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Catching a Falling Financial Knife

Gold Confiscation Lessons from the 20th Century

Commodities / Gold and Silver 2012 Dec 08, 2012 - 07:09 AM GMT

By: Adrian_Ash

Commodities

Three nasty examples of how people lost the gold they owned...

TODAY'S chatter in the trading rooms says some gold owners fear a punitive US tax hike in New Year 2013, with the Obama government targeting precious-metal investors.

Hence this month's sell-off (or so the tittle-tattle says) – akin to the move by Japanese households to sell gold in late 2011 ahead of new reporting rules for precious-metals dealers.



In truth, such a US move looks very unlikely. Ahead of needing cross-party support to fix both the fiscal cliff and debt ceiling disaster, it would be clearly partisan. (Not all US gold investors are Republicans, but very few are Democrats in our experience.) And besides, gold already attracts the higher 28% rate of capital-gains tax in the US, since it is deemed a "collectible". Easier to raise CGT rates across the board, and whack anyone trying to grow their savings in fair measure. It would raise far more revenue, too.

Still, this chit-chat does highlight a key point about gold – the fact that, within living memory, it got special ill-treatment from government everywhere. Western households were blocked from owning gold bullion for 30 years and more after the end of WWII. Over the 20 years previous, their gold had been variously nationalized, compulsorily purchased and stolen.

Not just investment-grade bullion. And not just gold belonging to private citizens either.

1935: Mussolini nabs 35 tonnes of gold wedding rings
The United States "confiscation" of 1933 is well-known (in fact a compulsory purchase, made at the then-price of $28 per ounce before the price was raised to $35.) But with gold still central to the monetary system, many governments were looking to acquire more. With a smile, of course.

December 1935 saw popular Fascist dictator Benito Mussolini appeal to the patriotism of Italy's wives, urging them to swap their gold wedding bands for steel rings instead. Yes, really. On Wednesday the 18th, La Stampa gave over its entire front page to this financing drive:

  • "The most noble rite of 'faith' joins all women in Italy in one heroic will" ('fede' meaning both 'wedding ring' and 'faith' – clever, eh?)
  • "The Queen lays down her wedding ring upon the Altar of the Homeland"
  • "The proud and moving offer of the women in Turin"

Italian women were so "encouraged" by this popular show of patriotism that, fifty years later, they were still ashamed at being forced to part with their wedding rings. Mussolini got 35 tonnes all told. He ended upside down, hung on a meat hook from the roof of a petrol station.

1939: Nazi Germany steals Czech gold in London
You didn't need to be a private individual, nor keep your gold at home, to lose precious metals in the 1930s. Little-recalled today, the Nazis' theft of Czechoslovakian gold reserves caused such fuss in the British press in mid-1939 that the public was fully prepared for war by the time Germany invaded Poland in September.

The Bank for International Settlement had been established in 1930 to try and manage the fast-collapsing international Gold Standard. Based in neutral Switzerland, it was supposed to be above politics, and although its senior staff were all senior central bankers in their home countries, they played by a "gentlemanly" code of mutual support and respect. Unelected both then and now, central bankers held themselves to be noble and independent from the dirty business of democracy or dictatorship.

So when, on 20 March 1939, just after the Nazis marched into Prague, a message was sent to the BIS apparently by the Czech National Bank, the BIS duly passed the message on. It asked the Bank of England (then, as now, the world's premier clearing point for physical gold) to move the metal held in BIS account No.2 to a new BIS account, No.17.

Never mind that the Czechs had already sent word that any instructions would come "under duress" and must be ignored. Never mind that the British parliament had put a freeze on all Czech assets, to defend them against Nazi theft. And never mind that the Bank of England knew BIS No.2 contained Czech gold, and that No.17 was held for the German Reichsbank. Because the Bank of England's governor, Montagu Norman, was also a director of the non-political BIS. And he'd do anything to protect the noble independence of central bankers, applying their "gentlemanly" rules and so appeasing the Nazis one last time, by feigning ignorance of whose gold sat in those two anonymous BIS accounts.

The transfer was done before anyone outside the central banks knew, and the gold was then sold in just 10 days. By the time the story broke in May, the £6 million in proceeds was long gone. (We can find no reference to the transfer, nor to the national scandal starting in May, in Norman's personal diary.)

1966: Britain starts prosecuting gold-coin investors
Two decades after the war ended, and 35 years after Britain quit the Gold Standard, its politicians were busy meddling with gold investment. Because the Pound was falling on the currency markets. So people were buying gold, sending money overseas to buy it and so hurting the UK's already terrible balance of trade. Thereby hurting the Pound yet again.

To try and stem the slide, the Labour government put a block on imports of gold coin, and banned private citizens from owning more than four gold coins. Anyone with a bigger collection had to tell the Bank of England, whose officers would then judge whether the owner was a true collector, or a speculator.

Speaking in the (very heated) parliamentary debate of 13 June, the Conservative MP for Worthing, Terence Higgins, asked why the Government was attacking gold. "People are holding gold because they have no faith in the Government's policy on the stabilization of the cost of living and on curtailing the rate of inflation...Will it take action against other specific assets which are a hedge against inflation?" (Indian households might ask the same today.)

But too bad – the "rule of four" went through (as it became known by retail dealers). By June 1967 some 4,847 people had submitted themselves to the Bank of England's scrutiny, and prosecutions had begun. Exchange controls on gold were finally lifted by the first Thatcher administration's first budget, in 1979.

The moral of these tales? Because gold is no longer central to the world's monetary system, so-called "confiscation" looks a very 20th century phenomenon today. But that may well change. Exchange controls such as Britain had in the 1970s (and which Italy didn't lose until 1999) are more likely. Because people, like governments, want to own gold when they fear inflation, financial strife or political crisis. Holding it at home could expose them to theft or coercion. If they hold it safely at arm's length overseas, even a secure democratic jurisdiction requires clear ownership if you are retain control.

Be sure to get it if you're thinking about buying gold any time soon.

By Adrian Ash
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2012

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

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Catching a Falling Financial Knife