What to watch to foresee imposition of currency/capital controls, precious metals forced sale for paper money ("confiscation")?

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jshayinma@comcast.net's picture
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What to watch to foresee imposition of currency/capital controls, precious metals forced sale for paper money ("confiscation")?

See Forget Greece, The US Almost Had A Failed Treasury Auction on what the author claims was evidence of a near "failure" of the Treasury auction last week of 30-year bonds.  Is this alleged shift in the makeup of the 30-yr Treasury Bond auction last week an early warning of soaring long term interest rates?  If so, how soon, how violent?  Where does one track the composition of the auction buyers, as this author has done?

[Apologies for all the clutter in the file that is attached--the same article as the link, but I could not figure out how to delete the attachment, once I saw how messy it displays.  It will be easier to read the article on the Web using the link than in the attachment.]

Violent up moves in long-term interest rates, along with probably simultaneous crash of the value of the US$ against selected other currencies and especially against gold, would be good indicators that the risk of currency controls [i.e., being able to move money abroad as a not-super-rich private person or to physically carry currency or gold out of the country] and capital controls [obstructions to or prohibitive taxation of investment in foreign assets] will quickly follow.  Corporations and the super-rich will almost certainly be able to circumvent these controls, but someone like myself who is NEITHER, will find it hard and/or scary.

In addition to interest rates on long Treasuries and the value of the US$ relative to other currencies [incl. gold], what else might one watch?  Interest rate spreads of other sovereign debt vs. US Treasury debt?  US Treasury credit default swap rates?  [YES, such a thing exists and trades, even though the financial media in the US never mentions the fact.  Does anyone know a good on-line place to find current CDS transactions re US Treasuries?]

Practical steps to protect ourselves from being ravaged by truly terrible economic and market events requires actions IN ADVANCE of the events.

What I fear, above all, is hyperinflation.  Once it starts and is widely-recognized, it will probably be impossible to diversify holdings of assets that would keep their value and still be liquid.  The most obvious kinds of assets that would hold their value are gold and silver, and the point I want to make here is diversifying the LOCATION of these assets.  Being able to hold precious metals in one or more countries other than one's domicile is an obvious diversification.

The trouble is that this is expensive and fairly slow to implement, especially the first time the relationship or off-shore custody is arranged.  Waiting to do this until it is obvious that it is worth the cost would be to wait until it is too late.

What do people think of the following simple approach?  

First, decide whether and where to open such an off-shore account, versus giving some assets into the private custody of a friend or relative abroad.  [Going into the decision to use a custody account will be whether one wants to be able to take delivery or not, whether the account is "allocated" or "pooled," what country, the transparency and meticulousness of the paperwork, etc.]

Second, [assuming the custody account format], find out if the chosen organization is willing to complete the paperwork to open an account without actually purchasing some precious metals to put into it, with the expectation that with the account open, it would be possible to wire money to it to make the purchase very quickly, once one has decided that this is necessary.  I have no idea what different outfits' posture is toward this.  However, it is possible that some people reading this will conclude that this sounds like a prudent thing to do with a fraction of one's assets, and go ahead and make the minimum purchase necessary to create and keep open the account.  In the case of the Bullion Management Group in Canada, this would be a single 1-kg gold bar, 50 Troy oz. platinum bar, or 1,000 Troy oz silver bar, the latter being the least up-front money to open the account.  It would then be possible to wire larger additional sums for purchase the moment one decided this was a good thing to do.  An advantage of doing it this way is that the whole mechanism has been "exercised," e.g. getting the wire transfer set up at one's brokerage house or bank--these things take some time, and the funds do not transmit instantly abroad, at least for mere mortals like myself. 

strabes's picture
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Re: What to watch to foresee imposition of currency/capital ...


I think your approach is prudent.  The only risk is, even if you get the account setup, waiting until it's too late to wire the funds and acquire the metals.  Both parts (wiring funds, and acquiring metals) have an associated risk and it's possible the latter might be prohibited even before the type of capital controls you're talking about.  Having said that, I'm waiting to add to my position because I'm not interested in paying these prices for metals as we approach deflation (in my opinion before hyperinflation). However, if you have no metals yet, I would get a minimum amount regardless of price...that's your insurance and you don't want to gamble with that.

I'm using Swiss facilities.  Despite the media hype, unless someone can convince me otherwise, I'm confident it's the safest.  In fact I think the hype is on purpose to scare people from doing what the IRS knows is the best way to keep wealth out of its hands.  I guess nuke attack is a risk of having all my offshore assets in one spot, but if Switzerland gets nuked, the world is over anyway!

jshayinma@comcast.net's picture
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Re: What to watch to foresee imposition of currency/capital ...

Re: precious metals and DEFLATION--

It occurred to me after I hit the button on my question, that I should mention the DIFFERING behaviors of gold, silver, and platinum under deflation.

During a deflation the value of money rises relative to everything that can be purchased with it.  Whether governments and central banks like it or not, gold remains money, and so its value rises in a deflation.  Now those of us who have invested in bullion and PM mining shares remember with pain the hammering both took during the panic in Q-IV, 2008, which would appear to be a deflationary event.

The truth is that I am not entirely satisfied with my own explanation when I have been asked about this: I usually say that when the margin clerks are in charge, financial assets get liquidated without discrimination.  [This is a fancy version of the old and crude stock market adage: "When the paddy wagon comes it takes ALL the girls away, the virtuous with the fallen."]  I find that I want to understand this in more detail than I do: How do margin calls in equities affect futures?  How do margin calls in futures and equities affect physical markets, such as the NY Spot and London?  I don't feel I grasp the inner workings here.

Back to the question of precious metals in a deflation: Bob Hoye [Institutional Advisors] sees great information content in the gold/silver ratio.  He claims that there is a 200 year history of this ratio foretelling banking/credit crises.  The ratio had certainly bobbled around 50-60 for a couple years before the present crisis struck.  In August, 2008 the ratio began to shoot up, eventually peaking around 84 before coming back down to bobble between 60 and 65 in Q-IV 2009.  It now stands at 70.43, which Hoye thinks portends a renewal of the banking crisis.  He expects the ratio to reach 100 before we have seen the last of these troubles--probably around the time that the DJI/gold ratio is at or below 1.0.  But what does all this have to do with the theme here?  

Silver and platinum are both dual personalities, part money and part industrial metals.  Platinum is more nearly a pure industrial metal, silver is vividly a "split personality," and gold has very tiny industrial uses, compared to its monetary use.  [I have the 2009 CPM Gold and Silver Yearbooks, and could dig this comparison out if there were a great need to know this with a sharp pencil.] When there is a slowing of economic activity, a slowing of investment, a slowing of production, the industrial demand for silver drops sharply, but the demand for gold does not.

But remember here that I am talking about the RATIO of gold to silver.  In a severe deflation, gold will rise, and silver may also rise in absolute terms, but much less than gold.

What I am saying to Strabes is, that in my opinion, based on the above perceptions, is that in the face of EXTREME economic and market moves in either inflationary or deflationary directions, gold will do well.  Market timing, if you expect these extremes, should not take priority over having a core safety position, and even less over getting the machinery set up and tested. 

Another old stock market adage [from around 1890-1910, I believe]: "Put 10% of your assets in gold and PRAY THAT IT DOESN'T WORK." [Meaning, I think, that the enormously destructive extremes, during which that safety position in gold would save your ass, did not happen.  God willing, they will not happen.]

SagerXX's picture
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Joined: Feb 11 2009
Posts: 2219
Re: What to watch to foresee imposition of currency/capital ...

Great posts jshay.  Welcome to the forums!  

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