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Exchange Controls on Gold?

Exchange controls to fight a currency crisis could impact Gold Investment...

government decides to confiscate gold in the future, what impact might that have on the Gold Price, Gold Mining stocks, and the Comex Gold Futures market asks Julian Phillips of the

We assure you, this is not a fatuous question. Is it possible, you may well ask, under what circumstances this could happen as it did in 1933...? That year, the US government banned the ownership of gold by US citizens and purchased all but rare Gold Coins from the US public on pain of a $10,000 fine or imprisonment. Washington did this at $20 an ounce. Two years later they had revalued gold to $35 an ounce, thus knocking the forced sellers some 43% lower against the metal in terms of their newly devalued dollars. So there is a precedent!

In a later part of this series, we will examine the reasons behind this first confiscation and compare these with today to see if we can expect the same in the months to come? But for now, let's imagine that a confiscation could take place. Further assume that the rare Gold Coins (those trading at a large premium to the Gold Price) are again excluded. This means that high caratage gold bars and coins trading at close to the Gold Price will have to be handed over to the Fed and sent to a place like Fort Knox.

The likely impact on asset values? First, producer shares.

It may sound strange to say this, but investors in gold-mining Exchange Traded Funds will readily concur that gold producer stocks have little to do with the Gold Price, except to define what a Gold Mining company will earn from its gold production. Buyers of gold shares don't expect to influence the price of gold when Buying Gold shares. They are buying equities only, with all the risks of any corporation. The way the gold price affects them is through the price received over the space of the half year and full year when the results are published.

This makes the average Gold Price of prime importance to these shares. Of course there are many who based on their forecasts of the average price of gold will discount this average and reflect it in the price of the shares. Many believe that gold shares are six months ahead of that average.

Now imagine a regime where US-owned gold is confiscated. It may well be as last time that the gold is paid for at a fixed price. It may well be that gold mines in the US are paid that fixed Gold Price and no more. Then the average price achieved from that mine will be the new "fixed" price of gold. One will then be able to measure the earnings of a gold mine and allow some part of the price for the risks attendant on a corporation (management, balance sheet, etc).

Gold mines operating where the Gold Price earned is entirely different from that inside the United States will trade at different levels commensurate with these different Gold Prices. The price of each Gold Mining company's shares will therefore be very different than those in the United States. It could be that foreigners will buy US gold mines shares to get a higher price or U.S. investors will buy foreign gold mine shares to get their higher gold prices. But either way, there will be a separation of the two for sure.

We expect that investors of any kind will continue to be allowed to invest in gold mines no matter where they are in the world. If foreign Gold Mining shares are trading at a different, higher price to those in the US, then the US mines will benefit to the extent that dividends flow into the country. You can be sure that the US will encourage this. After all, the objective of a confiscation of gold will not, at this stage, be to restrain foreign investment, but to bring gold into the hands of government. It all depends on what Capital or Exchange Controls attend the confiscation of gold.

Where life changes for an investor is in the physical and Gold Futures market. If there is no free gold market inside the States (due to the continuous purchase of gold by the US Treasury or Fed), there will be no gold market on which to base the futures and option market inside the States. Perhaps the US regulators will feel that that is an unavoidable cost justified by the reasons they confiscated the gold in the first place.

But the financial world is far too sophisticated to allow such a draconian result. We have absolutely no doubt that London or Paris or Shanghai or Moscow or Tokyo will step into the gap and widen their own Gold Futures and options market or accept new business into their already established futures and options markets. After all, many foreigners buy futures and options on COMEX. Where will they go?

Again we have to understand why gold would be confiscated in the first place before guessing whether US investors could still access these offshore gold markets. It would seem likely that the acquisition of gold would be the purpose, no other. So why prevent US citizens from going overseas to invest in a futures and options market (or physical Gold Bullion) when they can go to invest in any other markets there? It is possible that at some stage the United States would instruct that US-owned gold held abroad be repatriated, forcing delivery first. But this would be at a later stage only, we feel, and it would be very hard to implement.

The only reason this would not be allowed would be because full scale Exchange Controls would have been imposed on US investment overseas. Usually these are not prevention measures but added cost measures. In the United Kingdom in 1971, two types of currencies were used, one for international trade and one for international investment (known as the Dollar Premium). At its worst the international investment currency stood at a 31% discount to the 'commercial' currency. This translated into the export of around 50% more Pounds for investment than for commerce.

The US could experience this in a Dollar meltdown if badly drafted Exchange Controls passed through Congress. And as for UK investors during the Seventies, Gold Investment could still then offer a defense against such ill-conceived government policy.

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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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