Fellow Seeking Alpha contributor Shaun Connell recently wrote a response to one of my articles. His title was "Why Gold's Attackers Are Wrong." His core thesis was this:
Gold exists not just as an inflation hedge, but as a currency failure hedge. If the dollar "dies" -- whether through hyperdeflation or hyperinflation -- then gold essentially wins.
Some might then argue that we should just put money in an index fund, because it offers the same protection. This is, of course, absurd. It's paper, which means that a political movement can delete it. It can be gone. In minutes.
Your assets can be frozen. The economy can fundamentally collapse. Corporations can be nationalized. You can't skip town with a trunk full of stocks, but you can certainly do that with a box of gold coins. And that'll never change.
I enjoy reading Shaun's articles, and his argument does certainly lend credence to the notion of keeping some gold coins around (and why many precious metals investors prefer physical gold to "paper" products like GLD). However, his premise does have some flaws.
Bullion and Executive Order 6102
The premise of Shaun's argument is that your assets can be frozen and everything you own can be seized, but gold is sacrosanct and you'll always be able to "skip town" with it. There's just one problem.
In a world where the government routinely freezes personal assets and nationalizes corporations (clearly an overreach of power), what's to stop them from marching into every citizen's home and taking all their gold?
Think it's preposterous? Think again. It's already happened. Executive Order 6102, signed in April '33 by FDR, criminalized the possession of monetary gold and required citizens to turn in all of their gold to the Fed. Actual text of the law can be found here.
It Could Happen Again
Most people would claim that such a move would be preposterous, and that it would never happen.
But for a power-hungry government, is criminalizing the possession of gold any less ridiculous than taking over Exxon-Mobil or freezing every citizen's assets? If they see gold as posing a threat to their empire and the use of their currency, why wouldn't they criminalize gold? In essence, if gold was really the populist tool to preserve wealth, why wouldn't a government set on destroying wealth take it away?
If you're going to invest a significant chunk of money in gold bullion, at least take the time to think through your end scenario thoroughly. In a real apocalypse scenario, gold is worthless -- only sustenance items (food, water) and weaponry would still have any value. And what about this government-seizure-of-assets scenario, where the government goes crazy and decides to reenact Orwell's 1984?
If you've ever read 1984, you know that it's hard to resist this "all-powerful" government forever. And here's the thing. Even if you manage to "skip town with your trunk of gold," like Shaun says, there are a myriad of problems you'll face. Operating under the assumption that you manage to escape the government and safely spirit your trunk of gold away to wherever you're going, how are you going to exchange it for goods and services? You can't exactly walk into any of the now-nationalized businesses and set your bag-o'-gold down on the counter -- that's illegal.
You'd only be able to exchange gold with others like yourself, and you'd have to do it under the cover of darkness. But how many "others" would there be? How many others would be willing to risk painful punishment for the right to use gold as a currency? And, in doing these black market deals, how would you know that the "others" aren't actually secret government agents or someone trying to rip you off? As you can see, possessing, using, and selling gold in this scenario is a little like dealing drugs -- dangerous, illegal, and not at all advisable.
So if you're worried about a big bad government taking all your assets, don't make the mistake of thinking that gold is immune to seizure or confiscation. If you have the financial wherewithal to do so, sure, purchase a few gold coins -- but don't go crazy. Because just as paper assets can be frozen, physical bullion can be confiscated.