Gold confiscations in the past

Gold is a (classic) safe haven that has been used for years in times of uncertainty. The security that gold can provide is the preservation of the value of your money. The value of money can decrease in times of inflation, but gold moves with it. So when money becomes less valuable, this does not apply to gold. In addition, the return on gold is not linked to assets, such as shares. This can also provide security when you divide your investments. For this reason, gold is part of the portfolio of every well-diversified investor. In the past, however, various governments have thrown a spanner in the works.

 

Gold confiscation

In times of extreme crisis, the government has the power to confiscate investors’ gold. These gold confiscations have happened several times, including in 1933 in the United States. During the Great Depression, all the gold was confiscated. The owners were compensated for this, but this was at market rates. Many people were not happy about this. The reason for confiscating the gold was that it allowed the government to print more dollars, which would stimulate the economy and support the exchange rate. After the confiscation, the government set a new rate for gold. This was much higher than before and is part of the Gold Reserve Act 1934.
Another example of gold confiscations is the law that the Australian government passed in 1959. This law allows for the confiscation of privately held gold. The Australian government is allowed to do this if it helps protect the currency. The United Kingdom government has also passed a similar law. In 1966, the country banned the possession of more than four gold or silver coins. This was repealed in 1979 but for a time blocked the private importation of gold.

 

Why do governments seize gold?

Why would governments do this? The above examples have a negative impact on private investment in gold. This is a case of monetary policy trilemma. This trilemma consists of:
 

1. Setting fixed exchange rates
2. Allow capital to move freely across international borders
3. The independent setting of interest rates and the printing of money.

 
During the 1930s, a system was created that tied gold to a fixed exchange rate. The gold standard meant that dollars were tradable for a fixed amount of precious metal. In addition, there was free movement of capital. Unfortunately, the system quickly began to falter as many people exchanged their dollars for gold. The United States had a way to regain control of monetary policy and this was by printing money. However, this was offset by the confiscation of gold.

 

The current world

What would happen if governments continued to operate in this way? Distrust and fear would probably increase significantly among investors. In addition, it would serve as an incentive to invest in other assets, such as silver. Other precious metals could also be interesting. Fortunately, the current situation is different from the past. The various Western economies have free exchange rates and therefore also control over monetary policy. For this reason, governments are authorized to print money, but also to lower interest rates. This can be done without having anything to do with gold, which was different in the past. Therefore, gold confiscations would not be necessary in the present time.
There is no longer a need for countries to confiscate gold in times of monetary turmoil. In today’s world, gold is no longer needed to control policy, but can be printed and interest rates lowered. For this reason, gold is even more interesting as a safe haven. It can serve as a good hedge against the current turmoil and rising inflation.
 
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