Roland WatsonThere it sits, reflecting the natural or artificial light and perhaps the glow of your satisfaction and reassurance.
You are a gold or silver investor and you are contemplating this little mound of metal in the comfort of your living room or perhaps some bank deposit facility. Either way, it's your metal and you intend to profit from it in the years to come. When you look at it, you see more than your face. You see multiplied profits, wealth preservation, crisis kudos and true money.
You congratulate yourself on getting in on the bull market early. You tell yourself that anyone getting in early will likely never make a loss in his or her lifetime. That is a good assumption to be working on.
Getting into metals when everyone was getting out is a tried and trusted investment technique. It worked for equities in the late seventies and it has worked for gold since the late nineties. The problem before our hypothetical investor is when to get out.
Perhaps one could apply the reverse technique? Get out when everyone is getting in. That sounds easy, but first you must recognise and respond to a few things. The first is your greed, the second is other investors' greed and the third greed is why I write today.
This greed belongs to "The Government" and they will one not so sunny day want your gold and silver. Before that day comes, you will want your gold and silver to be somebody else's gold and silver. You will want somebody else's cash to be your cash. You will be selling your gold and silver as the political landscape takes on a hostile looking nature.
I have read various commentators on this subject of confiscation and the arguments go along the lines of "not enough gold to be worth monetizing" or "too few silver investors worth chasing". Others remind us that a lot of coin holders held onto their gold after the 1933 confiscation in the USA. Whether that is verifiable or not, holding onto illegal $20 coins for nearly 40 years before the repeal of confiscation was not the wisest course to take. Anyone seeing the confiscation coming would have taken an entirely different course.
Which brings us to today and about 35 years into freely floating fiat currencies - subject to government manipulation of course. Gold and silver don't pop up much except when a crisis occurs. But when they do, handing in your gold or silver becomes a matter of government-defined patriotism. Whether it is done by appeal or coercion is a matter of circumstance.
For example, look at South Korea during the Asian Currency Crisis of 1997-1998. During that turmoil, millions of Koreans dutifully sold or donated nearly 270 tons of rings, necklaces and other gold trinkets worth $2.2 billion to act as collateral for the bailout of the Won. One quote suffices to show the alleged contrast between retaining gold and patriotic duty:
"I sold two gold rings and one necklace", said Lee Suk-ja, a housewife. "It was a small amount, but I take a great pride in taking part in helping the country in time of need."
Out of an estimated adult population of 36 million that is about one ounce of gold for every four adults. One presumes the even more patriotic just gave their gold over free of charge.
Malaysia and Thailand also stirred their citizens to their "patriotic duty" at that time. So we see that in 1997 the Asian governments made an appeal to their citizens to hand in their gold for the local currency or government treasuries. In other words, they asked the people nicely for their gold. At other times, governments have demanded gold on pain of prison or death.
Which brings me to "The Great Confiscation". Why should government seek to renationalise gold and silver - because they have a currency crisis. It's that simple, and the greater the crisis, the greater the confiscation. What will bring on this great confiscation? The answer is oil, or rather the increasing lack of it.
You see, modern money may no longer be backed by gold, but it is assuredly and implicitly backed by black gold. There is only one thing that stops an ever-increasing supply of fiat money from being repudiated by its holders and that is an ever-increasing supply of cheap oil for it to float on.
Cheap oil ensures economic growth, and if there is one thing that fiat money needs to survive, it is an expanding economy. But at some point in the not too distant future we can expect that trend to reverse. Cheap oil will become expensive oil as global crude oil production goes into an irreversible decline. I ask you to forget about what government-sponsored entities are saying about plentiful supplies for decades to come. Yes, we still have billions of barrels; about half of the recoverable oil is still there. But the second half of the remaining oil is harder to get out and is up against more bidders from fast growing economies such as China. Take a look at this chart of American Crude Oil production:
Domestic oil production in the USA peaked about 1970. It is now at about half that level and dropping, it will never hit its 1970 heights again. When M. King Hubbert, a geologist at Shell, predicted in 1956 that the lower 48 states oil production would roughly follow a bell-shaped curve and hit the top of that curve in the early 1970s, he was derided by his peers and superiors. The so-called experts such as the United States Geological Survey (USGS) said there was plenty of oil yet to be found. Shell tried to stop him presenting his conclusions but he persevered and his name is now enshrined in the Peak Oil debate.
The USGS was right about more oil to find, it constitutes the little rally in production from 1977 to 1986 when oil was found in Alaska, but even that was not enough. It could not stop the inevitable - every country eventually hits a point where more oil wells are drying up than ones that are being struck. It has happened to the USA, it will happen to Saudi Arabia, Russia and Iran and probably quicker than their governments would have us believe.
Interestingly, Hubbert also applied his techniques to global crude oil data and concluded that too would enter a decline around the year 2000. As it happened, his conclusions were made before the oil crises of the 1970s that would curtail demand for years. Revised estimates now place the peak variously between now and the next ten years.
Having digressed, the point is this. Fiat money is implicitly backed by oil and that backing is about to undergo the equivalent of an oil super tanker turning around. The oil supply will begin to decline at a certain percentage per year, the economies of the world will proportionately contract, debt and its servicing will come under increasing repudiation, the fractional reserve system will stress and the uncertainty over nations and their fiat currencies will come under siege.
You believe the fiat money system is doomed? Welcome to the event that will really kick it in the teeth.
The dynamics of this are complex as inflationary and occasional deflationary forces blow hot and cold. Demand destruction balances and creates temporary supply relief but recession and eventually depression are increasingly undesirable bedfellows. Welcome to the new era of investing. Welcome to a world of uncertainty and confusion.
Enter gold and silver.
Remember my super tanker analogy? For a rough guide as to how things will pan out, just run the last 100 years in reverse. Think back in economic history about all the major monetary events of that period. Fiat money, oil and dollar crises, Bretton Woods, illegal ownership of gold, major wars, nationalisation of silver and all the way back to a gold or bimetallic standard.
Our reverse gear trip through monetary history will not quite pan out in that detail, but it gives you an overview of what lies ahead and in that timeline lies the increasing nationalisation of gold and silver in all forms (not just bars and coins) as stability is sought in different measures over different periods of time.
This may begin as "The Great Appeal" in the fashion of South Korea but I expect it to end as "The Great Confiscation" in Roosevelt fashion. Governments will have no choice in this matter. The IMF decree of no gold backed currency will be in tatters as nations break rank and seek to increase their gold and silver reserves in anticipation of a currency pegged not to the dollar but to something with a store of value.
Will government finally return to commodity money? I think so. Will they stay on it? History suggests they won't but that will depend on factors that lie beyond the initial impact of Peak Oil.
So, your exit strategy is at the mercy of government. It won't be enough to look at moving averages on charts or the latest gold production figures. Government in its socialist form believes in crisis ownership. When that crisis hits, your gold becomes the government's gold. If they are feeling generous, they may pay you at a discount in depreciating fiat currency.
Plan your exit strategy accordingly. It may even influence your entry strategy as the safest form of precious metals is sought out in a world of confiscation.
You may already believe fiat money is doomed with or without Peak Oil. In that case, just look upon Peak Oil as the black icing on the crumbling fiat cake.
April 24, 2005
This issue is discussed in more detail in issue 2 of New Era Investor. Please go to www.newerainvestor.com to buy the first issue as a sampler or take up the whole annual subscription.
Comments are invited by emailing the author at firstname.lastname@example.org
Email this Article to a Friend