As a society we’re not as rich as we thought we were. And there are powerful forces at work, sapping much of the illusory wealth out of the financial system.
Many refer to it as 'financial repression'. Basically the authorities generate a system where inflation outpaces interest rates and returns on savings. And little by little your real wealth is whittled down.
But there are ways to avoid such a ransacking of wealth. Here at The Right Side we take a pragmatic approach. We insist on returns above the level of inflation, and we gather insurance against the ultimate price of financial repression – out of control inflation.
Gold has proved to be a pretty good investment during these repressionary years. It nearly always does well when real (after inflation) returns are negative. And going forward I suspect its value as an insurance policy may prove critical.
But I know many readers are concerned about gold’s efficacy as insurance. I mean, if the authorities want to repress the hell out of you, then they could even put an end to private gold ownership. As one reader pointed out last week, that’s exactly what happened in the USA in 1933. Dealing with the Great Depression caused President Roosevelt to hit the financial repression nuke button – the sequestration of gold.
But I really can’t see it happening.
Today I want to give you three reasons why I think gold holders will be all right. And if you’re still not convinced, we’ll look at few ways to protect yourself – something gold holders probably ought to do anyway.
There’s no gold standard anymore
Back in 1933, people were literally starving in the street. The economy had been in a downward spiral for years. And gold was an integral part of the monetary system. Citizens knew that the precious metal was an important factor for economic prosperity.
So when Roosevelt blamed the horrific economic conditions on the gold hoarders, there was a general acceptance that he was probably right. Hoarding gold was akin to the banks hoarding money today. Something had to be done!
Not so today. If anything, today the authorities tell us gold is useless – a barbarous relic of the past. If so, then how can they argue that they need yours?
They can’t have it both ways...
It’s a point of law
The bottom line is, government has no business seizing the assets of some individuals (those interested in precious metals in this case), while leaving others to enjoy their own trappings of wealth.
Now I’m no big fan of what increasingly looks like an overbearing EU, but its courts offer at least some protection. Today the public has much better access to information about their rights – and they won’t sacrifice their property without a fight.
That’s why democratic governments don’t tend to do all-out property grabs. They’re much more inclined to steal your assets by taxation.
But taxing gold may prove difficult...
The government goes for the easy tax grabs
In a modern world, taxation is a problematic affair.
Multi-national businesses often choose where to ‘domicile’ – and therefore where to pay the majority of their tax. They are mobile. That’s why corporation tax has been on the decline... governments want to attract, not deter tax-paying businesses.
Rich individuals are mobile too. They move to Monaco and work a couple of days a week out of London. David Cameron has ‘rolled out the red carpet’ to rich Frenchmen that may want to work out of London and avoid Hollande’s punitive 75% tax band.
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So mobility is a problem for the authorities. That’s why they prefer to tax immobile things. Recently, as the Greek government found itself in need of a cash injection, it implemented radical tax on property. They even billed the citizens through their electricity provider, thus ensuring payment.
Now, if you’re going to implement tough new taxes, are you really going to impose it on something as difficult to pin down as highly mobile precious metals?
I don’t think so. It’s much easier to tax property and financial savings.
Though I argue that the world is a different place from 1930s USA, there’s no doubt that some things never change.
By saving precious metals, we’re insuring against what could be a pretty rotten social/economic future. And when life is feeling pretty rotten for the many, they’ll probably be looking for scapegoats amongst the few. That could well mean gold holders.
If nothing else, a government in trouble may find it politically appealing to tax gold. I guess you can’t totally rule out the idea that they may even sequester it from the ‘lucky’ few.
As is always the case with taxation, you need to get your protection in early. It’s no good trying to ferret away your gold, or financial gains after the event.
The best way to protect your gold holdings is to diversify your exposure.
If you like ETFs (a type of fund traded on the stock market) then consider buying one abroad - the USA or Canada for instance. You can also hold a gold ETF in a pension Sipp, or Isa – it may help avoid burdensome taxation.
Store physical precious metals in different jurisdictions too. A safety deposit box abroad could work. If that sounds like too much hassle, you could use a service like Bullion Vault. It has established a well respected online business that allows users to buy physical gold and silver stored in New York, Zurich, or London. The holdings are physical bullion specifically allocated to clients.
Spread betting your way into gold exposure may work for some investors too. Gains on spread bets are tax free – and you may find that a bet on the price of gold will still be okay, even if physical holdings aren’t. Remember that you can lose more money than you stake with a spread bet if it goes against you. For more on spread betting, click here.
Though private gold holdings were criminalised in '30s USA, holding gold mining stocks weren’t. Investors who wanted exposure to old yella drove gold mining stocks to fantastic prices. Many stocks multiplied by thousands of percent.
Recently, I suggested a respectable gold mining ETF trading in New York – many online brokers deal US stocks, and it may be worth a look.
Personally, I don’t think gold will be sequestered – it’s just too much hassle in today’s highly mobile world. But it’s probably best to diversify your gold holdings anyway. I certainly do.
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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