The Risks You Run When You Own Gold, and the Danger You Face If You Don't

This speech was delivered at the Steve Sjuggerud Conference in Long Beach, California on Wednesday, January 28, 2004.

At breakfast a nice young man set aside his French toast to ask me, “Burt, how do I know if a coin dealer is reliable?”

I answered without hesitation. ” To start with, make certain he has been in the business at least 43 years 7 months and 11 days — Make that 12 days.”

You guessed it, that happens to be my tenure in the trade, and I admit my sassy response sounded self-serving. You don’t need a novice practicing on you whether he is selling a Krugerrand, a Proof Seated Dollar or, anything for that matter.

Some years ago, I was seriously troubled by a potential tax problem. I foolishly mentioned the matter to my family attorney. As he listened to the details, his face drained of color, and I feared he would pass out. Irving was clearly the wrong lawyer for this problem,

If I need brain surgery, I want a doc who has handled so many cases that my particular tumor is almost boring.

Which gets to my subject matter for the day: “What risks does the first time gold buyer face?” And, the follow-up, larger question: “Is there a downside to owning gold?”

Answer: Yes, there are reasons NOT to buy and own gold. (These reasons apply to silver and platinum as well)

Here are just a few:

  • There is a risk in holding gold! All the crooks, those in government and those in the private sector all want to get their paws on your gold. Some of my crusty old-timers are comfortable ONLY when they sit, shotgun in hand, on top of their coins.

  • There is a cost to holding gold. Not only do you pay for Safety Deposit boxes, the gold owner is also “punished by losing interest” he might have received from other investments.

  • Your government will start to regard you as peculiar. Buy a Treasury Bill, or a share of IBM, and you’re a fine citizen, a patriot. But, buy an ounce of gold, and “there’s something wrong with you.”

    You may be one of those “paranoid crazies” who owns guns and writes letters to his local newspaper.

    Speaking of paranoia, I have been invited to join Paranoid’s Anonymous, but they won’t tell me where the meetings are.

  • A high percentage of gold owners will never use banks to store valuables. They would rather hide things around the house.

Which leads to a new and scary risk. As we age, we are inclined to forget things — What was I talking about?

Oh yes, forgetting where you put things.

I have a pal, Kurt, who was barely in his 50s at the time. He owned 7 or 8 investment-grade diamonds, D color, flawless, VVS 1 or, however they grade those things. Kurt had paid over 12 thousand dollars for each.

Well, he couldn’t recall where he’d hid them. But, he wasn’t worried. He was confident he would find them when he REALLY started to look. One day, he REALLY started to look, but didn’t find them.

Panic set in and he compounded the problem by telling his wife about the missing stones. She took over the search, located a hypnotist who was renowned for delving into the subconscious, and poor Kurt was subject to 3 tortured sessions with a fat lady from Romania.

Result: No diamonds! (unless the hypnotist had them) — and although Kurt has no conscious recollection of the three evenings, to this day, whenever he smells garlic, his left hand gets numb.

A month later, Kurt wisely told his wife the white lie that he found the missing diamonds and sold them at a profit.

He confided that it all came back to him in a flash on New Year’s Eve while watching an old Guy Lombardo video tape. Every male in sight was attired in a tux. That did it.

In searching for a place to hide his precious diamonds, what could be more plausible than placing them in the pocket of an old tuxedo that no longer fit?

He also remembered depositing a trunk full of old clothes in a giant Goodwill box at the local shopping center.

Lesson: If you hide something, better tell someone younger what it was you hid and where it was you hid it.

Some folks think that the greatest risk of all to the gold owner is confiscation. They use 1933 and the events that took place that year as their evidence.

I don’t share the view that confiscation is that great a threat. The situation today is unlike 1933. Gold is not circulating money and those who own gold are regarded as wackos. Let them go unnoticed seems to be government strategy.

I’m not minimizing the threat government poses to assets and privacy. They can come and take your living room furniture, but I do not think confiscation would be their weapon.

Some who contend that there is safety in holding gold coins dated prior to 1933 haven’t thought out the premise.

Can you imagine the absurdity of a bureaucrat standing at your front door with an eye loop examining your gold coin to see if it’s legal or not?

Let’s review what happened that fateful year. On April 6, 1933, a month after his inauguration, FDR demonetized gold. The $20 gold piece was no longer money. Well, since it wasn’t money any longer, bring it to the bank, they said, and we’ll give you a $20 bill for it.

That’s called theft.

In January of 1934, The Gold Reserve Act changed the value of an ounce of gold from $20.67 to $35. Somebody almost doubled their money! Anybody we know?

Here’s an interesting historical aside: Prohibition was just about coming to an end. It had been a disastrous, failed social experiment. Prohibition spawned the crime families, which endure to this day.

Other great American dynasties were enriched by Prohibition. Joseph Kennedy, the clan’s patriarch, held the contracts with the Scotch Distillers. He could legally import the good booze to Canada, and, then, the bootleggers and rumrunners took over. Magically, the illicit hooch appeared off the coast of California destined for thirsty residents of San Francisco and points south.

The proceeds probably wound up back in Europe. The system was too good to scrap.

The UK demonetized gold in 1931. The handwriting was on the wall for the US. A million dollars was a lot of money in those days, but there were folks who could raise much more for a “sure thing.”

A million dollars bought 50,000 $20 gold coins. It boggles the mind how many coins were legally “purchased” through the banks, sent to Canada and then on to Swiss banks.

To this day, over 70 years later, US gold coins are still available from European banks. That gives you some idea of how many left the US between 1931 and 1933.

I don’t believe anybody was ever prosecuted for not turning in gold coins, nor for sending them out of the country.

Unfortunately, most poor schnook citizens turned their few gold coins in because they were told to do so.

Some months ago I wrote an article for describing why “The King Doesn’t like Gold, He never Has, He Never Will.”

Gold is synonymous with freedom, and most of the kings we see these days are hardly interested in expanding the freedom of their vassals.

We should regard anybody seeking the throne with suspicion.

Well, I’ve used all of my time telling you why gold is a problem to buy and to hold.

I never got around to telling you the danger you face if you DON’T own gold.

For now, all I can say is that NOBODY ever went to the Poor House buying gold.