As reported in an earlier commentary called Silver will be Confiscated!, the Optimist is pleased to confirm his opinion that the U.S. government will not confiscate gold from citizens again. When the subject of gold confiscation reaches a sufficient level of audience participation during the coming dollar debacle, the Optimist is confident that the government would willingly take a solemn oath to affirm that the government will not again confiscate gold.
The basis for that sanguine view by the Optimist is yet another facet of This Time It Really Is Different! In 1933, gold was not only money (as we know that it was in the distant past, still is in the present, and will continue to be throughout the foreseeable future), but gold was also legal tender. With gold as legal tender, paper certificates (which were dollars that were "as good as gold") were only promises to pay real gold on demand. Many contracts actually specified payment in gold coins or bullion, and all dollar transactions were understood to be the equivalent of exchanges for real gold. When Roosevelt decided that he needed to subtly encourage the wealthy to assist in alleviating the suffering in the great depression (a process that is described in other forums as theft by the goons with the guns), he was forced to take the gold to get the wealth. Through the miracles of modern finance, however, we are now in a truly different environment in which gold is not legal tender. Most people now think that paper is money, and they do not even realize that gold continues to be the real store of value for all the same reasons that caused countless generations to depend on gold as money.
With gold all but hidden from public perception, the government has a much easier method of separating wealth from people who have it. Now, the government can subtly encourage the wealthy people to assist in alleviating the suffering in the coming great inflationary depression simply by increasing the tax rate (a process that is described in other forums as theft by the goons with the guns). The relatively few voters who have real wealth in the form of gold will discover that the paper profits they expect from a golden umbrella as protection from a deluge of FED printed paper will be substantially reduced through a windfall profits tax (a process that is described in other forums as theft by the goons with the guns).
The Optimist encourages all owners of gold to maintain a cheerful and positive attitude through the traumatic tax process which will separate them from the value of their wealth. Those people can expect to be frequently reminded that the government is doing them a great favor by not forcibly taking their gold, but instead is only taxing away the wealth that gold represents. The Optimist must confess that he considers it possible that the government actually does not want the gold. If they collected a few thousand tons of physical gold, then they would need to hire a fleet of moving vans to transport the stuff. Even worse for the government is that they may need to spend months housecleaning the accumulated junk out of storage in the Ft. Knox vault that once was the repository for America's proud collection of gold bullion, so they can make space there for gold once again. Rumors persist that two decades of non stop gold sales and leasing programs by government and its special friends, which coincidentally was simultaneous with a twenty year bear market for precious metals, may have essentially emptied that once substantial reserve of real wealth. The Optimist is hopeful that those rumors are false, and that the government will soon put them to rest with a verifiable accounting of the gold which the government continues to own.
The Optimist is pleased that he can provide more factual information about the amount of silver that the government has in storage. That amount is zero. Nada. Zip. Government warehouses which once held billions of ounces of silver bullion just a few short decades ago, became completely empty last year. The government is in the unusual position of needing to purchase silver on the open market to continue minting the popular silver Eagle coins. Silver that was once only stored in abundance for use primarily as a monetary material, has been consumed by commercial uses for decades at a faster rate than it could be replenished by mining. The shortfall in which consumption exceeded supply year after year resulted in the current situation where there exist less than a few hundred million ounces of bullion silver remaining in the free world. The demand for silver is insatiable, but the supply that can be provided by mines is much less than the amount consumed. The free world would have almost surely run out of bullion silver by now without the helpful assistance of our most dependable friend and benefactor, communist China. At the expense of depleting its own inventory of precious silver, which China will need in the future to support its own economic growth, China has been the provider of last resort for the ever increasing demand for silver to consume in the world's manufacturing processes. Although pessimists might focus on what will happen in the great silver crunch after the inevitable chill blows through the relationship between China and the free world, it is not the Optimist's intention to dwell on such negative thoughts.
Instead of giving you grim assessments of how terrible it will be when there is not enough silver to meet the essential demands for the full spectrum of users, from photographic film through a multitude of manufacturing processes to production of the advanced weapons systems which form the basis of our national defense, the Optimist will simply and positively assure you that the government will provide the silver that is needed at all levels in our society. Since the government cannot create the bullion silver that has been depleted over decades from storage in our national warehouses, government will do what government does best. Congress will express shock and surprise at the sudden depletion of our national supply of bullion silver, which has only been happening for decades, and they will declare a national emergency as a result of defense contractors and other lessor manufacturing interests being unable to continue without the essential element of silver. The proclamation of national emergency will label owners of investment silver as vile profiteers, and will demand that all silver be turned in to the government in an unselfish act of patriotism (a process that is described in other forums as theft by the goons with the guns). The final end to the process in which silver has been systematically depleted over decades will be a total national confiscation.
Loyal readers, by now, have come to depend on the Optimist to offer positive perspective and optimistic solutions to problems others can only see in dreadful degrees of pessimism. The Optimist will not yet disappoint those followers who depend on his cheerful insights. Just as in his commentary on zero taxes in our lifetime, the Optimist presents a Constitutional amendment which will be clear, concise, and difficult for Congress to dance around. As background, the Optimist proposed this amendment to another newsletter writer almost two years ago, and attached a letter that the Optimist sent to selected members of Congress in April 2003. Although the Optimist must apologize in advance for the lack of socially redeeming humor in the messages which follow, he presents them verbatim in hopes that he will be forgiven for the serious tone that matches the serious situation which lies ahead for our nation. Readers are invited to circulate this message to all who are interested.
Subject : Confiscation of gold and silver is a serious risk
Date : Wed, 09 Jul 2003
There is a clear and pressing danger that precious metals could be confiscated again by the government. As indicated in the message I sent to selected members of Congress (copy below) in mid April 2003, I asked for a "Sense of the Congress" resolution to affirm that the government would not take silver by force from unwilling investors. Such a resolution, however, would be far from sufficient. Not even the 4th Amendment in the Bill of Rights was adequate to prevent the government from confiscating gold in 1933. My suggestion is that the precious metal community should press for a new amendment to the Constitution that clearly states something like
"The government shall not seize, impose excessive taxation on, or otherwise prevent peaceful ownership of personal property that was legally acquired by private citizens."
My suggested amendment is intended to both insure that our ownership of property will be protected, and to also reduce the danger that confiscatory "windfall profits" taxes could be imposed on our investments. Thanks for helping to educate the community on this risk factor.
Here is a copy of the message I sent to a few members of Congress in mid April 2003:
Greetings. Silver is an essential element in America's ability to maintain a strong national defense. High tech weapons systems and military grade photographic processes all require and consume a significant quantity of silver. Current events in the silver markets, however, present risks that silver may not be available in adequate supply to meet the national defense needs of America. The paragraphs below will provide the basis for requesting Congress to (1) restore a USA stockpile of silver as a strategic reserve for use in national defense; (2) clearly confirm that silver resources owned by private US citizens will not be confiscated by the government; and (3) require the CFTC to verify that entities permitted to hold exorbitant numbers of short derivative positions in silver will not pose a risk of catastrophic systemic default that could imperil the entire US financial system.
Looking beyond the end of the Iraq war, the USA and its partners will need to rebuild and replenish weapons systems. Many of those weapons consume silver, which is in short supply at historically low levels. Furthermore, new and advanced weapons systems will also require the unique properties that only silver can provide. A secure and readily available stock of silver is essential for the security of the USA. Unfortunately, silver is being consumed at a faster rate than it can be replaced, so worldwide stocks of silver are being depleted. At some point in the not too distant future, foreign nations will attempt to acquire the above ground stocks of silver, both to ensure their own national defense capabilities and to protect the many industries which consume silver in their economies. Just as Congress saw the wisdom of implementing a strategic reserve of crude oil to mitigate potential shortages, so too should Congress act to establish a safe and secure supply of silver, which is in very short supply and which is vital to the manufacture of equipment that is essential for our national defense. The national defense of the USA requires action to rebuild a stockpile of silver to insure its availability to meet urgent future national security needs.
Despite clear and compelling evidence of the need to adequately prepare America for the inevitable severe shortage in silver, the government may choose the path of indifference and inaction until confronted with a national emergency. Unfortunately, the national emergency caused by a silver shortage in the USA will coincide with a world wide panic to hoard all supplies of silver, and that will be too late to initiate plans to acquire a necessary domestic stockpile of silver. Considering that governments routinely use eminent domain processes to take land from unwilling owners, and the government demonstrated in 1933 that it could confiscate gold from unwilling citizens, it is reasonable for the American public to be concerned about how their prudent investment in silver would be protected during the national emergency that a severe silver shortage will produce. Silver investors are as patriotic as other Americans, and equally willing to make sacrifices for the good of the nation. However, a plan by default for government to confiscate silver from unwilling owners is an unacceptable solution to the rapidly approaching silver shortage problem. Government failure to acquire silver now while it is still available will not be adequate justification for forcibly taking silver from citizens in the future. Congress is requested to specifically affirm that the US government will not confiscate silver resources from unwilling owners.
The price of silver is very cheap by any standard. Silver prices are near historic lows on an inflation adjusted basis, and are substantially lower than the true cost of production. There is a natural economic perception that a material or commodity has little value when its price is cheap, so it would be understandable for uninformed people to mistakenly assume that silver must be in plentiful supply. In contrast to that perception, world stockpiles of silver bullion are almost depleted, and more is consumed each year than can be produced. Silver prices should be much higher, but like a large helium filled balloon that would rapidly rise when released, the price of silver is being artificially held down by two very thin threads. The first is that China and Mexico are dumping silver into the USA at prices which are substantially below the cost of US production. Although that is painful for US miners who are thereby prevented from making a reasonable profit, the foreign dumping keeps prices low for US industries who consume silver, and for the US consumers who purchase products which include silver. The effect of that foreign dumping of silver extends significantly beyond the simple suppression of price by supplying real physical silver needed by industries. It also enables the second weak thread that persistently hammers silver prices to historic lows on an inflation adjusted basis. That second thread is concerted action by a small group of financial institutions who act together to quench price rallies by selling short derivatives on more bullion silver than is known to exist in the world. By selling essentially unlimited amounts of paper silver derivatives, that small group of institutions can effectively stop rallies and force the price of silver back down to lower levels. The Commodities Futures Trading Commission (CFTC) is aware of this massive uncovered short selling of non-existent silver, and it facilitates the process. So long as China and Mexico continue to dump silver at below the cost of US production, the huge gambles against the price of silver by a few institutions result in lower prices and significant profits for those institutions. There is, however, a very sinister hidden risk to the entire US financial system in this process that Congress should address. Please consider what might happen if China or Mexico abruptly stop dumping silver into the US market.
There is no need to speculate about geo-political conspiracies to find a potentially serious problem with US dependence on silver dumped by China and Mexico. For example, China's economic growth is being curtailed by the new disease SARS. As a simple economic response to that reduction in projected growth, Chinese leaders may decide to reduce the amount of base metals (copper, lead, zinc, etc) which they mine. Silver is a by-product of mining base metals, so China will produce less. If China decides to retain its silver for its own national defense and internal industrial needs, then China may make a surprise announcement that exports of silver will be stopped quickly. That announcement would be issued during China's trading day, when the US markets are closed. China's announcement would race through the Asian markets, and would spur maximum accumulation of silver by Asian governments, investors, and industrial users. When the European markets open, the unstoppable tidal wave of much higher silver prices would further intensify as European governments and investors attempted to lock in the small amount of available physical silver for their essential needs. The tidal wave moving west from Europe would be further reinforced and magnified by sharp increases in companion markets such as gold and other commodities. Before the US financial markets could open for business and react to the rapidly escalating price of silver, the financial tidal wave would have crested into a massive tsunami that would smash into the US financial markets. Silver that closed the previous day at less than $5 per ounce would be valued the next morning at more than $50 per ounce, and the price would continue to rise relentlessly because there would be no sellers. The US institutions that the CFTC permitted to be short derivatives for more than 300 million ounces of silver that they could not deliver (in addition to massive shorts in the companion futures markets) would awaken in New York with new debts which exceeded $25 Billion, and which continued to climb each minute. The CFTC would be powerless to assist because there would be no sellers in the futures exchange, but only a rapidly expanding pool of unsatisfied buyers who demanded to take delivery of physical silver which does not exist. A likely emergency session of the CFTC to retroactively change the rules for derivatives to require cash settlement instead of physical delivery would be ineffective because the few large institutions who suddenly owed more than $25 Billion would be unable to provide that much capital. Some of the largest financial institutions in America would be instantly bankrupt, unless the FED came to their rescue by printing tens of Billions in new money to give to the institutions who had bet too much against the price of silver. By permitting a few institutions (that are so large the FED could consider them too big to fail) within the American financial system to sell short huge quantities of derivatives promising to deliver silver which does not exist, the CFTC would be creating the risk of debts in the tens of Billions that the Federal Reserve would be forced to pay off. Congress is requested to require the CFTC to specifically confirm that institutions or individuals who use the derivatives markets to assume large enough risks to potentially damage the US financial system have the available resources to fully fund those risks and to meet the obligations which they assume.
Please permit me to express my thanks and gratitude for your continuing efforts to preserve the freedom of all Americans, and to support the strong national defense which is necessary to maintain that freedom. As it always has in the past, silver will play a significant future role in the national defense and in the commerce of America. Your assistance with insuring that the national defense and the freedom of Americans will not be damaged by an inevitable shortage of silver will be much appreciated.
Reader input appended on 5/19/05:
That was certainly a very interesting article on silver and its possible eventual confiscation. I'd be interested to get a sense of what responses you received from members of congress. But I imagine they were frustrating. So, how should one invest in silver under the circumstances?
Comments by the Optimist:
Congress now has a wonderful system in which you can send emails and letters to every Senator or Congressperson on the Hill, but all of them ignore the correspondence and expect only the person who can get your vote to answer. My Senator forwarded my letter to a Defense office, who replied that I should not worry my empty little head about such trivial concerns. Defense gets all the silver they need from recycling, thank you. I did not waste the postage, or my time, to reply that when the big silver balloon goes up, it will quickly become difficult to impossible to find any silver at an affordable price, no matter whether it had been previously used or not.
I continue to believe that silver is the best investment opportunity in the world at this time. The perpetual problem, both now and in the future, is to prevent all the thieves from stealing your silver. For now, I prefer to not offer any specific suggestions on how to accomplish that objective. Let your imagination run wild!