Your Gold Won’t be Confiscated, But Uncle Sam Might Do This
One of the big fears our clients have is that one day, the government will confiscate their precious metals.
There’s a good reason for that fear: In 1933, President Franklin Roosevelt signed an executive order requiring US persons who held gold to sell it to the Treasury at the official price of $20.67/ounce. Roosevelt then ordered that the value of the US dollar be adjusted to $35/ounce of gold. In effect, this revaluation amounted to the confiscation of 40% of the value of the holdings that were forcibly bought by the Treasury.
While there is a legal precedent to the forced sale of precious metals, confiscation of this asset class would be less likely today compared to other asset classes. This is true for several reasons, including the limited value of precious metals held by the general public, the difficulty of enforcing the confiscation, and the fact that the US dollar is no longer backed by gold.
However, another scenario involving gold is a lot more likely. As with Roosevelt’s executive order, it wouldn’t involve direct confiscation. But if you decided to sell your gold, it would feel like confiscation.
If you were born before 1960, you may remember that President Nixon imposed wage and price controls in 1971. The plan was very popular. In polls, 75% of Americans approved the idea.
My mother was one of them. She thought grocery prices were too high. But she changed her mind when her favorite brands started disappearing from supermarket shelves.
After Nixon’s re-election in 1972, he ended most price controls, but the authority for them remained in effect.
In October 1973, the Organization of Arab Petroleum Exporting Countries proclaimed an oil embargo against the US and other countries that supported Israel. Over the next few months, imports fell sharply, and the price of oil soared from $3 to $12/barrel.
Congress responded by extending price controls on oil. The controls succeeded in keeping the price of gasoline relatively low. But shortages – and long lines at the gas pump – quickly followed. in 1979, there was another oil price spike, thanks to a revolution in Iran, a major oil producer. Oil prices rose from $20/barrel to $40/barrel in just a few months. With price controls still in effect, long lines at gas stations started again.
President Jimmy Carter had the good sense to begin a phaseout of oil price controls. But in exchange, he signed a bill in April 1980 that imposed a windfall profits tax on the domestic oil industry. The tax was imposed on the difference between the market price of oil and an adjusted base price.
Not surprisingly, the tax discouraged domestic oil production. It also led to the loss of more than 100,000 jobs. America’s dependence on imported oil, which wasn’t subject to the excise tax, soared. These circumstances led Congress to repeal the windfall profits tax in 1988.
You might wonder how this history is relevant to gold confiscation. Well, America’s national debt has now surpassed $22 trillion and is increasing at a rate of more than $1 trillion per year. Uncle Sam also has more than $200 trillion in unfunded liabilities – promises made to federal pensioners, Social Security recipients, Medicare beneficiaries, and more.
I’ve written that the US can endure these enormous deficits for a while because we’re living in a profoundly deflationary environment. And that could last a decade or longer. By that time, our national debt could easily exceed $40 trillion.
But deflation won’t last forever. And the impact of all the deficit spending will eventually lead to an inflationary rebound. The Fed will increase interest rates to fight inflation. Sooner or later, there will be a breaking point; interest rates will rise so high that Uncle Sam won’t be able to make even the interest payments on the debt, much less pay it back.
One way Congress could deal with the crisis is austerity measures – sharply cutting Social Security and Medicare payments and imposing higher taxes. Austerity would likely lead to a depression worse than the one our parents and grandparents experienced in the 1930s.
Congress could also direct the Treasury to create more money out of thin air. But that would be like throwing gasoline on a fire and would likely lead to hyperinflation.
There’s a third option: a “soft” default on the debt. It would involve a deliberate devaluation of the dollar to allow Uncle Sam to pay back debts at a much lower value. To regain investor confidence in the devalued dollar, the government would need to reinstate the dollar’s link to a fixed standard of value – most likely, gold.
If the dollar were linked to gold at a fixed price of $15,000/ounce, investors would have the confidence that, even with a sharply devalued currency, Uncle Sam could pay its debts. Of course, existing debt obligations would instantly lose most of their value. Anyone holding Treasury bills, notes, bonds, or any other debt instrument denominated in dollars would be economically devastated.
But a handful of Americans – those with the foresight to accumulate gold (and perhaps silver) – would be richly rewarded. At least on paper, they would enjoy huge “windfall profits.”
Most Americans would be outraged at the enormous profits a privileged few made just like they were in 1979 when oil producers benefitted from higher prices. They’ll put enormous pressure on Congress and the President to punish the evil speculators who treasonously bet against the dollar by buying gold.
The President probably can’t impose a windfall profits tax by executive order. That’s because the Constitution gives Congress clear control over taxation. Still, the President might try to impose the tax by decree, and it might work if there’s enough popular support for the measure.
It’s likely, though, that you’ll have some announcement that the tax is pending. At that point, you’ll need to make some fast decisions.
One option is to sell your gold at the higher price and hope Congress doesn’t make the tax retroactive. You’re taking a risk, because the Supreme Court declared in 1981 that the Constitution doesn’t prohibit retroactive tax increases.
You could expatriate – give up your US citizenship – and then sell your gold. But the exit tax in effect since 2008 imposes tax on the unrealized gains of an expatriate. A substantial amount of gain is not subject to the tax (currently, $725,000), so if your windfall profits are less than that amount, which would be adjusted for inflation, they wouldn’t be subject to tax. And of course, you’ll need a second passport so you can live in another country legally and not become stateless.
Another option would be to hold your gold and hope the windfall profits tax on gold is eventually be repealed, as the one on oil was in 1988. That would work if the tax was imposed on realized and not unrealized gains. But of course, there’s no certainty that unrealized gains would be excluded from taxation or that the tax would eventually be repealed.
You could sell your gold secretly without telling the IRS. That might be possible if you held it offshore in a private non-bank vault. Of course, if Uncle Sam ever discovered you were a tax scofflaw, you would face heavy penalties and a possible prison sentence.
You also could keep your gold in a Roth IRA or a Roth solo 401(k) plan. With either type of Roth, you don’t get a tax deduction when you establish or add to the plan. But you also don’t owe tax on any increase in value. Unless Congress changes the rules, gold held in a Roth IRA shouldn’t be subject to a windfall profits tax. Of course, Congress changes the rules all the time.
One thing is for sure: US federal debt is on an unsustainable trajectory. Uncle Sam will eventually need to choose between a deflationary depression, hyperinflation, or a soft default on American its debt.
Make sure you’re ready for the consequences of that decision with your own Plan B.
Protecting your assets (and yourself) against any threat - from the government, the IRS or a frivolous lawsuit - is something The Nestmann Group has helped more than 15,000 Americans do over the last 30 years.
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