EASILY REVOKED PRIVILEGE
We previously stated that gold ownership was made illegal on 1st May 1933. What we did not tell you was that U.S. citizens, under Order 6102, were allowed to own up to $100 in gold coin [+5 ounces]. Today that would be worth under $8,400, a mere token gesture to real gold owners. It acted as a tiny escape valve to the general body of citizens and did not detract from the fact that effective gold ownership was abolished. So that we fully understand the attitude of governments to gold, which remains real money in times of crisis, we add this paragraph:
Congress could easily revoke the privilege again. In fact, at no time during this century has the U.S. government recognized the right of private gold ownership. The Trading with the Enemy Act, which President Roosevelt invoked in 1933 to restrict private gold transactions, remains law. Although private ownership of gold in the United States was legalized on August 15, 1974, the power to confiscate gold remains in the hands of the President. The President still retains the right, under the Emergency Banking Relief Act, to “investigate, regulate or prohibit…the importing, exporting, hoarding, melting or earmarking of gold” in times of a declared national emergency. It is highly unlikely that either the Courts or Congress would successfully argue that confiscatory powers are not implicit in the Emergency Banking Relief Act if a currency crisis or other fiscal emergency prompted the President to, once again, nationalize gold.
The privilege, not right, to own gold was restored to U.S. citizens on the 15th August 1974 (not 1971, when Nixon floated the USD against gold and stopped foreign central banks from converting USD to gold). It is pertinent to the thinking behind this series, to understand the importance to government of gold and that the right to confiscate may not be restricted to individuals or institutions but could embrace a nation or two.
CAN U.S., U.K. CONFISCATE OTHER NATION’S GOLD?
In recent months we have seen Venezuela repatriate its gold reserves from the U.S., Canada and the U.K.’s central bank vaults. Why? Before we answer that question, you may not know that the bulk of the world’s central bank’s gold reserves are held by U.S. and U.K. central banks. It is held in unallocated accounts where no individual bar is attributed to any particular owner, but part of a pool of gold held by the U.S. or U.K. central banks. This allows that bank to conduct various leasing operations against that gold. This is why so many writers express alarm at the safety of national gold holdings. The question frequently asked is, “Are those gold holdings really there?”
If they are not there, then the figures we are told of each nation’s holding become a farce. If this were to come out then there would be a furore the like of which the financial world has not seen since the U.K. was forced to confirm it had issued far more notes against the gold they claimed than the gold it had.
Today, when a nation realizes that it is becoming unpopular in the western world, it smells danger to the assets held outside its country, which become vulnerable to seizure. An airline that can’t pay fuel bills will have the aircraft impounded. Likewise, Iran has found that it cannot trade its gold outside the nation. Venezuela feared the same, realizing just how it would not be able to stop the seizure of its foreign country-held gold. We see that Greece, as part of the bailout package, has pledged its 111-tonne gold reserves to ensure repayment of their debt.
So don’t be fooled. Governments are just as vulnerable as individuals. Government interests take priority over private interests! More importantly, host government rules on foreign held gold take priority over foreign held gold as we have seen in the case of Iran, and now Greece.
This week, the message from these situations became clear even to the large developed nations.
With the Eurozone crisis and the steps taken to resolve it -including the phenomenal amounts of newly printed money-the risks on the balance sheet of Germany (it applies to other supportive members of the Eurozone as well as the E.C.B. itself) are moving to the point where fears and concerns are growing in relation to the risk on the Bundesbank’s balance sheet. These fears are permeating down to the German public, German politicians and indeed the Bundesbank itself, in what is now a gigantic risk. Germany has the second largest gold reserves in the world at 3,396.3 tonnes of gold. With such a credit risk one has to ask, “Where is this gold? Is it held in the U.K. or the U.S. and is it free from encumbrances? Is it leased or have the Bank of England or Federal Reserve leveraged this gold against other money? Is it just part of a larger pool in an unallocated pile?”
It’s no surprise that now questions are being asked.
RISING RISKS TO EUROZONE MEMBERS
The Eurozone’s central bank system is massively imbalanced after the E.C.B.’s balance sheet surged to a record €3.02 trillion last week, 31% bigger than the German economy, after a second tranche of three-year loans. The two initial tranches totaled [€489 + €712] €1,201 meaning that the Balance sheet has been expanded by 50% in the last few months!
The concern is that were the Eurozone to collapse, Bundesbank’s losses could be half a trillion euros, more than 1½ times the size of the Germany’s annual budget. If that happened, Germany’s gold bullion reserves would be needed to support the currency, either as collateral or to actually repay debt. Shades of 1919-1923 come back to German minds again! The support would have to be for either a rebuilt euro or a return to the old currency, the Deutsche Mark.
The German lawmakers want to know for sure where the German gold is held.
It’s believed that some 60% of Germany’s gold is stored outside of Germany and much of it in the Federal Reserve Bank of New York. If this is the case one has to ask, in the light of the massive currency swaps engineered by the Fed and the E.C.B. to raise the two tranches of cheap money for European banks, “Was gold swapped too, or was it pledged as collateral?”
The public pressure to repatriate national gold reserves has heightened considerably in the last year. Should Germany want its gold back home, we ask, “Can it get it back or has it already been used in these ways? If not will Germany follow the road of good housekeeping and bring its gold home?” If they do, you can be sure there will be a stream of developed world and emerging world central banks that will follow suit! Then they would be able to maximize the use of the gold reserves to resolve any systemic or monetary crisis.
We have discussed Germany, but the same questions must soon be raised in France, Italy and other Eurozone members. And what about the European Central Bank itself?