Will the government confiscate gold?

August 9th, 2009

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Recently, some of our readers (who are more pre-disposed towards gold) have expressed their concern about possible government decrees against gold (see Pre-empting strong states). They fear a repeat of the American government’s decree against gold in 1933, during the height of the Great Depression. Today, we will address some of the concerns.

First, will the government confiscate physical gold?

The short answer is: very unlikely. The long answer is that we have to distinguish the difference between confiscation and nationalisation. In 1933, the US government nationalised gold. They did not confiscate gold. When governments nationalise X, they take X away from you but pay something in return as compensation. When governments confiscate X, they take X away from you and gives you nothing in return. It is more likely for governments to nationalise than to confiscate gold.

Second, what is the primary objective of any governments when they nationalises gold?

Remember the analogy we used in Recipe for hyperinflation,

… imagine you are the only person in town who has the authority to create money out of any piece of paper with your own signature. Wouldn?t this make you a pretty powerful person in town? With such power, you can acquire anything you wish at the expense of others. Likewise, the paper money that we have today is exactly such money. Look at any piece of paper money today and you will find the words of a government decree (e.g. ?This Australian note is legal tender throughout Australia and its Territories?) and perhaps a signature or two.

The objective of a gold-nationalising government is to maintain their monopoly on money, which is an extension of maintaining their power. Therefore, gold will only be nationalised if the government perceives a threat to their monopoly on money.

In the case of the US, will they nationalise gold in the near future? Not now, at least. To understand why, consider this fact: it is said that 70% of the world’s currency are US dollars. Half of these US dollars are located outside of the US. So, what if the US government decides to nationalise gold tomorrow? That will send a signal to the rest of the world that the US dollar is in trouble. What will foreigners then do to their US dollars that are located outside the US? They will then sell their US dollars to buy gold. The result: the US dollar will crash in value and gold prices will soar (in US dollars).

If the US government’s objective is to preserve the US dollar as the world’s reserve currency, then nationalising gold will backfire on that objective spectacularly.

When will the US government nationalise gold? It will happen when people no longer wants to accept US dollars as money, for example in the case of hyperinflation. When that happens, the US government will surely nationalise (or maybe confiscate) gold. By then, the bulk of wealth transfer will have already occurred and any gold investor worth his salt will already (1) have his gold stashed outside the US or (2) sell his gold to acquire real assets or (3) emigrated out of the US.

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