Genre: Opinion/Argumentation

Why Sinclair Is Wrong About Gold Confiscation [ The following turned up in the Rick's Picks forum. However, it was unrelated to the discussion concerning White Gates Farm, and so I am reposting it below: 1) to give it greater visibility; and 2) because I share the author's skepticism that the gold price will achieve the stratospheric heights that Jim Sinclair has predicted (even if I am not so confident that government will not someday confiscate bullion or curtail its free exchange).  The author, who goes by the handle 'Doc,' blogs at silverdoctors.com RA ] Well, Thanksgiving is over and so if I may I would like to begin a new conversation on the issue of Gold demand and Central Banks. Jim Sinclair has recently stated in response to one of his readers that Gold confiscation is not an issue of concern; that it is an unlikely scenario. He has strong views on the subject. More specifically, he wrote: "There was much to be gained by gold confiscation in the 1930s because we were on a gold standard. Gold in the 1930s was the only instrument of QE. It is not now nor will it be again in the future. There is no reason except some sort of fear of revenge to consider confiscation of gold, gold shares or the gold ETFs now. Those that worry so much about this do not really understand what gold was under a gold standard". I beg to differ. I think Jim's argument is not well thought out as he fails to consider the varied number of reasons for Central Bank accumulations that we are now witnessing across the globe. So I have penned a response to him that I will repost here at Ricks Picks for the benefit of others who may want to weigh in with their own views on this discussion. Reposted from Silver Doctors: Jim Sinclair is overlooking the fact that the purpose of Gold is to give essential meaning to a currency. Central Banks have taken a keen interest in the metal in the past few years for its virtues as a settlement mechanism and its use in assuring the legitimacy of their respective sovereign currencies. This is precisely what makes it a target for confiscation. With no gold-backing whatsoever the exercise of printing money for trade is near to pointless with so much risk currently in play and this is particularly so for nations without alternative reserves of wealth to support the money it offers abroad. Lets keep in mind that most Western countries have continued to carry gold on their books despite the fact the gold standard was eliminated. Now why would they have bothered to do that? This is not the case for every Western nation of course. Canada for example has virtually no Gold holdings whatsover however this problem is overcome as that country is well endowed with both oil and agricultural production for export. These indirectly serve the purpose of Central Banks needs for holding collateral against any potential default risk to other nations. Let's also recall that the purpose of Gold in the past was to facilitate trade between nations. In the absence of any other mechanism or product to exchange gold has served the purpose of payment to satisfy creditors. The alternative of course is the direct exchange of food, industrial commodities, energy or specialized services. In more modern times however fiat currencies have substituted for gold as the fluid to make the system work but as we are seeing cracks appear in exchange mechanisms a new interest in Gold has arisen. A country that can meet the capital needs of the market where trade is concerned by supplying alternative resources that are in demand does not need Gold as backing nor its collateral for external purchases and imports. In this case fiat suffices and it is accepted on face based on a nations resource strengths. Fiat in this case is more than adequate where a nation is not questioned regarding its solvency. The US itself is well endowed in the worlds most essential and demanded resources which include energy, food and minerals. All these it has available for export. In the case of Corn and Soy it may be the global leader. Its currency is thus not in doubt despite heavy indebtedness in the same way we question European solvency. The point though is that balancing trade between nations is of much greater significance than how a country exchanges goods and services within its borders. The currency issue is one of international relationships and as gold is borderless it is where Central Banks will turn to insure those trade relationships carry on without regard to risk while proving it can collateralize its currency for trade. As a medium of settlement there are few simpler alternatives than Gold but it is not the only choice as I have already noted above. So when we also consider that other Central Banks around the world are now bolstering gold stocks against a backdrop of widespread currency devaluations then it should be clear to even the children in the room that moves are afoot to stabilize trading realationships and reduce currency risk while also insuring transaction liquidity is sufficient in a worst case scenario. A worst case situation would be the collapse of the European Union and the possible dissolution of the Euro with the concommitant risk of multiple sovereign defaults and bond failures. This is not just a possibility in the minds of some economists but an inevitability although I seriously doubt the Euro is truly at risk. So how do you protect yourself against such a scenario at a time when social discord may overrule current political dictates? Let us not forget the ballot box and how it may bring less cooperative elements to the forefront as a disenfranchised electorate chooses those with more radical solutions to our collective problems. The world is clearly becoming more discordant as job losses mount and living standards decline during this period of deleveraging (particularly in Europe) and this presents stability risks on both a Sovereign and global level. Witness the rise of Neo-Nazi parties in Greece, separatist movements in Spain and anti-Euro groups in the Northern countries as just a few examples of more divergent political movements in Europe that present hazards to the current group of policy makers and leaders. Any prudent Central Bank would naturally look to Gold under these circumstances as a backstop against potentially serious fiat losses (in a default scenario) and as a means of providing insurance in preserving the viability of its banking system while protecting the real gains their country may have acheived through past trade activities. Indeed, we are seeing exactly this scenario unfold much to the delight of many in the Gold investing community who perceive CB buying as a primary impetus behind future price rises in the yellow metal. Let me assure you though that what lies at the heart of this exercise is not greater price volatility but rather price stability in metals versus currencies. Investors should bear in mind that we will likely never see the more more extreme valuations that some people have proposed as discipline is gradually brought back to our money production processes. We are now discovering again what value is where a currency is concerned and as regards resource strength I have few doubts about the sanctity of the Dollar as a global reserve currency. How deeply it may yet fall is another question but there is now a widespread acknowledgement that we may be reaching the end of the thin branch that permits nearly unlimited printing to resolve the shortfall in genuine economic activity. The resolution to the dilemma will likely come about as inflation pressure mounts and velocity bounces off its historical lows. It is then that some of the excess liquidity must be withdrawn. No doubt Gold prices in US Dollar terms will benefit in the meantime but a price point of 5 or 10 thousand dollars per ounce is just preposterous and probably spells the end of the currency in our lifetime were it to occur. As Basel III seeks to make Gold tier one we cannot help but note this suggests moves are afoot to reduce unpredictability and volatility in Golds price movements which is actually contrary to the thinking in the Gold community that seeks speculative gains. And so it is this money, (that which is earned abroad that I discussed above) that has come through exports and the honest efforts of its citizens which needs protecting as opposed to the internally generated transactions and cash accounts. Internal transactions in a country are much less relevent than external trade where the issue of Gold-backing is concerned. Do we not measure our success versus other counties in terms of our relative trade in goods and services? If the cash reserves we hold in our balance of trade accounts in another nations currencies are being devalued sharply are we not at risk of loss? Let's keep in mind we need to pay our bills to others as well. Will they continue to accept our word that we are good for the invoice or should we not be showing evidence of solvency via a backing mechanism whether it be oil, corn or metals? Gold as a first order is proof to others that we can collateralize and meet our obligations when necessary. From this perspective it becomes easier to understand why China, Russia, Brazil, Mexico and many others are in the process of bolstering gold holdings. This is no casual event. Billions upon billions are being spent by the various nations on an object with no intrinsic use. Now why would they be doing that? Furthermore, why would they be doing so in such numbers and volumes? Part of the answer of course is that gold makes up for deficiencies in other areas of their respective economies although that is really a topic for another day. It should be clear though that Gold has been the object of serious interest to some CB's for a number of years now and that this interest is growing as global currency uncertainties evolve. At some point though there will not be adequate sources of supply for all CB's with a desire to accumulate and this is where the rubber hits the road. Confiscation is all but assured on this basis although where it happens first is unclear. It is worth considering that the price of Gold will subsequently become mutually managed by the collective will of our banking community for the good of preserving and stabilizing trade exchange and value between nations. The unfortunate use of the word "confiscation" is a misnomer in my opinion and it has been over used by those who fear government with an eye to accumulating reserves. Simple trading bans and offers to purchase from private holders are sufficient to achieve the goal of acquisition without causing alarm. This is not a forced move but an offer to exchange where no other reasonable offers exist. I also believe we are evolving towards a hybrid system of currency valuation and that all the major players including China will play a role in the development of this new regime. Gold has a keystone position in the new heirarchy and so it will not be overlooked. Take note though that these activities we are witnessing where Central Bank acquisitions are concerned are quite outside the needs of the individual who pursues Gold for personal or speculative purposes and therefore the collective needs of the global community of nations will take precedence over the private desire of individuals. Put more simply, Gold is heading back to the vaults of nations and its use in private transactions will therefore be diminished if not eliminated altogether. That is why Jim is wrong and it is why the inevitability of Gold "confiscation" is assured. Besides making a lot meaningless noise you have proven nothgin whatsoever. Have you ever read the executive order by FDR? Did you notice they confiscated the notes and bars only. Coins were left alone, as they were deemed collectible. Also FDR confiscated GOLD because it WAS USED AS MONEY then. People would have horded it as PUBLIC debt was failing like today and moving into PRIVATE investments, like stocks, gold , silver & collectibles. Gold holds 1% of the world's investments. There is not enough to go around anyway or make a difference. The US Treasury could easily change the price from $42 to whatever they want. Who and what army is coming down the street with tanks to get your GOLD? These and a million other reasons are what you have overlooked. Study history, know your history and know what goal GOLD plays in the market place before commenting on something you have no clue about. Two of your quotes..."So is U.S.-Canada for example has virtually no Gold holdings whatsover however this problem is overcome as that country is well endowed with both oil and agricultural production for export." As you say, "These indirectly serve the purpose of Central Banks needs for holding collateral against any potential default risk to other nations." Are you not aware of the United States vast oil reserves along with their vast agriculture production? If you watch what is happening there more closely you may see a much different picture of what is occuring on the American landscape. What is going on is vastly more than a planned remonitization of the global system with gold confiscation as one of its sources of backing. This gasoline engine is not being shut down to be revamped to run again on E-gas. You may be right though. Confiscation may happen. And then it may not. It will depend on the fascist in charge. However, I am not convinced by your arguements that gold confiscation is a matter of course. This is much, much more so than about the gold. "The alternative(to gold) of course is the direct exchange of food, industrial commodities, energy or specialized services." All of which has be replied to above, plus the added bonus of an enormous military..... "....understand why China, Russia, Brazil, Mexico and many others are in the process of bolstering gold holdings." You may or may not know that these lessor players out there obtaining gold are doing so in public view and voice only. They are obtaining and holding dirivitive contracts on a hugly leveraged paper position on the physical metal only to appear as obtaining the metals itself. I can't speak for China. Nobody can. I believe nothing without verification coming from China, U.S. or most anywhere in todays world, and nobody is letting out the 'real' on their gold positions today. The case with Mexico was strictly a leveraged 10 to 1 paper grab for what ever the PR of that was about..... You have presented a well thought out case here, that says what it says but I think you may be overlooking some very important issues that are well hidden in the spin everywhere out there today..... Follow Rick's Picks Via Learn the Hidden Pivot Method Intuitive and nearly fool-proof, Rick Ackerman's Hidden Pivot Method will have you forecasting trades and managing risk like a seasoned pro. This two-day online seminar will teach you the precise methods Rick uses to nail down trades with a success rate that is frankly astonishing. Rick's next seminar will be held on January 16th - 17th and 7th . Early-bird registrants before 12/28 save $50 on tuition. (use coupon code: 7D5629 ). For more information on the benefits of The Hidden Pivot Seminar, visit our seminar information page . 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