By Howard S. Katz, Goldseek

Things are looking good for the gold bugs these days.  September and early October saw the (long awaited) break above $1,000.  This past week saw the technical pull back to the breakout point, and Thursday was the turnaround day.  Friday saw some very bullish candlestick signals in many of the gold stocks.

But one thing has been bothering many gold bugs.  In 1933, the U.S. Government confiscated the people’s gold.  The Government even went into safety deposit boxes (in private banks) and took the gold out of them.  This was done once.  Perhaps it could be done again.

Actually, I find this fear to be alarmist.  There were special circumstances which led to the confiscation of gold in 1933, a special legal situation unique to American history and which made the confiscation necessary if the New Dealers were to achieve their objective of taking us off the gold standard.

First, let us go back to a key event in American history.  For those of you outside of the USA, this is still useful information because America was (and still is) the most wealthy country in the world, and its gold/silver standard played an important role in that accomplishment.  As Senator Daniel Webster wrote early in America’s history:

“Most unquestionably there is no legal tender and there can be no legal tender in this country, under the authority of this government or any other, but gold and silver….”  [as quoted by Chief Justice Salmon P. Chase, “Supreme Court Reports,” Legal Tender Cases, 12 Wall 586, Opinion of the Minority.]

The U. S. went on the gold/silver standard with the adoption of The Constitution in 1788.  This was compromised on a few occasions but basically led to a stable currency for the period 1788-1933.  This was the fastest growing economy in the history of the world.

The first compromise occurred during the War of 1812.  The Federal Government did not abandon hard money, but the private banks outside of New England suspended payment of gold and silver and were allowed to get away with it.  Essentially only New England remained on the gold standard for the duration of the war.  In relation to this, it is only the New England militia who refused to invade Canada in 1812, and it was this fact which led to the American defeat.

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Source: GoldForecaster.com  08/10/2009

As part of a series we first look at this
question: “If the U.S. decides to confiscate gold in the future, what
impact might that have on Gold Shares and the COMEX Gold Futures
prices?”

We assure you, this is not a fatuous question. Is it possible you may well ask under what circumstances did this happen in 1933? [We will answer that more fully in a later part of the series].
What we can confirm is that in 1933 the U.S. government banned the
ownership of gold by U.S. citizens and purchased all but rare gold
coins from the U.S. Public They did this, at $20 an ounce. Two years
later they revalued gold to $35 an ounce, a 75% revaluation. So, there
is a precedent! [In a later part of the series, we will examine the
reasons behind this first confiscation and compare these with today to
see if we can expect the same in the months to come.]

So we continue this part on the basis that a confiscation will take
place. And we further assume that the rare gold coins [trading at a
large premium to the gold price] are excluded. This means that high
caratage gold bars and coins trading at close to the gold price will
have to be handed over to the Fed and sent to a place like Fort Knox.

Gold Share Markets

It may sound strange to say this, but investors in gold Exchange
Traded Funds will concur but gold shares have little to do with the
gold price, except to define what a gold mining company will earn from
its gold production. Buyers of gold shares don’t expect to influence
the gold price when buying gold shares. They are buying equities only,
with all the risks of any corporation. The way the gold price affects
them is through the price received over the space of the half year and
year when the results are published. This makes the average gold price
of prime importance to these shares. Of course there are many who based
on their forecasts of the average gold price will discount this average
and reflect it in the price of the shares. Many believe that gold
shares are six months ahead of that average.

Now imagine a regime where U.S. owned gold is confiscated. It may
well be as last time that the gold is paid for at a fixed price. It may
well be that gold mines in the U.S. are paid that gold price and no
more. Then the average gold price achieved from that mine will be the
new “fixed” price of gold. One will then be able to measure the
earnings of a gold mine and allow some part of the price for the risks
attendant on a corporation [management, balance sheet, etc]. Gold
mines, where the gold price earned is entirely different from that
inside the U.S., will trade at different levels commensurate with these
different gold prices. [We will discuss different global prices in a
later part of the series]. The price of gold mining company’s shares
will therefore be very different than those in the U.S. It could be
that foreigners will buy U.S. gold mines shares to get a higher price
or U.S. investors will buy foreign gold mine shares to get their higher
gold prices? There will be a separation of the two for sure.

We do expect that investors of any kind will continue to be allowed
to invest in gold mines no matter where they are in the world. If
foreign gold mine shares are trading at different price and higher ones
at that, then the U.S. will benefit to the extent that dividends flow
into the country. You can be sure that the U.S. will encourage this.
After all the objective of a confiscation of gold will not, at this
stage, be to restrain foreign investment, but to bring gold into the
hands of government. It all depends on what Capital or Exchange
Controls attend the confiscation of gold.

Futures and Option Markets

This is where life changes for an investor. If there is no free gold
market inside the States [due to the continuous purchase of gold by the
U.S. Fed] there will be no gold market on which to base the futures and
option market inside the States. Perhaps the U.S. regulators will feel
that that is an unavoidable cost justified by the reasons they
confiscated the gold in the first place.

But the financial world is far too sophisticated to allow such a
draconian result. We have absolutely no doubt that London or Paris or
Shanghai or Moscow or TOCOM will step into the gap and widen their own
Futures and Options market in gold or accept new business into their
already established futures and options markets. After all, many, many
foreigners buy futures and options on COMEX. Where will they go?

Will U.S. investors have access to these markets?

Again we have to understand why gold will be confiscated in the
first place. It would seem likely that the acquisition of gold will be
their purpose, no other, so why prevent U.S. citizens from going
overseas to invest in a futures and options market when they can go to
invest in any other markets there. It is possible that at some stage
the U.S. would instruct that U.S. owned gold held abroad be
repatriated, forcing delivery first. But this would be at a later stage
only, we feel.

The only reason this would not be allowed would be because full
scale exchange Controls would have been imposed on U.S. investment
overseas. Usually these are not prevention measures but added cost
measures. In the U.K. in 1971 two types of currencies were used, one
for international trade and one for international investment [Dollar
Premium] . At its worst the international investment currency stood at
a 31% discount to the ‘commercial’ currency. This translated into the
export of around 50% more Pounds for investment than for commerce. The
U.S. could experience this in a dollar meltdown.

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