Published January 28, 2013

Two Chess Moves Away from Capital Controls

Dear Reader,

I'm just back from Vancouver, where Doug Casey, Jeff Clark, Marin Katusa, and I spoke at the 2013 Vancouver Resource Investment Conference. After such an alarming year for so many gold stock owners, it was good to see the show was as large and well attended as ever. I'm not sure we can draw too many conclusions from that fact, but it was encouraging.

I met with about two dozen companies and collected a lot of information to mull over, but best of all was meeting some of our readers who've become friends over the years. Thanks for coming down to the show.

Another highlight was the metaphor Jeff developed in response to a question about what it means for Germany to be repatriating its physical gold reserves. His answer was so striking that I asked him to develop it into an article for all our readers to benefit from. The result is below; and it's quite timely in light of the buying opportunity gold is giving us this week.

I hope you find it as insightful as I did and will be motivated to take action.


Louis James
Senior Metals Investment Strategist
Casey Research

P.S. Would you like to know which brokers other Casey subscribers use?

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Two Chess Moves Away from Capital Controls

By Jeff Clark, Senior Precious Metals Analyst

The best indicator of a chess player's form is his ability to sense the climax of the game.

–Boris Spassky, World Chess Champion, 1969-1972

You've likely heard that the German central bank announced it will begin withdrawing part of its massive gold holdings from the United States as well as all its holdings from France. By 2020, Bundesbank says it wants half its gold reserves stored in its own vault in Germany.

Why would it want to physically move the metal from New York? It's not as if US vaults are not secure, and since Germany already owns the gold, does it really matter where it sits?

You may recall that Hugo Chávez did the same thing in late 2011, repatriating much of his country's gold reserves from London. However, this isn't a third-world dictatorship; Germany is a major ally of the US. So what's going on?

Pawn to A3

On the surface, it may seem innocuous for Germany to move some pallets of gold closer to home. Some observers note that since Russia isn't likely to be invading Germany anytime soon – one of the original reasons Germany had for storing its gold outside the country – the move is only natural and no big deal. But Germany's gold stash represents roughly 10% of the world's gold reserves, and the cost of moving it is not trivial, so we see greater import in the move.

The Bundesbank said the purpose of the move was to "build trust and confidence domestically, and the ability to exchange gold for foreign currencies at gold-trading centers abroad within a short space of time." It's just satisfying the worries of the commoners, in the mainstream view, as well as giving themselves the ability to complete transactions faster. As evidence that it's nothing more than this, Bundesbank points out that half of Germany's gold will remain in New York and London (the US portion of reserves will only be reduced from 45% to 37%).

Sounds reasonable. But these economists remind me of the analysts who every year claim the price of gold will fall – they can't see the bigger implications and frequently miss the forest for the trees.


What your friendly government economist doesn't reveal and the mainstream journalist doesn't report (or doesn't understand) is that in the event of a US bankruptcy, euro implosion, or similar financial catastrophe, access to gold would almost certainly be limited. If Germany were to actually need its gold, regardless of the reason, any request for transfer or sale would be… difficult. There would be, at the very least, delays. At worst such requests could be denied, depending on the circumstances at the time. That's not just bad – it defeats the purpose of owning gold.

But this still doesn't capture the greater significance of this action. First, it reinforces the growing recognition that gold is money. Physical bullion isn't just a commodity, a day-trading vehicle, or even an investment. It's a store of value, a physical hedge against monetary dislocations. In the ultimate extreme, it's something you can use to pay for goods or services when all other means fail. It is precisely those who don't recognize this historical fact who stand to lose the most in an adverse monetary event. (Hello, government economist.)

Second, here's the quote that reveals the ultimate, backstop reason for the move: Bundesbank stated it is a "pre-emptive" measure "in case of a currency crisis."

Germany's central bank thinks a currency crisis is really possible. That's a very sobering fact.

We agree, of course: history is very clear on this. No fiat currency has lasted forever. Eventually they all fail. Whether the dollar goes to zero or merely becomes a second-class currency in the global arena, the root cause for failure is universal and inevitable: continual and perpetual dilution of the currency.

Some level of currency crisis is inescapable at this point because absolutely nothing has changed with worldwide debt levels, deficit spending, and currency printing, except that they all continue to increase. While many economists and politicians claim these actions are necessary and are leading us to recovery, it's clear we have yet to experience the fallout from spending more than we have and printing the difference. There will be serious and painful consequences, sooner or later of an inflationary nature, and the average person's standard of living will be greatly reduced.

And now there are rumblings that the Netherlands and Azerbaijan may move their gold back home. If this trend gathers steam, we could easily see a "gold run" in the same manner history has seen bank runs. Add in high inflation or a major currency event and a very ugly vicious cycle could ignite.


If other countries follow Germany's path or the mistrust between central bankers grows, the next logical step would be to clamp down on gold exports. It would be the beginning of the kind of stringent capital controls Doug Casey and a few others have warned about for years. Think about it: is it really so far-fetched to think politicians wouldn't somehow restrict the movement of gold if their currencies and/or economies were failing?

Remember, India keeps tinkering with ideas like this already.

What this means for you and me is that moving gold outside your country – especially if you're a US citizen – could be banned. Fuel would be added to the fire by blaming gold for the dollar's ongoing weakness. Don't think you need to store gold outside your country? The metal you attempt to buy, sell, or trade within your borders could be severely regulated, taxed, tracked, or even frozen in such a crisis environment. You'd have easier access to foreign-held bullion, depending on the country and the specific events.

None of this would take place in a vacuum. Transferring dollars internationally would certainly be tightly restricted as well. Moving almost any asset across borders could be declared illegal. Even your movement outside your country could come under increased scrutiny and restriction.

The hint that all this is about to take place would be when politicians publicly declare they would do no such a thing. You could quite literally have 24 hours to make a move. If your resources were not already in place, even the most nimble of us would have a very hard time making arrangements.

Once the door is closed, attempting to move restricted assets across international borders would come with serious penalties, almost certainly including jail time. In such a tense atmosphere, you could easily be labeled an enemy of the state just for trying to remove yourself from harm's way.

The message is clear: storing some gold outside your country of residence is critical at this point, and the window of time for doing so is getting smaller. Don't just hope for the best; do something about it while you still can. The minor effort made now could pay major dividends in the future. Besides, you won't be any worse off for having some precious metals stored elsewhere.

If you're moved to take action, know that you're not alone. The Hard Assets Alliance had its busiest month to date in December, and January is on pace to set another sales record. International storage options are very attractive and include Zurich, Melbourne, Singapore, and London. If you're unfamiliar with the program, learn about this breakthrough service. Even if you choose another method to store precious metals internationally, it's critical that you take these first steps now.

The best chess players in the world aren't that way because they can see the next move. They're champions because they can see the next 14 moves.

You only have to see the next two moves to "win" this game. I suggest making those moves now before your government declares checkmate.

Gold and Silver HEADLINES

Asteroid-Mining Race Heats Up as One More Company Reveals Its Space Plans (Mineweb)

US-based Deep Space Industries (DSI) announced the launching of its campaign to inspect small asteroids that pass by the Earth as potential mining targets.

In 2015, DSI, in association with NASA and other companies and groups, plans to send a fleet of small, 55-pound FireFly spaceships to identify potential exploration targets. By 2016, Deep Space plans to launch larger DragonFly ships that would collect materials from asteroids and bring them to the Earth to analyze.

Deep Space Industries is the second company to embark on asteroid exploration. Last year, Planetary Resources – a company founded by aerospace entrepreneurs and backed by filmmaker James Cameron and Google Executive Chairman Eric Schmidt – announced intentions to form a similar business.

We continue to be very conservative about the commercial prospects of these companies. Mining is often unprofitable on Earth due to rising costs and political risks, as well as lack of infrastructure in remote locations. Space poses the ultimate infrastructure challenge. While we look forward to seeing how the companies plan to deal with it, we take such news as curious developments without any investment interest for now.

India Hikes Import Tax on Gold (Mineweb)

India raised its import duty on gold from 4% to 6% with the intention of restraining external purchases of bullion, in order to balance the the country's account deficit. As an immediate implication, investment demand for the precious metal is expected to fall. However, gold consumption in the jewelry sector is most likely to remain largely unaffected.

These measures will also likely boost smuggling. By creating conditions for gold's black market to expand, the Indian government may lose more than it expects to gain by introducing the new tax.

US and Canadian Mints Rationing Silver Coin Sales (Mineweb)

Sales of silver coins have been so strong in January that the US Mint temporarily suspended sales of Silver Eagles and will only be able to supply authorized dealers again on a rationed basis. The Royal Canadian Mint has announced that it, too, has to ration sales of its popular Silver Maple Leaf coins.

Sales of Silver Eagles reached six million within the first two weeks of January before being suspended. Analysts suggest that this rapid pace was driven by "the typical rush to acquire the most recently dated coins, as well as pent up demand following three weeks of unavailability (in December 2012)." The situation with the Royal Canadian Mind is perhaps a knock-on effect of the US suspension, as dealers in North America scramble to source coin supplies from mints in which customers have full confidence.

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