Commodities / Gold and Silver 2013
Feb 01, 2013 - 10:53 AM GMT
By: Jeff Clark
The best indicator of a chess player's form is his ability to sense the climax of the game. –Boris Spassky, World Chess Champion, 1969-1972
You've likely heard that the German central bank announced it will begin withdrawing part of its massive gold holdings from the United States as well as all its holdings from France. By 2020, Bundesbank says it wants half its gold reserves stored in its own vault in Germany.
Why would it want to physically move the metal from New York? It's not as if US vaults are not secure, and since Germany already owns the gold, does it really matter where it sits?
You may recall that Hugo Chávez did the same thing in late 2011, repatriating much of his country's gold reserves from London. However, this isn't a third-world dictatorship; Germany is a major ally of the US. So what's going on?
Pawn to A3
On the surface, it may seem innocuous for Germany to move some pallets of gold closer to home. Some observers note that since Russia isn't likely to be invading Germany anytime soon – one of the original reasons Germany had for storing its gold outside the country – the move is only natural and no big deal. But Germany's gold stash represents roughly 10% of the world's gold reserves, and the cost of moving it is not trivial, so we see greater import in the move.
The Bundesbank said the purpose of the move was to "build trust and confidence domestically, and the ability to exchange gold for foreign currencies at gold-trading centers abroad within a short space of time." It's just satisfying the worries of the commoners, in the mainstream view, as well as giving themselves the ability to complete transactions faster. As evidence that it's nothing more than this, Bundesbank points out that half of Germany's gold will remain in New York and London (the US portion of reserves will only be reduced from 45% to 37%).
Sounds reasonable. But these economists remind me of the analysts who every year claim the price of gold will fall – they can't see the bigger implications and frequently miss the forest for the trees.
Check
What your friendly government economist doesn't reveal and the mainstream journalist doesn't report (or doesn't understand) is that in the event of a US bankruptcy, euro implosion, or similar financial catastrophe, access to gold would almost certainly be limited. If Germany were to actually need its gold, regardless of the reason, any request for transfer or sale would be… difficult. There would be, at the very least, delays. At worst such requests could be denied, depending on the circumstances at the time. That's not just bad – it defeats the purpose of owning gold.
But this still doesn't capture the greater significance of this action. First, it reinforces the growing recognition that gold is money. Physical bullion isn't just a commodity, a day-trading vehicle, or even an investment. It's a store of value, a physical hedge against monetary dislocations. In the ultimate extreme, it's something you can use to pay for goods or services when all other means fail. It is precisely those who don't recognize this historical fact who stand to lose the most in an adverse monetary event. (Hello, government economist.)
Second, here's the quote that reveals the ultimate, backstop reason for the move: Bundesbank stated it is a "pre-emptive" measure "in case of a currency crisis."
Germany's central bank thinks a currency crisis is really possible. That's a very sobering fact.
We agree, of course: history is very clear on this. No fiat currency has lasted forever. Eventually they all fail. Whether the dollar goes to zero or merely becomes a second-class currency in the global arena, the root cause for failure is universal and inevitable: continual and perpetual dilution of the currency.
Some level of currency crisis is inescapable at this point because absolutely nothing has changed with worldwide debt levels, deficit spending, and currency printing, except that they all continue to increase. While many economists and politicians claim these actions are necessary and are leading us to recovery, it's clear we have yet to experience the fallout from spending more than we have and printing the difference. There will be serious and painful consequences, sooner or later of an inflationary nature, and the average person's standard of living will be greatly reduced.
And now there are rumblings that the Netherlands and Azerbaijan may move their gold back home. If this trend gathers steam, we could easily see a "gold run" in the same manner history has seen bank runs. Add in high inflation or a major currency event and a very ugly vicious cycle could ignite.
Checkmate
If other countries follow Germany's path or the mistrust between central bankers grows, the next logical step would be to clamp down on gold exports. It would be the beginning of the kind of stringent capital controls Doug Casey and a few others have warned about for years. Think about it: is it really so far-fetched to think politicians wouldn't somehow restrict the movement of gold if their currencies and/or economies were failing?
Remember, India keeps tinkering with ideas like this already.
What this means for you and me is that moving gold outside your country – especially if you're a US citizen – could be banned. Fuel would be added to the fire by blaming gold for the dollar's ongoing weakness. Don't think you need to store gold outside your country? The metal you attempt to buy, sell, or trade within your borders could be severely regulated, taxed, tracked, or even frozen in such a crisis environment. You'd have easier access to foreign-held bullion, depending on the country and the specific events.
None of this would take place in a vacuum. Transferring dollars internationally would certainly be tightly restricted as well. Moving almost any asset across borders could be declared illegal. Even your movement outside your country could come under increased scrutiny and restriction.
The hint that all this is about to take place would be when politicians publicly declare they would do no such a thing. You could quite literally have 24 hours to make a move. If your resources were not already in place, even the most nimble of us would have a very hard time making arrangements.
Once the door is closed, attempting to move restricted assets across international borders would come with serious penalties, almost certainly including jail time. In such a tense atmosphere, you could easily be labeled an enemy of the state just for trying to remove yourself from harm's way.
The message is clear: storing some gold outside your country of residence is critical at this point, and the window of time for doing so is getting smaller. Don't just hope for the best; do something about it while you still can. The minor effort made now could pay major dividends in the future. Besides, you won't be any worse off for having some precious metals stored elsewhere.
The best chess players in the world aren't that way because they can see the next move. They're champions because they can see the next 14 moves.
“The message is clear: storing some gold outside your country of residence is critical at this point, and the window of time for doing so is getting smaller”
There are some practical pitfalls. Sure, you can still transfer funds to another country, Canada for example, and then buy gold in Canada and store it in a non bank depository. Of course, there is still a paper trail for US gold grabbers.
Secondly, many of us have the real stuff in the US, but transporting it out of the US would require declaration to the authoritarians at the border. I suppose you could make multiple trips across the border with less than 10k, but that activity would probably arouse suspicion.
Then, unless you’re planning on living in Canada, it’s probably going to be a struggle getting your stash to your condo in Panama or Ecuador.
“The hint that all this is about to take place would be when politicians publicly declare they would do no such a thing.”
We are getting hints like this all the time now. Second amendment and nationalization/ confiscation of pensions are just two prominent examples.
I believe the best investment right now is in certain gold and silver miners with significant new mines/plants coming on line. There is a huuuge lag between when the price of the precious metals increases significantly, and when the relevant miners can add to the supply. During that time they have to drill for a long time to find the gold and silver, spend millions to discover it, spend a whole bunch more to have the discovery independently confirmed through a 43-101 independent report, spend money on a feasibility study, spend a sometimes years working on, and waiting for all the relevant permits, then take the feasibility study and look for financing, dilute the heck of the current share price further by raising the money, then construct the plant, build the mine, order the equipment, hire and train the workers. Because of all this, the miners have gotten clobbered in the stock market while the price of gold and silver has soared. The market is currently discounting everything about the miners, including huge increases in their resources. This means that the best bet right now are certain small miners with new mines about to be put in production. Some of these miners are selling for 2 or 3 times next year’s cash flow, and when the new mines are put in production, they will almost literally be printing money. The beauty is that you don’t need gold and silver to go up to make huge gains. All you need is for the prices not to come down! Happy investing everybody!
I believe the best investment right now is in certain gold and silver miners with significant new mines/plants coming on line. There is a huuuge lag between when the price of the precious metals increases significantly, and when the relevant miners can add to the supply. During that time they have to drill for a long time to find the gold and silver, spend millions to discover it, spend a whole bunch more to have the discovery independently confirmed through a 43-101 independent report, spend money on a feasibility study, spend a sometimes years working on, and waiting for all the relevant permits, then take the feasibility study and look for financing, dilute the heck of the current share price further by raising the money, then construct the plant, build the mine, order the equipment, hire and train the workers. Because of all this, the miners have gotten clobbered in the stock market while the price of gold and silver has soared. The market is currently discounting everything about the miners, including huge increases in their resources. This means that the best bet right now are certain small miners with new mines about to be put in production. Some of these miners are selling for 2 or 3 times next year’s cash flow, and when the new mines are put in production, they will almost literally be printing money. The beauty is that you don’t need gold and silver to go up to make huge gains. All you need is for the prices not to come down! Happy investing everybody!
I fail to see why storing gold in a foreign country is smarter than storing it in a big, hidden, buried safe on your own premises - - a safe which, in the event the stench of rummaging government brownshirts fills the air, could also be booby-trapped.