Gold Confiscation: Straws in the Wind

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In the emails
that our readers at Casey Research send our way, questions and concerns
about the possibility of gold confiscation rank high.

My somewhat
standard response is that, yes, it’s possible, but that we
should see straws in the wind well before it happened… allowing
us to take measures to protect ourselves.

While I don’t
want to make too big a deal about it, there have been clear signs
of late that the U.S. government is taking an unhealthy interest
in your gold.

My recent
article “I
Smell a VAT
” touched on one such straw. The relevant point
being that, thanks to a regulation slipped into the healthcare legislation,
coin dealers – and all businesses, for that matter – will
have to begin reporting any purchases of $600 or more from anyone,
including clients selling back their gold.

While I think
the overriding intent is to pave the road for the implementation
of a value-added tax (VAT), there’s no question that the legislation
simultaneously paints a target on the back of the free trade of
precious metals.

Then, a couple
weeks ago a friend sent me a copy of Mother Jones, an a unapologetically
“progressive” mouthpiece with a cover story titled “Glenn
Beck’s Golden Fleece
.”

And friend
and correspondent Lowell sent along an article with an embedded
video link to a lengthy ABC
News “investigation”
by Clintonista George Stephanopoulos
that picks up on the Mother Jones story.

Now that you’ve
watched the video – and if you don’t, some of what follows
won’t make any sense – I’d like to share some observations
based on personal experience.

About Coins

Years ago,
I headed up the publishing division of a company (that will go unnamed)
with a separate division selling coins. I was there when the coin
business started, and while not involved, was impressed at its rapid
growth in the heady days of the 1970s gold bull market.

Then something
happened. While the founder was a strong advocate for hard money
and sincere in his intent to do the right thing by his customers,
as the coin business grew, he increasingly recruited “professional”
managers to run the firm – hired guns whose sole focus was
boosting the bottom line and, by so doing, their bonuses. And the
business hired more and more “professional” salespeople
– the sort of folks who know how to squeeze a client good and
hard.

As the company’s
sales soared, fueled by hard-hitting marketing, the founder’s
good intentions began to weaken under the onrushing flood of cash
that began to wash in. In time, the entire conversation at the coin
division switched from “What’s good for the customer?”
to “What coins can we sell with the biggest mark-up?”

On those occasions
when I was invited to comment on what was going on, I did what I
could to argue against the corporate culture that had developed,
but my impassioned and increasingly angry fights with the managers
of the coin division couldn’t win out over the millions in
profits being made. As much as I enjoyed my job, the situation became
so degraded, I had no choice but to resign.

Now, let me
be clear. The company broke no laws and, in fact, did nothing that
I suppose most businesses on to a good thing might not do; marketing
was generating lots of prospects, and the sales force was selling.

The problem
was that the product line had moved from selling highly liquid government-issued
gold and silver bullion coins to selling illiquid “modern rarities,”
an oxymoron if there ever was one. Whether “proof” Mexican
silver dollars, “treasure” coins, or privately minted
commemorative coins, the one thing you could be sure of was that
the mark-ups were huge.

Which meant
that, in the absence of an active collectors market – which,
when it comes to “modern rarities,” just doesn’t
exist, and never will – the coins were very unlikely to ever
provide a reasonable return on investment, let alone be a good asset
to preserve capital. Quite the opposite, they were almost certain
losers.

Buyer Beware

In the ABC
video, you’ll hear a sound bite from a client of Goldline who
spent $5,000 on “collectible” coins, saying that he wanted
to buy bullion, but that the sales guy “kinda, sorta talked
me into buying these other coins.” Soon thereafter the buyer
decided to sell those coins and, when he did, he took a 42% loss.
Which, he points out, was a big hit to his net worth.

You can probably
spot all the things wrong in that paragraph, but I’ll do it
anyway.

First, the
disgruntled former client says he was looking to buy bullion coins,
but the sales guy switched him to a “collectible.” Whose
fault is it that he allowed himself to be swayed? Quoting Nancy
Reagan, when dealing with a salesperson, often times the best thing
to do is “just say no.”

Second, if
taking a loss of about 42% on an investment of $5,000 really hurts
his net worth – he shouldn’t have been buying illiquid
coins in the first place.

Third, buying
any “collectible,” or pretty much any asset, at full retail
and then turning right around and selling it, is invariably a sure-fire
ticket to a quick loss.

Finally, who
is to say that the coin dealer that bought the coins off the client
didn’t lowball him? That, too, is part of generating a profit
in the coin business.

While I feel
sorry for the former Goldline client, he really can’t blame
anyone but himself for that loss. He didn’t do his homework
or stick to his guns when the salesman tried to move him up to a
higher-margin product line.

As for the
company, I don’t know them, but I do know that they spend a
lot on marketing and celebrity endorsements. It doesn’t take
a genius to figure out that money has to be recouped from somewhere
– specifically, the clients. Which is why I strongly suspect
that, yes, the company’s salesmen are especially aggressive.
And that they try very hard to load their clients up with high-margin
coins.

Let me recap
some lessons from this article, and based on my own brush with the
business.

First, if
you’re going to become a coin collector, don’t think you
can stumble into it and enjoy any measure of success. Do your homework
– then do some more – before actually laying out your
hard-earned cash. Fortunately, there are a lot of useful resources
out there for you to rely on… pricing guides, auction results,
and numismatic groups, to name just a few.

More important,
however, is that if you are not going to be a collector, then stay
away from anything but U.S. or Canada-minted bullion coins, or bullion
bars issued by the widely acknowledged mints such as Johnson Matthey.

Will the bullion
products be exempt from confiscation, should it come to pass? No.
But trying to avoid confiscation by dealing yourself into a large
loss right out of the box by overpaying for an illiquid pseudo-collectible
is just silly… no matter what the sales person tells you.

What’s
in the ABC Video That Should Concern You

While imminent
confiscation isn’t really addressed in the ABC exposé
of Goldline, there were some things that caught my eye as worthy
of further reflection.

The first
was the contention by the appropriately named NY congressman, Anthony
Weiner, that it was ludicrous to suggest that the government could
ever just confiscate a person’s gold. Excuse me? Deep breath.
If the Weiner were to repeat that contention to my face, the conversation
might roll out something like this…

“What!?!
Did you actually just say what I think you said?”

“Why,
yes, David, I did.”

“Are
you kidding?”

“Why,
no, David, I am not.”

“So,
a government that can invade countries on false pretenses…
arrest people and throw them into prison camps and hold them indefinitely
without trial… whisk suspects off to foreign countries to be
tortured… hit targets in sovereign nations on the other side
of the globe with missiles fired from drones… declare imminent
domain to take private property in order to give it to a hotel developer…
confiscate homes because someone on the property, maybe not even
the owner, is caught with a marijuana cigarette… freeze the
bank accounts of anyone suspected of a crime, then not let them
use their own money to defend themselves… offer known criminals,
murderers even, ‘Get out of jail free’ cards if they testify
against someone else… but they wouldn’t confiscate gold?
Oh, and by the way, Roosevelt already did it once, you moron!”

“Who
are you calling a moron? Security, we have a problem.”

Another deep
breath. Pat hair back into place and resist urge to apply my forehead
to the keyboard.

But enough
of Mr. Weiner.

The second
thing that should concern you – and the EVP of Goldline tossed
Stephanopoulos a soft pitch down the middle on this one – was
when he mentioned that his salesmen have instructions to “advise”
their clients on the best sort of coins to buy. Paraphrasing Stephanopoulos,
“But your people aren’t licensed as investment advisors,
are they?”

No, but I
suspect that, if this witch hunt continues, they may soon have to
be.

Especially
because a congressional committee has been set up to investigate
this serious matter. Surprise, surprise, the co-sponsor of the committee
is none other than Congressman Weiner. Apparently he was chosen
for this particular bit of dirty work. While all of this may be
nothing more than grandstanding and bare-knuckle politicking, any
time Congress gets involved, pretty much anything can happen; keep
your eyes open for a fresh assault on the gold coin industry.

And, finally,
the thing that probably concerns me most is that, whatever else
he is, Glenn Beck is a highly visible and apparently effective critic
of the current administration. Having failed to knock him off the
air by unleashing a well-financed boycott that chased away many
of his advertisers, it appears the Democrats are now pursuing their
vendetta against Beck by attacking the business practices of the
show’s largest sponsor. No matter what your opinion is of the
man, this sort of determined government-backed assault should make
your antenna go up.

Is Goldline
an angel? Based on my experience with the industry, probably not.
But in this case, I’m not sure that that matters as much as
that they sponsor Beck’s show.

A Final
Word – on Confiscation

Do I think
confiscation is imminent? No.

But I do think
that the straws in the wind point to yet more regulation. This could
ultimately place gold dealers under the watchful eye of the SEC
or some other Frankenaucracy that emerges out of the new financial
reform legislation.

I am not a
fan of regulation – even if it sounds like a good idea. For
instance, to protect the ignorant from predatory salesmen. My rationale
is that this is not a perfect world and never will be. Humans can
and will find a way around every rule (witness the fact that Madoff,
the former head of the NASDAQ, was able to scam billions off clients).
Therefore, the sooner the citizenry learns that they have to rely
on their own common sense – and actually educate themselves
– before reaching for their wallets, the better. Having an
implied government blessing over every transaction does nothing
but create a false sense of security.

But that’s
just my particular, and some think peculiar, world view. Back in
the world we live in, any new regulations will, if nothing else,
assure that any private transactions between you and your favorite
coin dealer will become a thing of the past. The new reporting requirement
on purchases of over $600 pretty much makes that a reality.

With this
new layer of reporting in place, should the sovereignty come to
the conclusion that it, versus you, should be in possession of your
gold – they’ll know whose door to knock on.

Of course,
we can’t know if and when such a thing might occur… but
to pretend it can’t is to be naïve or, in the case of
Weiner, disingenuous.

In my article,
“I Smell a VAT,” I touched on some ideas for how you might
protect yourself from a possible gold confiscation (none of which
involved buying overpriced coins).

There is one
other option I didn’t mention – expatriate. Many of the
happiest people I have met in my life have their passport from one
country, residency in another, and money/gold in a third.

As David says,
getting your money – and maybe yourself – out of the U.S.
is one of the smartest strategies to protect your wealth from the
long and ever-growing arm of the government. Click
here to read
our new report on the 5
best ways of internationalizing your assets
.

David Galland
is the managing editor of Casey
Research
.

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