US Gold Confiscation

A topic which keeps on cropping up is that the US Government might confiscate its citizens’ gold. This article discusses the likelihood and practical difficulties behind such a move.

The importance of property rights

An important error has crept in about President Roosevelt’s Executive Order 6102, signed by FDR on 5 April 1933. It did not order confiscation, as many goldbugs say. It forbade ownership of gold coin, bullion, and gold certificates worth in excess of $100, with exemptions for specific uses and collections. It required all persons to deliver excess quantities by 1 May 1933 to the Fed in exchange for $20.67 to the ounce. That it was not confiscation but enforced encashment is a vital distinction, because property rights were not technically violated. What was lost was the right to future ownership of gold.

With that in mind, a new Executive Order confiscating ownership and possession of gold would be a major advance of federal power, creating a precedence for the confiscation of all forms of property.

However, if a future US administration took steps to override property rights for gold by confiscating it, just imagine the consequences. Foreign owners of US property, both corporeal and incorporeal, with at least $40 trillion of the latter and unknown quantities of the former, would certainly take the view that they could be targeted next. At the margin, panicking sellers would collapse both dollar-denominated asset values and the dollar itself. This makes it unlikely that a US administration would go down this path.

The property rights issue is why FDR’s Executive Order forced the exchange of gold for the equivalent in dollars. Legally, there was no loss of value to those exchanging their gold under duress, because of the established gold standard whose exchange rate had been fixed in law since 1900. That FDR subsequently devalued dollars is a separate issue.

Practical implications

A statist enforcement of a gold exchange for fiat dollars would probably be strongly resisted by the American people today, perhaps as strongly as the right to bear arms. It would risk stirring up a hornet’s nest of public discontent with the government. Furthermore, the introduction of such a move would probably be a response to a collapsing dollar, an attempt to stabilise a visibly deteriorating situation — visible, that is, to a general population no longer readily accepting government propaganda.

Additionally, there is the problem of derivatives, which didn’t dominate gold trading in 1933. It would be the end of Comex contracts, leaving American bullion banks and market makers badly exposed, with the disruption extending to London forwards as well. It would be a gift to the Shanghai Futures Exchange, which, with the Shanghai Gold Exchange, would emerge as the undisputed global leaders in all forms of gold trading.

However, we cannot rule out the motives of politicians, which history repeatedly proves to be at odds with common sense. When the dollar is sliding and priced in dollars, gold is soaring; the temptation to take a swipe at alleged profiteers of the dollar’s misery could prove too great to resist. How to do so is the problem.

What would be the basis of exchange?

Having ruled out crude confiscation, we now look at the practicalities of an exchange of gold for dollars. Under US law, the Federal Government values gold at $42.22 to the ounce. Yet clearly, to enforce that rate of exchange when the market value is thousands of dollars more would be rightly deemed confiscation of the difference. Foreign owners of US property would certainly see it to be confiscation even though they may not be affected, with the consequences outlined above. Therefore, the dollar would have to be officially devalued at least to current values against gold, becoming a de jure admission of a de facto position.

In recent years, several commentators have recommended a gold revaluation to strengthen the Fed’s balance sheet anyway. But aside from the dollar’s devaluation issue, as a prelude to an enforced exchange of gold for dollars, it would require the dollar to go back onto a credible gold standard, just like it was in 1933. In other words, it would not be sufficient to just announce a compulsory exchange rate: a commitment to maintain the gold-for-dollar exchange rate would be required.

We need not consider what the exchange rate for a new gold standard would be because, at this stage, we can simply rule it out. Any gold exchange rate to be credible requires a radically revised approach to government economic policies, which would be politically unacceptable and legally impossible without extensive changes to mandated spending.

Therefore, for the US Government to address the gold issue appears to invite problems in the implementation unnecessarily. Almost certainly, action of this sort would drive up the dollar price of gold, because domestic supply would simply dry up. But with a disrespecting public, covert demand would continue and probably accelerate, for example, by storing bullion in foreign jurisdictions. And as a gold alternative, there would also be a rush for silver, disrupting market allocation for its industrial uses as a critical material.

Foreign holders of dollars would almost certainly do the exact opposite to an executive order by cashing in their dollars for gold, putting huge strains on the gold standard required. Clearly, any move to remove gold from public ownership risks destabilising the dollar unnecessarily.

Are US gold reserves still there?

For decades, gold bugs have questioned the entirety of the US Treasury’s gold reserves. And following the Bundesbank’s demand in 2013 for the return of just 300 tonnes of its earmarked gold stored with the New York Fed, and the NY Fed’s denial of the Bundesbank’s request for access even just to audit its property, there is an unanswered question over the existence of earmarked gold for other central banks as well.

The history of this scandal almost certainly lies in the carry trade of the 1980s and 1990s, when gold, which could be leased for an annualised rate of less than 2% was sold into the market for dollars and then used to buy US Treasury bills yielding over 10% in the early 1980s, falling to about 5% by the mid-nineties. The problem was that this gold came out of central bank reserves. And presumably, the price risk was hedged in paper markets in the absence of physical bullion being returned.

In 2002, analyst Frank Veneroso who obtained information from the highest sources, including Terry Smeeton, head of foreign exchange and gold operations at the Bank of England, concluded that between 10,000—16,000 tonnes of central bank gold had been leased or swapped for dollars by that time. This would not have been evident in central bank balance sheets, because under IMF accounting rules, leased and swapped gold is recorded as the property of the central bank even though it is not in possession. There is, therefore, an enormous hole in official central bank figures to this day. The question arises as to where this hole is located.

Much of the central bank gold was stored in financial centres, principally New York and London. The NY Fed and BoE, respectively, arranged for leases and swaps, which produced income to defray storage costs. I suspect that the Bank of England kept a tighter rein on its gold earmarked for other central banks than the NY Fed, bearing in mind that it was the Americans which led anti-gold propaganda, and believing in their own hubris, almost certainly suppressed the price by selling bullion.

The irony in all this is that rather than “adorning the necks of Asian women” as Veneroso put it, much of this gold was probably bought secretly by China following the People’s Bank’s appointment for this very role in 1983. And as illustrated by the fiasco over the Bundesbank’s gold, the circumstantial evidence is that the US Government no longer possesses the earmarked gold entrusted to it and has possibly compromised its own gold holdings as well.

Therefore, the US is badly hampered not just in its relationship with other central banks having disposed of their gold entrusted to it, but it could possess considerably less of its own gold than officially stated.

In conclusion, a repeat of FDR’s executive order would not only be virtually impossible, requiring outright confiscation, defying property law, but it would undermine the dollar even further. While there is no knowing the depths of stupidity that politicians will stoop to, there are enough hurdles in the way to make implementation extremely difficult, if not impossible. Furthermore, the outcome would be extremely bullish for gold speculators and suicidal for the dollar.

However, it is best to play safe and store bullion outside the US, not in the banking system, and not in vaults outside the US owned and operated by US corporations.