Gold Confiscation: Straws in the Wind
Source: David Galland, Casey Research (9/14/10)
"The U.S. government is taking an unhealthy interest in your gold."
My somewhat standard response is—yes, it's possible but that we should see straws in the wind well before it happened. . .allowing us to take measures to protect ourselves.
While I don't want to make too big a deal about it, there have been clear signs of late that the U.S. government is taking an unhealthy interest in your gold.
My recent article "I Smell a VAT" touched on one such straw. The relevant point being that, thanks to a regulation slipped into the healthcare legislation, coin dealers—and all businesses, for that matter—will have to begin reporting any purchases of $600 or more from anyone, including clients selling back their gold.
While I think the overriding intent is to pave the road for the implementation of a value-added tax (VAT), there's no question that the legislation simultaneously paints a target on the back of the free trade of precious metals.
Then, a couple weeks ago a friend sent me a copy of Mother Jones, an a unapologetically "progressive" mouthpiece with a cover story titled "Glenn Beck's Golden Fleece."
And friend and correspondent Lowell sent along an article with an embedded video link to an lengthy ABC News "investigation" by Clintonista George Stephanopoulos that picks up on the Mother Jones story.
Now that you've watched the video—and if you don't, some of what follows won't make any sense—I'd like to share some observations based on personal experience.
Years ago, I headed up the publishing division of a company (that will go unnamed) with a separate division selling coins. I was there when the coin business started, and while not involved, was impressed at its rapid growth in the heady days of the 1970s gold bull market.
Then something happened. While the founder was a strong advocate for hard money and sincere in his intent to do the right thing by his customers, as the coin business grew, he increasingly recruited "professional" managers to run the firm—hired guns whose sole focus was boosting the bottom line and, by so doing, their bonuses. And the business hired more and more "professional" salespeople—the sort of folks who know how to squeeze a client good and hard.
As the company's sales soared, fueled by hard-hitting marketing, the founder's good intentions began to weaken under the onrushing flood of cash that began to wash in. In time, the entire conversation at the coin division switched from "What's good for the customer?" to "What coins can we sell with the biggest mark-up?"
On those occasions when I was invited to comment on what was going on, I did what I could to argue against the corporate culture that had developed, but my impassioned and increasingly angry fights with the managers of the coin division couldn't win out over the millions in profits being made. As much as I enjoyed my job, the situation became so degraded, I had no choice but to resign.
Now, let me be clear. The company broke no laws and, in fact, did nothing that I suppose most businesses on to a good thing might not do; marketing was generating lots of prospects, and the sales force was selling.
The problem was that the product line had moved from selling highly liquid government-issued gold and silver bullion coins to selling illiquid "modern rarities," an oxymoron if there ever was one. Whether "proof" Mexican silver dollars, "treasure" coins, or privately minted commemorative coins, the one thing you could be sure of was that the mark-ups were huge.
Which meant that, in the absence of an active collectors market—which, when it comes to "modern rarities," just doesn't exist, and never will—the coins were very unlikely to ever provide a reasonable return on investment, let alone be a good asset to preserve capital. Quite the opposite, they were almost certain losers.
In the ABC video, you'll hear a sound bite from a client of Goldline who spent $5,000 on "collectible" coins, saying that he wanted to buy bullion, but that the sales guy "kinda, sorta talked me into buying these other coins." Soon thereafter the buyer decided to sell those coins and, when he did, he took a 42% loss. Which, he points out, was a big hit to his net worth.
You can probably spot all the things wrong in that paragraph, but I'll do it anyway.
First, the disgruntled former client says he was looking to buy bullion coins, but the sales guy switched him to a "collectible." Whose fault is it that he allowed himself to be swayed? Quoting Nancy Reagan, when dealing with a salesperson, often times the best thing to do is "just say no."
Second, if taking a loss of about 42% on an investment of $5,000 really hurts his net worth—he shouldn't have been buying illiquid coins in the first place.
Third, buying any "collectible," or pretty much any asset, at full retail and then turning right around and selling it, is invariably a sure-fire ticket to a quick loss.
Finally, who is to say that the coin dealer that bought the coins off the client didn't lowball him? That, too, is part of generating a profit in the coin business.
While I feel sorry for the former Goldline client, he really can't blame anyone but himself for that loss. He didn't do his homework or stick to his guns when the salesman tried to move him up to a higher-margin product line.
As for the company, I don't know them, but I do know that they spend a lot on marketing and celebrity endorsements. It doesn't take a genius to figure out that money has to be recouped from somewhere—specifically, the clients. Which is why I strongly suspect that, yes, the company's salesmen are especially aggressive. And that they try very hard to load their clients up with high-margin coins.
Let me recap some lessons from this article, and based on my own brush with the business.
First, if you're going to become a coin collector, don't think you can stumble into it and enjoy any measure of success. Do your homework—then do some more—before actually laying out your hard-earned cash. Fortunately, there are a lot of useful resources out there for you to rely on. . .pricing guides, auction results, and numismatic groups, to name just a few.
More important, however, is that if you are not going to be a collector, then stay away from anything but U.S. or Canada-minted bullion coins, or bullion bars issued by the widely acknowledged mints such as Johnson Matthey.
Will the bullion products be exempt from confiscation, should it come to pass? No. But trying to avoid confiscation by dealing yourself into a large loss right out of the box by overpaying for an illiquid pseudo-collectible is just silly. . .no matter what the sales person tells you.
What's in the ABC Video That Should Concern You
While imminent confiscation isn't really addressed in the ABC exposé of Goldline, there were some things that caught my eye as worthy of further reflection.
The first was the contention by the appropriately named NY congressman, Anthony Weiner, that it was ludicrous to suggest that the government could ever just confiscate a person's gold. Excuse me? Deep breath. If the Weiner were to repeat that contention to my face, the conversation might roll out something like this…
"What!?! Did you actually just say what I think you said?"
"Why, yes, David, I did."
"Are you kidding?"
"Why, no, David, I am not."
"So, a government that can invade countries on false pretenses. . .arrest people and throw them into prison camps and hold them indefinitely without trial. . .whisk suspects off to foreign countries to be tortured. . .hit targets in sovereign nations on the other side of the globe with missiles fired from drones. . .declare imminent domain to take private property in order to give it to a hotel developer. . .confiscate homes because someone on the property, maybe not even the owner, is caught with a marijuana cigarette. . .freeze the bank accounts of anyone suspected of a crime, then not let them use their own money to defend themselves. . .offer known criminals, murderers even, 'Get out of jail free. . . cards if they testify against someone else. . .but they wouldn't confiscate gold? Oh, and by the way, Roosevelt already did it once, you moron!"
"Who are you calling a moron? Security, we have a problem."
Another deep breath. Pat hair back into place and resist urge to apply my forehead to the keyboard.
But enough of Mr. Weiner.
The second thing that should concern you—and the EVP of Goldline tossed Stephanopoulos a soft pitch down the middle on this one—was when he mentioned that his salesmen have instructions to "advise" their clients on the best sort of coins to buy. Paraphrasing Stephanopoulos, "But your people aren't licensed as investment advisors, are they?"
No, but I suspect that, if this witch hunt continues, they may soon have to be.
Especially because a congressional committee has been set up to investigate this serious matter. Surprise, surprise, the co-sponsor of the committee is none other than Congressman Weiner. Apparently he was chosen for this particular bit of dirty work. While all of this may be nothing more than grand standing and bare-knuckle politicking, any time Congress gets involved, pretty much anything can happen; keep your eyes open for a fresh assault on the gold coin industry.
And, finally, the thing that probably concerns me most is that, whatever else he is, Glenn Beck is a highly visible and apparently effective critic of the current administration. Having failed to knock him off the air by unleashing a well-financed boycott that chased away many of his advertisers, it appears the Democrats are now pursuing their vendetta against Beck by attacking the business practices of the show's largest sponsor. No matter what your opinion is of the man, this sort of determined government-backed assault should make your antenna go up.
Is Goldline an angel? Based on my experience with the industry, probably not. But in this case, I'm not sure that that matters as much as that they sponsor Beck's show.
A Final Word on Confiscation
Do I think confiscation is imminent? No.
But I do think that the straws in the wind point to yet more regulation. This could ultimately place gold dealers under the watchful eye of the SEC or some other Frankenaucracy that emerges out of the new financial reform legislation.
I am not a fan of regulation—even if it sounds like a good idea. For instance, to protect the ignorant from predatory salesmen. My rationale is that this is not a perfect world and never will be. Humans can and will find a way around every rule (witness the fact that Madoff, the former head of the NASDAQ, was able to scam billions off clients). Therefore, the sooner the citizenry learns that they have to rely on their own common sense—and actually educate themselves—before reaching for their wallets, the better. Having an implied government blessing over every transaction does nothing but create a false sense of security.
But that's just my particular, and some think peculiar, worldview. Back in the world we live in, any new regulations will, if nothing else, assure that any private transactions between you and your favorite coin dealer will become a thing of the past. The new reporting requirement on purchases of over $600 pretty much makes that a reality.
With this new layer of reporting in place, should the sovereignty come to the conclusion that it, versus you, should be in possession of your gold—they'll know whose door to knock on.
Of course, we can't know if and when such a thing might occur. . .but to pretend it can't is to be naïve or, in the case of Weiner, disingenuous.
In my article, "I Smell a VAT," I touched on some ideas for how you might protect yourself from a possible gold confiscation (none of which involved buying overpriced coins.
There is one other option I didn't mention—expatriate. Many of the happiest people I have met in my life have their passport from one country, residency in another and money/gold in a third.
As David says, getting your money—and maybe yourself—out of the U.S. is one of the smartest strategies to protect your wealth from the long and ever-growing arm of the government. Click here to read our new report on the 5 best ways of internationalizing your assets.