hacked, frozen or interdicted by the US.

Just before the Brexit took place, Jim reasoned the best thing the UK could do was to leave the EU. The UK has gold, and the EU lacks it.

When the next collapse of the international monetary system arrives, the gold powers (China, Russia, Germany, U.S., France, Italy, and the IMF) will rewrite the rules of the game. Their aim will be to reform the system as was done at the Smithsonian Institution in 1971, Bretton Woods in 1944, and Genoa in 1922. A UK outside the EU with insufficient gold will have no seat at the table.

The monetary system is changing. And gold – even if the Aussie government doesn’t get it – will be at the centre of it.

To find out more about the work Jim and I do over at Strategic Intelligence, go here.


Shae Russell,
Editor, Jim Rickards’ Strategic Intelligence

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Since starting out in the financial markets over a decade ago, Shae has extensive experience across various aspects of the industry. Shae cut her teeth in the derivatives industry, teaching clients basic trading techniques with technical analysis.

Joining Fat Tail Investment Research eight years ago, Shae has worked across a number of publications, such as Australian Small-Cap Investigator, Gold Stock Trader and Microcap Trader. She’s spent the past two years however, honing her macro analysis skills alongside Jim Rickards, showing Australians how to invest and profit form global macro trends.

Drawing on her extensive experience, Shae is a contributor to Money Morning, and lead editor of sister-publication Markets & Money, where she looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

Money Morning Australia