The thought of a government confiscating your gold may seem far-fetched but, given the shenanigans of the past few years and recent events in Cyprus, it is easy to see why some commentators are stirring the pot.
By Alan Higgins, Coutts
Roosevelt’s 1933 gold raid is well documented but it’s often forgotten that in 1966 Britons were banned from holding more than four gold coins or from buying any new ones, unless they held a licence.
It’s not just gold that governments can confiscate – pension assets can be in the firing line, although usually only in emerging markets and in extreme circumstances. In recent years, private pension schemes have been nationalised in Argentina and Hungary.
Could such a scenario happen today? It seems unlikely. In the Thirties, the dollar was pegged to gold and confiscation was simply quantitative easing by another name, while gold investment today is a global phenomenon, so policing any enforcement could be an onerous task.
And if they did confiscate all private holdings of gold, would it be enough? Such holdings are worth 1.5pc of world economic output. As the gold standard has been broken, the value of all the world’s money is now far in excess of the value of gold stocks. A major financial crisis usually costs a national government around 5pc to 10pc of economic output. So for most countries, confiscation of private gold holdings wouldn’t save the day. In Cyprus, with its bloated financial sector, the bill is more like 30pc. Cyprus showed how much more could be raised by an immediate tax on bank accounts.
Demand for gold as a hedge against risk has fallen despite the Cyprus tremors. On the flip side, there appears to be more buying by central banks when the price slips below $1,600. Many commentators suggest that central bank buying could push gold back to its $1,900 highs; we tend to disagree. Central banks, like all investors, want to be smart in their buying and are unlikely to chase the price higher.
Cautious investors seeking market protection certainly face a dilemma. Traditional safe havens such as bonds have lost their appeal; indeed, given extreme valuations, the prospect of losing money is real.
The appeal of gold as a safe haven remains intact – we hold gold in some of our portfolios. It still plays an important role, given continuing currency devaluation, near-zero interest rates in developed economies and inflation risks. What’s more, investors benefit from governments finding it easier to tax income on bonds and equities, rather than gold.
However, other assets have also become more attractive, making significant gold exposure less vital than it was a year ago. We are looking for opportunities in assets linked to economic growth, such as equities and property.
Alan Higgins is chief investment officer (UK) at Coutts