If you are going to protect your wealth with physical gold, it’s clearly unsafe to keep it at home. Furthermore, in most jurisdictions, governments today are not to be trusted as they descend from debt insolvency towards outright bankruptcy. Desperate governments take desperate measures against their own citizens as well as those of other nations.
The proximate reason why people worry about this issue is the precedent created by FDR’s Executive Order 6102 in 1933, which forced US citizens to surrender their gold for paper dollars. It amounted to confiscation and has rankled in all investors’ minds ever since.
Should we be concerned today? You bet. In addition to an increasingly cavalier attitude by governments, investors face a boom in businesses offering to buy and store your gold. There are bound to be many cowboys operating in this industry, and some investors are going to be caught unawares.
Do you know the management of your gold dealing and vaulting service? How tried and tested is it — how long has it been in business? Are its vaults exposed to terrorist and drone attacks, and does the local population have a reputation for rioting?
This article is a timely and important guide to buyers and owners of physical gold.
The Background
First, we need to think through the purpose of gold ownership before we discuss the consequences of President Roosevelt’s Executive Order.
Physical gold is a safe haven from financial risk. In Roman law and therefore embodied in the common laws of the empire’s successor nations, it is the final settlement of all forms of credit, and unlike credit, it has no counterparty risk. The reason for owning bullion and gold coin is to protect one’s wealth when you deem credit to be too risky.
Clearly, today is such a time. Since 1933, the US Government has progressively reduced the value of credit, from the dollar’s devaluation in 1934, to the introduction of the post-war Bretton Woods system, which still denied citizens the right to exchange their paper dollars for gold, and the collapse of the Bretton Woods system in 1971, when the US Treasury put the fiat dollar at the head of the international currency system, replacing gold. Through the entire process, the dollar’s value has collapsed from 23.22 gold-grains in 1933 to only 0.12 grains today. Readers will be more familiar with the relationship expressed as $20.67 per ounce and $4,100, respectively.
Either way, the fiat dollar has lost about 99.5% of its value, and with the accumulation of government debt and rising funding costs, the fiat dollar appears to have limited time before it sinks even further — potentially to complete valuelessness. If fiat currencies finally lose all value, then so will all forms of credit denominated in them, leading to the complete death of the financial system. There will be no measurable value in bank deposits, bonds, stocks, or derivatives.
Those who fear this outcome can only protect their wealth by getting out of all forms of credit. There are ways to do this, such as acquiring land, debt-free property and physical commodities. But the easiest, most portable, fungible, and flexible corporeal asset independent of the financial chaos is physical gold. But it must be clear: possession of physical gold is always with a view to protect the value of wealth, not as speculation. At times of considerable instability of value in credit, it is the only practical refuge.
Storage Options
Given the precedent of FDR’s Executive Order, naturally there is fear among private individuals that the US or another Government might come for their gold again. While many individuals chose not to comply with the Order in 1933, their banks did so, handing in their customers’ gold. The implication is that gold in your bank’s custody is always at risk of government seizure.
However, regulatory reach is no longer confined to banks. Today, the entire financial system of banks, shadow banks, brokers, and investment managers comes under government regulatory bodies — not just onshore but offshore as well. Furthermore, the global reach of the US Government is considerably greater today. There are two examples of how this has recently been deployed relevant to our topic, as follows.
Venezuela’s Gold
In 2019, Venezuela’s central bank tried to withdraw gold from the Bank of England’s custody. Normally, the Bank would be expected to comply with the request, but the Maduro government was under sanctions by the US. Without going into the twists and turns of the case, it was clear that the British Government was pressured by the Americans not to return the gold. Consequently, property rights under English law were overruled by the US Government.
This serves as a possible precedent for the extension of a US Treasury freeze on gold ownership to all UK financial institutions; a regulatory instruction emanating from a foreign power over UK property rights, concerning the assets not just of US nationals, but of all nationalities storing their gold in the UK.
Sanctioning SWIFT Users
The SWIFT international bank messaging and payments system, like the Bank of England’s gold vaulting facility, was independent of political considerations. Both are meant to accommodate democracies and dictators without favour. In SWIFT’s case, that was until Russia’s Special Military Operation against Ukraine, when the G7 nations froze the Russian central bank’s $350 billion reserves. These supposedly non-combative nations forced SWIFT to ignore Belgian property laws.
How Secure Are the Cayman Islands?
At the New Orleans Investment Conference in October, we came across many investors who store gold in the Cayman Islands’ vaults. Most cited easy access from the US. Others told us that European riots, the proximity of Russia and the war in Iran discouraged them from considering Europe and Switzerland.
At first sight, Cayman seems natural for US and Canadian nationals, because it is the centre for the US captive insurance industry and offshore US hedge funds. It is a strong US-centric, well-regulated, financial centre. It is also a British Crown dependency, so territorially independent from the US. Doubtless, vault providers have emphasised these facts in their marketing.
But as we have seen from the above, property rights with respect to gold bullion is vulnerable from two sources. Being highly dependent on US financial services, the Cayman Islands cannot ignore US demands, for fear of their entire livelihoods being compromised by US financial sanctions. And then is the link to the British Crown, and the Cayman’s High Court is comprised of selected Privy Councillors in London. As we saw in the Venezuela case, they would probably find a way to rule in the US’s favour.
Conclusion
We saw confused thinking on this vital topic at the New Orleans Investment Conference. There were attendees who took the view that they needed to store their gold beyond the reach of the US authorities, referring to the precedent of FDR’s Executive Order 6102. But they did not factor in how the world of financial regulation and erosion of property rights have changed in the intervening years. The following checklist will help those with gold to store decide what is best for them:
Be clear about your objective. If you are ringfencing your wealth from mounting credit risk, then safe long-term storage of physical gold is for you.
Avoid jurisdictions which are military or economic allies. These include members of NATO, G7, G20, and the European Union.
Only politically neutral jurisdictions with the strongest property rights should be considered. Unarguably, these are Switzerland in Europe and Singapore in the Far East.
Vaulting companies do not come under financial regulations, being concerned exclusively with tangible goods rather than paper securities. However, you should check the ownership of the vaults, where the owners are incorporated, and with which laws they must comply.
Finally, consider the security of the vaulting arrangements. As well as having their own security, are they also in a secure, patrolled area such as an airport compound? Are the vaults above or deep below ground?
Your gold is guaranteeing your wealth. Don’t treat its storage lightly!
If you don’t hold it, you don’t own it. Good luck trusting someone else with your metals when the SHTF.
Excellent, straightforward information. Thank you!