In part one, we looked at the growing trend of governments moving their gold into their own home vaults to remove the influence and potential seizure of their gold when political policies clash with the country where the holding central bank was situated. We covered the dangers of holding gold at home and the difference in attitude individuals should have towards the problem of where and how to hold gold.
We also highlighted a law in China that makes it illegal to export gold, allowing the nationís total stock of gold to rise. Should the day come when the Peopleís Bank of China believes that it should harness the nationís gold, then it will be in a position to confiscate its citizens' gold. It appears difficult to reach any other conclusion to that law. With this policy it appears that the importance of gold in a nationís stocks will be of rising importance in the years to come. It follows, then, that other nations, including those in the developed world, may follow suit if the global financial scene deteriorates or if a change in the monetary system warrants it. Such a move would place all gold investors in danger of having their gold appropriated in the national interests. When U.S. citizens had gold ownership returned to them in 1974 after 40 years, they were informed by government that gold ownership was a privilege, not a right! What does this imply to you?
Even when an investor holds his gold at home he remains vulnerable to the will of the government of the country he lives in. Itís this danger an investor must prepare for if he is to get the full benefit of owning gold long term. We look at this here, the second part of the article.
U.S. and UK Citizens Holding Their Gold in Foreign Vaults
Because of the potential for gold confiscation, investors often decide that the simplest and best way to hold their gold is outside the country they live in. The belief is that their nation will not reach out to another country and try to persuade them to impose such controls on foreign soil. But does holding their gold outside their country keep it out of reach of their own government and central bank?
Many investors believe in buying the gold overseas to hold it in their own name in a bank or foreign gold exchange-traded fund (ETF), or even a private vault. For instance a U.S. citizen may hold his gold in the London Gold Bullion Securities ETF. In each case, whether private or public, the gold is owned directly by that owner in his name. So letís look at the vulnerability of this method of owning gold overseas.
A look around the world shows a tremendous trade interrelationship between nations. In the Eurozone there are 17 nations using the euro as their currency under the European Central Bank. As the Greek, Irish, Portuguese, Spanish and Italian debt crises are amply demonstrating, the financial dependence on these countries is very great. Members are pushing for "more Europe, not less Europe" and fiscal union is being favored more and more. The only way out of this osmotic pressure will be to leave the EU, at which point a nation will need to harness and hold inside the country all the mobile assets it can, whether it be capital or gold. Both are money when push comes to shove.
As Germany has demonstrated, gold is an important national asset to their central bank, the Bundesbankóso much so that after being allotted 600 tonnes of the potential Central Bank Gold Agreement sales potential, it declined them, only selling enough from its reserves to maintain a supply of gold coins (5 tonnes a year at best). As the Central Gold Bank Agreement stated, "Gold remains an important reserve asset." The Bundesbank president, at the time, said, "Gold is a useful counter to the swings of the dollar." In fact, it is a useful counter to any currency! So, as their failure to sell central bank gold demonstrates, gold will remain firmly in European central bank coffers. So expect, in a time of currency crisis, that the ECB will encourage inter-EU members' adherence to any dictates on privately held gold from either members or the ECB itself.
If the U.S. decides to act against the privately held gold of its citizens, then it does not take much of a stretch of the imagination to expect the U.S. to ask for the cooperation of the UK to any imposition it may wish to impose on U.S.-owned but UK-held gold. Even though it may not do so at individual level, within its borders (not wishing to be seen as cow-towing to the U.S.) it may press UK institutions too cooperate with U.S. dictates on the matter and encourage the UK courts to support such actions. The easiest targets in this case would be the institutions holding the gold of U.S. citizens, particularly the gold ETFs or banks. Here, at a collection point, the bulk of physical gold owned by individuals is held. Then it would simply take an order from government, approved by the courts, and that institution would be compelled to hand over the gold to the government for delivery to the ownership of the Fed, with or without the compliance of the real owners. The real owners would then be paid in currency for their gold, as was the case in 1933, or more imaginatively, in low-interest, government bonds.
But there is a government with a remarkable history of protecting individual wealth, provided the owner is not a known criminal. That is Switzerland!
For more than 300 years, Switzerland has been a neutral nation, well equipped to go to war to protect its neutrality. Its terrain is nigh on impossible for a "normal" army to traverse in the hopes of conquering the nation. In the last two world wars and in the face of many others, it has provided a safe haven for individually and institutionally owned gold. Such is the size of its banking and asset protection business that it forms a very significant part of its GDP. To ensure the protection of individuals and others privacy, it has bank secrecy laws that cannot be breached. Any breach of such confidentiality will lead to imprisonment in Switzerland.
You may say: "But look at the UBS debacle, where the U.S. IRS decided to tackle the bankís U.S. client base in the hope of getting the names of 45,000 of its U.S. clients." What was UBS to do? As an international bank with branches throughout the world, but with a particularly large on in the U.S., it was bound to comply with U.S. laws. But then the Swiss government stepped in and said that if it did disclose these names it would be breaking Swiss law and so would its Swiss executives, giving them an unpleasant homecoming if they complied with U.S. government requests. The two governments talked to each other, with the U.S. pointing out that some of the clients were criminals insofar as they were evading U.S. taxes. Eventually, and with other countries too, Switzerland has added tax evasion to its list of crimes that would prevent people from becoming Swiss bank clients. The result was that UBS was permitted by the Swiss government to reveal 4,500 of the 45,000 client names to the U.S. government.
That left 40,500 U.S. citizens with UBS bank accounts in Switzerland that are not in danger of being revealed. This has left the Swiss banking secrecy laws intact and Switzerland still the safe haven for wealth that it was before the debacle. But many safe situations have changed as a result of this action. The U.S. is still chasing other Swiss banks in the U.S., so are Swiss banks the safe place we thought they were previously?
Gold Held in a Swiss Bank
Inside the borders of Switzerland, institutions and individuals remain outside the reach of other governments. But where a financial institution has a branch or branches overseas, that bank or company comes into the jurisdiction of other governments and its laws. UBS was so large in the States that it faced devastating action and the possible loss of its banking license inside the U.S. if it did not do what the U.S. said. The same applies to all Swiss companies outside the safe borders of Switzerland. So any foreign clients of Swiss banks with accounts there may bring unwarranted and unwelcome attention to the institution. Their ability to retain the assets of their foreign clients could then be compromised, making Swiss banks and financial institutions not the safe haven the country itself is.
As the U.S. is now in the process of bringing a new law onto the books called the Foreign Account Tax Compliance Act (FATCA), which has expanded offshore asset disclosure requirements, the dangers to Swiss institutions with foreign branches has risen. A new form "8938" will then need filling in by U.S. citizens, which requires them to disclose the bulk of foreign held assets. As a result, Swiss banks in particular do not want new U.S. clients and have rejected attempts by U.S. citizens to become clients.
Letís be clear on thisóthis has nothing to do with law-abiding clients, but with the relations between the bank and the United States IRS and the future dangers that may arise on this front.
While gold held in Switzerland in its owner's name is currently quite secure, should the day come when the U.S. or any other government wants to confiscate its citizens' gold or any other assets, the heavy application of pressure on the Swiss institutions may force them to cooperate, no matter what the Swiss government says, provided the secrecy laws are still obeyed. And where will the pressure be applied? Inside the nation where the confiscation or repatriation orders has been imposed!
Switzerland would never allow the U.S. to impose such a law on Switzerland itself. Indeed, in the past a Bank of England detective tried to get access to British citizens' bank accounts in Swiss banks inside Switzerland, and was promptly locked up there. The same would apply to any other countries authorities if they tried to invade Swiss sovereignty.
Swiss banks are, therefore, not Swiss!
Gold Held in a Private Vault in Switzerland
The same applies to Swiss vaults. Where there is, for instance, a Swiss branch of a foreign security or vaulting company, there is a danger that pressure will be applied to them from outside Switzerland. The company will then have to decide where its own interests, and not the clientís, lie.
However, there are reputable vault companies in Switzerland that are entirely Swiss-based and so can offer the sort of security that its clients want. This is where foreign gold investors are the most secure.
Julian Phillips, The Gold Forecaster
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