This article brings the point of view of Claudio Grass from Global Gold in Switzerland.
My advice to everyone is simple and clear: “Get out of the current financial system, avoid paper money and the banking system in general and move into physical precious metals.” David Stockman has put it this way: “ABCD – Anything Bernanke Cannot Destroy!”
Confiscation is already here. I am not talking about outright confiscation of assets, but the confiscation of the buying power by inflating the money supply. If you keep your money in a bank account or “invest” it in bonds, you are actually losing money in real terms (i.e. after inflation). The decrease of your wealth basically results in an increase of the wealth of governments and banks, hence fulfilling the definition of confiscation.
John Maynard Keynes, British economist who lived from 1883 till 1946, once said:
“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
If you believe that the only confiscation will be through inflation and that the current system will still exist for the next 10 or even 20 years, then you can easily invest in assets that use paper solutions with claim status such as funds, ETFs, certificates, claim accounts etc. However you should consider that these solutions all depend on a functioning financial system. Furthermore, most of those instruments contain a “cash settlement clause”, which gives the issuer the right to suspend all redemptions and services in the case of “unusual market conditions” and the like.
However I am personally convinced that our current paper money system will collapse in the coming years. This is not a loose hunch I have, but history has shown that paper money systems only last a few years or maybe a few decades at most. However, eventually they all collapse. The world went through more than 50 hyperinflations in the 20th century alone. If a new hyperinflation would occur, paper solutions will collapse! A lot of paper solutions hedge their risk using the CME; should this central clearing house default, then most paper solutions will not be worth the paper they are printed on.
“Desperate times call for drastic measures.” That will be the argument of governments worldwide when hyperinflation hits. Private property rights will be suspended and the phase of outright confiscation will start. Governments in desperate need of financing will start to nationalize corporations, homes, farm land … and they will probably confiscate precious metals as well.
How can you protect your assets in case of a random confiscation?
The following are some the key topics everyone should address in order to protect from confiscation.
Tip: Storage outside of the banking system
Most importantly take your assets out of the banking system! The ordeal over MF Global has shown that even segregated storage may not offer the basic security one would expect. We have also seen instances in the US where client advisors in banks had to open their clients’ safe deposit boxes in orderto confiscate their gold on behalf of the government. Due to the tight link between banks and governments, confiscation of assets usually starts in the banking system, by freezing all assets. Furthermore safe deposit boxes are not insured against theft or fire; it might be possible that access to your safe deposit box is forbidden for a longer period of time if the bank goes bust or in case a bank holiday is declared.
Tip: Diversification across safe jurisdictions
Keep assets outside of the country you live in and in a safe jurisdiction where property rights are respected and the power of politicians is limited. In my view, the most secure place today is still Switzerland. Swiss politicians are only marginally better than others, but Switzerland has some key advantages:
- it has a strong federal structure limiting the power of central government
- it is the last remaining direct democracy left on this planet, the power of politicians is therefore limited.
Nothwithstanding the above, we at Global Gold also believe it doesn’t make sense to put all eggs in one basket. Therefore we recently started offering storage in Hong Kong and Singapore as reasonable alternatives. The main argument for these two locations is the fact that China and the city state of Singapore have imposed the fewest impediments in the past decade and that China openly talks about their objective to make the Remimbi the world’s new reserve currency by 2015.
Tip: Avoid countries which have confiscated gold in the past
Avoid storage locations in countries which have already experienced government confiscation in the past such as the USA, Germany, Italy and Russia. Although the British government so far never confiscated precious metals, I would be extremely cautious storing it over there. The reason is that the UK lost its independency since they gave up the Empire after WWII (they became the junior partner of the USA).
Tip: Find out under which law your broker or storage partner is operating
If you are storing gold or silver with a company which is operating under the jurisdiction of one of the above mentioned countries, it could turn out to be a disadvantage when the government decides to freeze assets on a global basis of a company.
Tip: Find out how can you communicate with your precious metals partner during a harsh crisis
Check the possibilities on how to execute transactions. Is it only possible online and what is the alternative if the internet is down or blocked? Is it possible to communicate via fax, by postal mail or can you organize everything in a small period of time personally on the spot? Try to find out how the account is set up. If it is through a bank (which is most likely the case), then it could take a tremendous amount of time to unwind the assets especially if you believe that the next crisis will involve the financial / banking system again.
Checklist: 10 criteria to consider when deciding on how to invest in precious metals
- It must be a non-banking solution
- Metals must be stored under your direct and unencumbered ownership
- The program must be free of small-print cash settlement clauses
- Metals should be stored at privately owned high security storage
- Make sure your metals are insured and audited by an independent 3rd party
- Make sure the metals are physically stored in the format of your choice (bullion coins & bars)
- Choose a partner that is buying metals from LBMA-Refineries and the most famous Mints (to assure the highest finess and quality)
- Make sure you can get your metals delivered or picked-up at any time without delay (if you have to wait for several weeks, you can be sure that the metals are not stored in the form you have chosen and purchased)
- Check the risk profile in terms of jurisdiction the company is operating under
Download and read the white paper about holding physical gold, which was created by Global Gold and GoldSilverWorlds.
This article brings the point of view of Claudio Grass from Global Gold in Switzerland (September 2012). If you have any further question please do not hesitate to contact him:
GLOBAL GOLD AG, Herrengasse 9, CH-8640 Rapperswil
Tel.: +41 58 810 1750, Fax: +41 58 810 1751, e-mail: email@example.com