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Metals Gain on Dollar Weakness; Gold Confiscation Basics

After months of dollar strength, a weaker greenback is sparking a rebound in the precious metals market. Silver and the other white metals turned in some big gains last week, and all metals are up this morning.

Whether the dollar continues to weaken depends largely on the posture of the Federal Reserve. Renewed talk of "tapering" could halt the decline, even if only temporarily.

Investors will get a look at data on both consumer and producer price inflation this week. Don't expect any surprises. Most of the inflation is currently manifesting itself in the equity markets – not in prices for goods and services.

Bullion Confiscation Fears Cause Some Investors to Make Poor Decisions

The relentless selling of gold futures, beginning in April, gives the superficial impression that there aren't too many investors interested in holding gold. The Fed is supposedly getting ready to wind down the printing presses. Investors should sell gold and hold dollars.

Questions surrounding the possibility of another gold confiscation a la Franklin Roosevelt's 1933 executive order 6102 often pop up during the conversations that Money Metals' Specialists have with customers. Unfortunately, the specter of this 70-year-old attack on wealthy "gold hoarders" is still haunting investors today.

As the Federal Government grows more authoritarian and more insolvent, investors should indeed worry about what kind of desperate measures may be coming. Of course, one of the easiest ways for the feds to confiscate private wealth in today's world would be through limitations on tax benefits tied to IRAs and 401(k)s – and potentially even requirements that U.S. debt be purchased within those accounts.

We strongly believe that forgoing or limiting your bullion purchases based on fears of government confiscation is counterproductive. Military critics often use the expression "preparing to fight the last war" when discussing the tendency for strategists to focus overmuch on the enemy's prior tactics at the expense of preparing for new ones. Letting the threat of confiscation deter you from building a position in physical gold and silver is preparing to fight the last war.

Vigilant investors can get a sense of the draconian tactics impoverished governments prefer today by looking to recent events around the world. During the banking crisis in Cyprus, officials took advantage of technology to launch a surprise attack on their citizens. Cypriots woke up one morning to find they no longer controlled the "cash" held in their banks. Confiscation took the form of electronically seizing bank accounts and limiting ATM withdrawals to €100 per day.

India's Attack on Gold Has Only Stimulated Demand and Profits

Bureaucrats in India are attempting to both profit from the demand their inflationary policies have created for gold and, at the same time, discourage investors from taking steps to protect themselves from ongoing devaluation of the Rupee.

India doubled the duties imposed on imported physical gold, and the nation is pressuring the trade group representing jewelers to stop members from selling bars and coins. So far the policy appears only to have stimulated public demand for the yellow metal and moved some of the buying to the black (that is, free) market.

The government of Pakistan recently took steps to increase border security – responding to a dramatic spike in gold smuggling into India. Indian government officials are undoubtedly outraged at the reluctance of their people to line up and get shorn by inflation.

So, given these measures, would Indians have been better served to forgo any investment in physical gold? Absolutely not. Bloomberg reported premiums for gold doubling as the higher duties and other restrictions impact supply.

And if the Indian government moves to completely destroy the legal market for gold, it will only serve to drive prices in the "black" market higher and at the same time stimulate demand for silver as an alternative.

Indians will not acquiesce to a ban on the buying and selling of gold – something they have been doing for centuries– regardless of how the politicians in New Delhi attempt to enforce it. Physical gold (and silver) has always been a nightmare for governments to tax and regulate and, as it turns out, that remains among the metal's most attractive features.

The easiest moves for governments to take are related to paper investments stored digitally. As demonstrated in Cyprus, bureaucrats can confiscate, tax, or regulate bank and brokerage accounts from the safety and comfort of their offices.

Today's investors worried about defending against government action would do better by holding tangible assets outside the banking systems, where they cannot be controlled digitally. And nothing is more "off the grid" than physical bullion.

Potential Market-Moving News This Week

  • Tuesday, Aug. 13th – July Retail Sales. The June report disappointed markets. With the rate of employment at generational lows and real personal incomes lower than they were 4 decades ago, expecting consumers to lead the way out of the current economic malaise is a bit of a stretch.
  • Wednesday, Aug. 14th – Producer Price Index. Prices for most producer goods have been rising only modestly over the past two years. This week's report may even show a decline – a reflection of lower commodity prices. Metals investors should remember that flat or declining prices and the fear of deflation are far more worrisome to politicians and central bankers than inflation – so weakness in the PPI (and CPI) may be good for precious metals in the medium term.
  • Thursday, Aug. 15th – Consumer Price Index. As with PPI numbers, investors should expect a report showing prices for consumer goods and services well under control.

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