Current Federal Reserve Chairman Ben Bernanke believes a simple recession turned into The Great Depression due to the Federal Reserve of the day not doing enough while the money supply contracted 31% from 1929–1933.
This reduction in the money supply was caused by no less than three bank runs between late 1930 and March 1933. Bank deposits formed 92% of the money in circulation at the time and 10,000 banks failed with the loss of $2 billion in deposits.
The Fed failed to inject enough money into the system to sustain the desired minimum level of monetary aggregates. Because it failed to do this, the public run on banks resulted in a contraction in the money supply, which caused the Great Depression." -Milton FriedmanBernanke, a monetarist like Friedman, believes if the Fed had provided enough money to the large banks and bought U.S. securities, then these banks would never have fallen. Bernanke is, today, putting what he believes to be the fix for our current economic woes into practice:
- Giving money to the banks;
- Cutting the prime interest rate the Fed charges commercial banks;
- Buying Treasuries
So why didn't the Feds of the time simply increase the money supply by turning on the printing presses much like Ben "Helicopter" Bernanke is doing today? Well, at that time, the U.S. was on the gold standard and the amount of credit the Federal Reserve could issue was limited by the Federal Reserve Act, which required 40% gold backing of Federal Reserve Notes, paper money, issued. Back then if you had $10 in your pocket, you knew, that somewhere, there was $4 worth of gold backing that "promise to pay" in your wallet.
But the Fed's back was up against the wall, they were running out of room to issue more notes. They had almost hit their issue limit on credit that could be backed by the gold in their possession—they needed more gold to issue more credit.
Their need was made worse because during the bank runs Federal Reserve paper money had been exchanged for Federal Reserve gold. Since the Federal Reserve was already hitting its limit on allowable credit, any reduction in gold in its vaults had to be accompanied by a greater reduction in credit. Something had to be done.
On April 5, 1933, President Roosevelt signed Executive Order 6102 making the hoarding of gold certificates, coins and bullion illegal. This order, by confiscating Americans gold, increased the amount of Federal Reserve owned gold thereby making an increase in the availability of Federal Reserve Notes or credit possible.
The reason gold was confiscated back then doesn't exist today. Today no country is on the gold standard (the U.S. cut the last ties to gold in 1971) and the U.S. Federal Reserve's ability, or any countries ability, to create credit, print money, is no longer tied to how many ounces of gold a country has.
The flip side of this unfettered creation of money is inflation—and this is of course exactly why someone might want to own gold and silver. But there is something potential gold buyers need to be aware of.
Its true gold was confiscated in 1933—but now you know the why and you also know that the reason for confiscation back then doesn't exist today.
So the next time you read an article about how your government is going to confiscate your gold—all of it except rare collector numismatic coins—track it back to its original source. Too many times you will find that it has, as its originator, a gold numismatics merchant. The patter is always the same—"Your gold is going to be confiscated, buy rare collector coins because they won't be confiscated."
Gold numismatics were not confiscated in 1933. Order 6102 specifically exempted "customary use in industry, profession or art." The same paragraph also exempted "gold coins having recognized special value to collectors of rare and unusual coins."
The U.S. Constitution's Eminent Domain Clause says: "nor shall private property be taken for public use, without just compensation." When gold bullion was confiscated compensation payment at the official gold price of $20.67 an oz was considered just, after all, that was the price of an oz of gold.
But the confiscation of rare gold coins, called numismatics, would have been stealing private property. Legally just compensation would have had to been paid but for that to happen each gold numismatic would have had to been individually graded and priced—a huge and expensive time consuming task the government was unwilling to take considering the small amount of gold that would have been recovered.
So let's revisit. . . "Your gold is going to be confiscated, buy rare collector coins because they won't be confiscated." We know the reasons Americans gold bullion coins were confiscated but gold numismatics weren't. For today's gold buyers, who still fear confiscation, the problem is: are the coins some gold dealers want to sell you actually gold numismatics and for a gold bullion investor—versus a coin collector—are they worth buying? Unfortunately the answers are maybe not and no.
Gold numismatics are rare collectors gold coins that trade at high premiums to their intrinsic gold content value. These coins are extremely rare, or one-of-a-kind, that collectors (there's that qualification again) purchase for their historical and aesthetic qualities.
Gold merchants can sell rare gold coins for a healthy markup, sometimes as much as 25 percent and more. The fierce competition in the gold bullion coin market often limits profit margins to maybe 3% over the spot price of gold.
American Gold Eagles, the Canadian Maple Leaf and South Africa's Krugerrand are all examples of gold bullion coins. Their value is derived entirely from their gold content. They are universally recognized and the value of these coins is easily verifiable. The reality is that too many coins sold as "numismatic" or "collectible" are ordinary gold bullion coins sold at high mark-ups to make fear-mongering dealers extra profits.
If you want to own gold, the safest way is to buy one or a mix, of the three gold bullion coins listed above, pay the 3% above spot and quit worrying about confiscation. Gold numismatics are not a store of value nor a better safe haven in a meltdown situation than gold bullion. Think about all the money you'll save. Maybe you'll buy some silver!
Gold bullion coins are a better store of value than gold numismatics—if social order breaks down and a collector needs to trade one of his collectables he's going to receive the exact same amount of goods that I would receive using gold bullion. That's because the transaction will be valued based on gold content and purity, not historical and aesthetic qualities.
Investors buy physical gold because it is a store of value—a way to protect your wealth from the relentless devaluation of fiat currencies—and a safe haven in times of turmoil. Your job as a retail investor, if you believe in gold and the ongoing devaluation of fiat currencies, is to buy as much potable, divisible gold with your dollars as you can. Buying gold numismatics is not the way to do this and buying gold numismatics that aren't. . .well that's being taken advantage of, to put it politely. Is this con game on your radar screen?
If it isn't, and you're a gold buyer, it should be.
Richard (Rick) Mills
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Richard is host of aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 200 websites, including: The Wall Street Journal, Safe Haven, Market Oracle, USA Today, National Post, Stockhouse, Lewrockwellcom, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, Mineweb, 321gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor and Financial Sense.
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