Gold investor’s biggest risk is political

1930’s repeating itself
Governments in advance economies are running out of financial ammunition to fight bankruptcies. The financial bazooka continues in the global financial markets. All financial transactions carry a risk. While I am convinced that your gold and silver investments will pay off, but they don’t come without risk. What do you suppose is the biggest risk we face today? Another 2008 style sell off? Gold stocks never breaking out of their funk? Maybe a Depression that would slams our standard of living very soon. You bet. Is the history repeating of 1930’s? I think, this time would be different and even worst than 1930. Kenneth Rogoff, from Harvard University in his Book, “This time is different: Eight centuries of financial folly” has mentioned many things that solidify, the history is repeating itself argument.

Political risk or economic risk
Though those things are possible, I don’t see that as your greatest threat: Your biggest risk is not that gold or silver may fall in price. Nor is it that gold stocks could take longer to catch fire than I think. Not even the prospect of the Greater Depression. Investor’s biggest risk is political. As bankrupt governments Greece, Italy, Spain, Ireland, Portugal, USA, and UK get increasingly desperate for revenue, any financial/real/monetary asset held domestically could be a target. Interesting book by Barry Ritholtz “Bailout nation, with new post-crisis update: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy” shares exciting insight about an engaging look at what led to the financial turmoil we now find ourselves in advance economies. Honestly, the party is over. It is absolutely essential that every investor diversify themselves politically and economically. In fact, at this point, it is one action that should be taken before anything else. Diversification strategy is the key across countries, currencies, equities, bonds, real estate and commodities. I know many reading this are prudent investors. These investors own gold and silver as solid protection against currency debasement, inflation, fiscal indiscipline and faltering economies. They set aside cash for emergencies. They have strong exposure to gold stocks, both producers and juniors, positioned ahead of what is likely the next-favoured asset class. They feel protected and poised to profit. Investors should remain ahead of the curve in these volatile markets. Yet, despite all this preparation, investors remain exposed to one of the biggest risks i.e. Political Risk. Similar to holding a diversified portfolio at a bank without checking the institution’s solvency, many investors keep their entire stash of precious metals inside one political system without considering the potential trap they’ve set for themselves. While storing some of your gold outside your home country is not a panacea, it does offer one important thing: another layer of protection. Valued investment strategy in the long run can protect wealth.

AMERICAN PERSPECTIVE AND ITS GLOBAL IMPACT
Consider the exposure of the typical US investor:
1) Systemic risk, because both the bank and broker are US domiciled;
2) Currency risk, as virtually every transaction is made in US dollars;
3) Political risk, because they are left totally exposed to the whims of a single government; and,
4) Economic risk, by being vulnerable to the breakdown of a single economy. Viewed in this context, the average US investor has minimal diversification. The remedy is to internationalise the storage of some of the precious metals.

THIS ACT REDUCES 4 PRIMARY RISKS
A) Confiscation: I don’t know the likelihood of another gold confiscation. It did happen on 5th April 1933, when USA government confiscated Gold to give boost to its balance sheet. All persons were required to deliver on or before May 1, 1933 all gold coins, gold bullion, and gold certificates owned by them to a Federal Reserve Bank, branch, or agency, or to any member bank of the Federal Reserve System. I do know that things are working against many US investors at the moment. With $14.9 trillion of debt and $117 trillion of unfunded liabilities, the US government will likely pursue heavy-handed solutions. Under the 1933 FDR “gold confiscation” in the US (the executive order was actually a forced delivery of citizens’ gold in exchange for cash), foreign-held gold was exempted. Value loss to the holders of gold to US residents in 1933 was 43 per cent at that time. Gold holding was criminalised in USA in the 1930’s.
b) Capital Controls: Many think some form of capital controls lie ahead, limiting or eliminating a citizen’s ability to carry or send money abroad. If enacted, all Americans capital would be trapped inside the US and at the mercy of whatever taxing and regulating schemes the government might concoct. Although they might be able to leave the country, however, their assets could not travel with them.
C) Administrative Action: There are plenty of horror stories of asset seizure by a government agency without any notice or due process, possibly leaving the victim without the means to mount a legal defense. Having some gold or silver stored elsewhere provides what could be the only available source of funds in such a scenario.
D) Lack of Personal Control: Having gold and silver stored elsewhere adds to the best options, people can pursue. Americans will have a source of funds available for business, entrepreneurial pursuits, investment, pleasure or travel.
Notice above I have said these risks can be reduced, not eliminated. After talking to so many American friends, I have shared this article on their insistence. There is no perfect solution; US persons could, for example, be compelled to pay a “wealth tax” on assets held worldwide, or even repatriate them in a worst-case scenario. Absent a crystal ball, the political diversity of asset location is an essential strategy against an uncertain future to get economic freedom.

Foreign-held assets also require greater awareness and planning
1) Access to the metal or sale proceeds may not be quick. Therefore, this option is for those with some gold and silver stored at or near home. I do not recommend storing all of your precious metals overseas; that defeats one of its purposes, to have it handy for an emergency.
2) While I think the US poses the greatest challenge, a foreign government could move to control certain assets as well. The risk varies by country and is generally greater within the banking system than with private vaulting facilities.
3) Understanding and complying with reporting requirements is essential. The bottom line, though, is that foreign-held precious metals can mitigate risk and give investors more options. And as the metal holdings grow; diversification becomes more crucial and strategic in the long run. Given the current rapacious climate in USA, it’s likely that simply buying gold won’t be enough. I strongly suggest every investor diversify one’s bullion storage outside his/her current political regime. The option may not be available someday, leaving investors vulnerable without a secondary source of bullion. Happy investing in gold with effective due diligence.

Shan Saeed is a financial market economist and commodity expert. He has 12 years of solid financial market experience. Graduated from University of Chicago, Booth School of Business, USA & IBA Karachi. He can be reached at Blogs at