By Patrick A. Heller
Commentary on Precious Metals Prepared for CoinWeek.com …..
One of the circulating rumors is that the reason for the major gold and silver price suppression over the past 11 days was to prevent a major default of London Bullion Market Association contracts. Before you dismiss that idea as a joke, there could be some substance to that rumor.
In theory, paper commodity contracts are supposed to be ultimately settled with delivery of the underlying commodity. Many investors are not interested in taking custody of the commodity, they simply want a convenient method for investing in it. Therefore, the COMEX futures exchange has only fractional physical holdings to cover outstanding gold and silver contracts. The London market supposedly is 100% backed by physical gold and silver stored in vaults, but in actual practice there is now 1% or less of physical metal to cover outstanding contracts.
Many investors who purchase commodity contracts understand that there is not sufficient physical metal to make delivery of more than a fraction of outstanding contracts. However, there are also many people who are under the erroneous belief that buying a paper commodity contract is just as good as buying the physical metal.
A lot of these people who think they own physical gold because they have a paper contract are starting to learn otherwise. Late last month, the huge Dutch bank ABN Amro informed their customers that they could not withdraw the physical precious metals they owned and had stored at the bank. At best, they could simply sell their holdings and receive cash for them.
There is a fresh report that a holder of a London contract tried to take delivery of the physical gold. He was refused delivery of the physical metal and told that, as the exchange rules permit, he would be paid cash for his contract. Another fresh report told how the owner or more than 200,000 Swiss Francs of gold in an allocated account at a major Swiss bank asked to withdraw the physical gold that he owned. He was told that the Swiss central bank had instructed the nation’s banks to deny all requests for delivery of large amounts of gold, allegedly out of fears that such requests might be made by terrorists.
Each of these three incidents is not technically what would qualify as events of default. Supposedly, the owners of all these accounts or contracts are being made whole without delivering the physical metal. This means that the public isn’t being told about the cumulative failures to honor commitments to deliver physical commodities.
I’ve said this before and it bears repeating. If you think you own gold or silver because you own a paper contract or certificate, the reality is that you don’t own the metal! The only precious metals you own are those you have in your direct custody.
The gold and silver price suppression campaign of the past two weeks, which was successful to a degree, apparently did not scare enough people away from wanting to own precious metals sufficient to bail out the London and New York commodity exchanges. With the very real possibility that the London and COMEX markets for gold and silver might be on the brink of default, I fear that the US government, its trading partners, and its allies around the world will be forced to take stronger measures in the near future.
Here are the five potential tactics that I fear may come to pass in the next few months.
- First, look for a repeat of what the US government authorized the COMEX to do at the January 1980 peaks in gold and silver prices. The COMEX stopped price increases by prohibiting new purchases of gold and silver contracts by investors. Investors who already owned COMEX contracts were limited to either continuing to hold the contract or to sell it. They were not allowed to increase their positions. The recent actions taken by the ABN Amro Bank and the unidentified major Swiss bank are almost exactly this kind of development. The consequence of such a development is that those who own little or no precious metals may find it almost impossible to buy any or any more, no matter whether paper or physical.
- Second, to forestall the failure of a major world bank, that nation may impose a bank holiday in order to seize some or all of the checking and savings accounts and retirement assets held by the bank’s customers. This is precisely what has happened in Cyprus, with a growing number of nations stating that they will adopt this tactic. There are several large banks that are reportedly near insolvency, but I won’t fan the flames of panic by naming them here.
- Third, look for there to be limitations on being able to withdraw funds from bank savings and checking accounts, certificates of deposits, at brokerages, and any other forms of “money.” This tactic was used against Ohio residents in the late 1980s that had accounts at certain financial institutions in that state.
- Fourth, at the same time, the government is likely to limit the ability to send funds out of the country, similar to the financial restrictions now imposed on Americans who seek to surrender their citizenship.
- Fifth, the US government could prohibit the purchases of physical gold and silver investment products. By doing this, the government could not be accused of confiscating gold or silver (except for the private Individual Retirement Accounts (IRAs) and 401K accounts) similar to the fully-compensated, mandatory redemption in 1933.
Through these measures, the US government would make it virtually impossible for people to protect themselves against the continuing decline in the value of the US dollar. The only people that have any hope of using gold and silver for their financial salvation would be those who already own physical gold or silver in their direct custody before any of these measures are imposed.
The first four capital controls I list above have already happened somewhere this year or were imposed by the US government in the past. The fifth capital control I listed is just a small stretch derived from the other four. Unfortunately, these are not outrageous predictions. I would hate to see any of them come to pass, but I have to call them as I see them.
Patrick A. Heller was honored with the American Numismatic Association 2012 Harry J. Forman Numismatic Dealer of the Year Award. He owns Liberty Coin Service in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Numismaster (under “News & Articles) . His award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com
I had a couple of comments I wanted to make on your piece.
Fifth, the US government could prohibit the purchases of physical gold and silver investment products. By doing this, the government could not be accused of confiscating gold or silver (except for the private Individual Retirement Accounts (IRAs) and 401K accounts) similar to the fully-compensated, mandatory redemption in 1933.
One thing I’ve considered is that rather than ban sales of metal outright, the government might just impose massive taxes on all gold transactions instead. I think that “small potatoes” retail buyers are likely to be okay, as long as they don’t try to sell their gold, because there are very few people in the country these days compared to the 1930s who own gold. Big investors that own large physical hoards, however, could be at risk of confiscation.
Third, look for there to be limitations on being able to withdraw funds from bank savings and checking accounts, certificates of deposits, at brokerages, and any other forms of “money.” This tactic was used against Ohio residents in the late 1980s that had accounts at certain financial institutions in that state.
I wanted to ask about this. In the 1980s I was a child and don’t remember ever hearing about this. Do you have more details on this event or a link to a story/article about it?
As always, I appreciate the work you and other writers on this site do.
I dont mean to steal Patricks because I am sure he is more knowledgeable than I am, but I believe he might be referencing the 1980’s Savings and Loan Crisis. I was in my 20’s then but I rember half of the savings and loan banks going belly upback then due to bad investments and the government had to step in, something like we just went thru but on a smaller scale. If you google it, there is a lot of information out there as to what happened. It had no impact on me because I was just starting out back then and had no money in the banks or even my pocket back then.
Dan has it correct. A large number of savings and loans in Ohio were closed when they started to suffer bank runs. When they were re-opened, people were only allowed to withdraw limited amounts for a period of time, until people realized that that government was not going to let the S&Ls fail.
Your comment about using higher taxes to discourage purchases of precious metals is a real risk. There are multiple ways to pretend that purchasing is still legal, which throwing so many roadblocks in the way so as to make it practically impossible to purchase. I apologize for the delay in response as I am chaperoning my daughter’s class trip to Washington, DC and have been off the computer several days. It was a nice break.