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Exchange & Capital Controls

Three US bills now propose exchange and capital controls on your investments...

AFTER A LONG MONTH in which attempts to lower the oil price and control the Dollar by talking alone were disappointed, writes Julian Phillips of the, the threat of much higher oil prices and an even weaker Dollar lies ahead, with the risk of a vicious fall in equity markets now thrown in.

   So rather than address the problem of liquidity and negative real rates of interest, the US authorities – through the offices of Joseph Lieberman, head of the US Senate Banking Committee – are proposing what in effect are exchange control measures on commodity markets, both domestically and overseas.

   Tasked with delivering controls over speculation in the commodities markets – speculation that has apparently driven oil and food prices higher – Senator Lieberman has revealed three draft bills. They would sharply curtail the activities of financial investors looking to defend their purchasing power against rising commodity prices by owning or trading those same commodities with futures or options contracts.

  1. Pension Fund Ban: The most extreme capital control proposed would prohibit private and public pension funds with more than $500 million in assets from investing in agricultural and energy commodities traded on a US futures exchange, foreign exchange, or over-the-counter.
  2. Market Limits: A second proposed bill would direct the Commodities Futures Trading Commission to establish total limits on the share of the commodity market held by financial investors.
  3. Position Limits: The third proposal would direct the futures regulator to impose speculative position limits on any stakes not related to real hedging activities, an action that could limit the commodities swaps activities of big investment banks such as Goldman Sachs.

   What are the implications of these moves? Frequently, we have pointed to the coming imposition of controls on the free flow of capital. In the absence of better fiscal and monetary policy, the long-term changes in America's financial position will demand them – at least in Washington's view.

   And Lieberman's proposals, outlined above, lay the foundation of what appears to be a long-term plan to create an environment where the full spectrum of controls both inside and outside the United States can be imposed in a flash.

Lieberman's Capital Controls: The Market's Reaction

   US financial markets may, in theory, be aware of the financial limitations now looming above them, but they have no experience of such measures – last seen in the developed West during the late '70s and abandoned in the early '80s.

   Hence these moves have received no market reaction to date. Which is just how the authorities would like it.
Because of the limitations to financial freedoms that any such measures impose, the first step any monetary authority will make is usually small, seemingly insignificant, or widely populist, such as these from Lieberman appear to be.

   After all, once accepted, it is a small and relatively easy step to tighten these controls. When the reason for their imposition poses a greater threat to the national financial system, it is just as easy a step to make them stringent.

   Re-read Lieberman's proposals carefully, and try to define the terms and limits of his draft bills. Essentially, these measures would require close monitoring of all investors, whether they be private and public pension funds, other investors or speculators. The exchanges themselves would have to run constant monitoring of all positions taken by such investors, so that controls will be effective. That in itself is onerous.

   But it is a fact of life that if you give bureaucrats their head in the financial markets, then the markets will cease to be free and cease to reflect the true picture of demand, supply and clearing price.

Lieberman's Capital Controls: Likely Success

   No doubt, initially, these draft bills would be successful if applied. But then ways to by-pass these measures will be found. Large funds will move capital away from the United States – as well as its apparently subject exchanges in London – and into other countries where investing in these commodities remains free from such regulations.

   The regulators, no doubt, will then seek to extend their control to cover foreign activities, perhaps by punitive taxes on overseas trading of food and energy contracts. And if it is found that – in the absence of "evil speculators" – it is in fact "real hedging activities" that are causing prices to rise, what then?

   There is little that bureaucrats will do other than to increase their regulations and power further, trying to define their permission through licenses or other means.

   Of course, if you believe that this is the full extent of the coming controls, then you have no cause to fear Lieberman's proposals. But if you do not see these controls as achieving their objectives, then you have to accept the likelihood of their extension. Once one does that you have to ask yourself, "Will they get to a point where they affect me?"

   Then you have to ask yourself, "Am I prepared to be a victim or should I take steps now to avoid such controls...just in case they overwhelm my investments?"

   Here at Gold Forecaster, we have advocated such preparations for some time now and continue to do so. Owning Gold Bullion – outright and without gearing – is an excellent start, not least if you have the flexibility to move it offshore quickly and at minimal cost. Because one must place oneself in a position to jump away from the storm, if possible.

   But more than that, one needs to be able to position oneself to enjoy the multitude of opportunities that such controls throw up. Sitting in hard assets may not be enough, in itself, compared to great many opportunities that will appear as further controls are imposed.

   And as for defending your personal property rights and investment freedoms, I have seen such controls strangle the markets in three separate financial environments over the last four decades. Hard-won experience says what is called for is a new approach, for proper positioning, proper structuring of your assets, so as to avoid the negative impact of controls and still reap the many benefits that may come up.

   One does not have to know the exact details of forthcoming government actions, just the principles involved. Then one places oneself in the correct environment, completely outside the web of the controls that can be imposed.

   The first step to take is to accept the principles that the governments are espousing now and realizing that they will affect you. The second step is to act to re-structure yourself so as to be positioned correctly to enjoy the controls that lie ahead.

   With the changes in the global economy, we do not believe that Europe can remain isolated from their effects. We repeat our call to prepare yourself for the new era of government financial and exchange controls.

For our regular weekly newsletter, including updates on how to side-step exchange and capital controls, please visit and subscribe to

JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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