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Saturday, June 25, 2011

Gold Illegal?

Last week, reader/commenter Shy Wolf had sent me a link to an article that blared to the effect of, "Over the counter gold sales to become illegal".  Yesterday, reader/commenter mama4x had asked for my thoughts on what was going on with this issue.

OK.  Just realize that this is BIG TIME crystal ball reading.  It borders on a Wild Ass Guess (WAG).

The original article was written on the Zero Hedge website [link to article].

To summarize:  The Dodd-Frank financial services bill had something in it that made certain types of Over The Counter (OTC) trades in gold and silver illegal effective July 15th.  I don't know why, it just is.  The article posted a notice from telling their customers that any US customers doing these purchases would have to close their positions or they would be liquidated by the company. deals with Foreign Exchange - trading the currencies of different nations.  Apparently, they offer a service where an American can buy gold and silver contracts using currencies other US dollars. 

First, an Over the Counter trade isn't what is sounds like.  If your company sells its stock publicly, AND that stock is not sold on a stock exchange (NYSE, NASDAQ, etc.) it is traded OTC.  If you want to buy a stock in a non-listed company, your broker calls another broker (or "market maker") in that stock, and buys the stock for you.  It's called an OTC trade.

Secondly, this prohibition has to do with contracts that are leveraged, or purchased "on margin".  This means you are buying these contracts without having to put up all of the money.

Lastly, if you are actually going to take possession of the gold purchased with the contract - within 28 days - you are exempted from this prohibition.

What this all sounds like to me is that the Dodd-Frank prohibition is aimed and crimping the style of market speculators.  Most of these guys buy a contract for X number of ounces of gold, and when the contract comes due, they either make good on their losses, or they get paid for their "winnings" and roll the paper profits over into more contracts.

From what I've read, this won't have any negative affect on you and me being able to buy gold and silver when we walk into our favorite bullion dealer and plop down some worthless greenbacks.

I do have one worry, though.  If, starting in July, this big chunk of money is no longer "buying" gold and silver, it could cause the spot market price of these PMs to drop.  Fewer dollars chasing a fixed amount of goods (reduced demand) usually results in a price reduction.

Yeah, that was the WAG portion of the post... ;-)

I have no idea if this will affect OTC trades that are not done by Americans using foreign currencies.  This specific prohibition could be a drop in the bucket, or it could be a huge, important number.  I dunno.

Here's some more WAG - from what I've read, this seems to be a way to squeeze the life out of Foreign Exchange.  It sounds like it might also be about making it less beneficial to use non-US funds when you're out making your money.  It wouldn't surprise me if those two bastards - Dodd and Frank (the two primary drivers, IMO, behind the current real estate and banking collapse) - were just coming up with some way to make it more difficult to make a buck.

Yeah, I'm biased and very leery of anything the two of them have a hand in.

Copyright 2011 Bison Risk Management Associates. All rights reserved. Please note that in addition to owning Bison Risk Management, Chief Instructor is also a partner in a precious metals business. You are encouraged to repost this information so long as it is credited to Bison Risk Management Associates.


Anonymous said...

What, exactly, happens to our economy or the world's economy is unpredictable. There are possible scenarios that are pretty grim. If our economy collapses next week or next year all bets are off. That is, who knows what our politicians will do! One thing I feel confident about and that is our politicians will follow the money. They will raise taxes, restrict freedoms, force the citizens to do what the government wants them to do. Do you really believe when TSHTF the government won't make the free trade in gold illegal? Or that they won't use their powers to confiscate that gold?

Chief Instructor said...

Anon, at this point in time, for me, it's pretty easy to NOT keep money in the bank. Interest payments are so low, it's not worth the risk. Similarly, keeping money in US dollars makes little sense to me as well. PMs or preps make much more sense.

I fully expect the US to follow the Argentine model of nationalizing huge chunks of private wealth. IRAs, savings accounts, etc. I wouldn't put it beyond them to go after tangible wealth such as gold/silver coins and perhaps even jewelry.

A slow or fast decline is the only question mark to me.