Could Ownership of Companies Like Silver Wheaton Be Outlawed?

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Includes: CEF, GG, GLD, SLV, WPM
by: Marc Courtenay

Before you ask the inevitable question "Have you lost your mind?" let me reveal the "method of my madness".

There are a growing number of people including some level-headed analysts who have publicly wondered whether it was possible that the private ownership of physical gold might be outlawed in the United States.

Many would say that the likelihood of that in the land of democracy and The Constitution is virtually zero. That is what I'd like to believe as well, especially if I were more "historically naive".

But, history does tell us that the US government, in the days of a fixed gold price, did intervene in a very direct manner with President F.D. Roosevelt banning the "hoarding of gold coin, gold bullion, and gold certificates" and thus forcing US citizens to sell to Federal Reserve at $20 an ounce.

Subsequently the Fed raised the price of gold to $35 an ounce, and the ownership of gold was literally outlawed up to around 1971.

Lawrence Williams, writing from London for Mineweb.com opined recently that:

...President Obama is known to be a Roosevelt disciple and he must be well aware of what was done at the time, given the parallels of the U.S economy between the present time and the 1930s.

There must be a temptation to try the same tactic, and then raise the gold price dramatically in a move which would certainly support reserves within those nations which still have major gold holdings.

Indeed, if monetary authorities worldwide see the gold price really start to take off, this kind of process has to become even more of a temptation as a big global move into gold could exacerbate the global financial crisis in that it would show that people no longer have faith in the economic status quo (it can be argued that already they don't) and the the current crisis of confidence could be severely worsened by such a rush.

As I've often said, it is the black widow spider that we don't see that bites us, not the one before our very eyes. The "obvious" conclusion on this subject might not be the most accurate one. Yet it is an important subject to discuss and debate.

In an article published late last year, Mark Mahaffey of Hinde Capital argued that such a possibility [that an economic crisis could trigger drastic government action] existed and pointed out that:

The fear for anyone who is in credit is that the financial system could become geared towards negating debt which, in turn, would destroy the value of their assets.

One way of bypassing this threat is to buy gold [and obviously a lot of people are doing just that at the present time]. However a general shift to gold would undermine the power of central banks and their influence on the economy.

Of course the monetary situation nowadays is completely different and the banning of gold holdings, and subsequent revaluation would be much harder to accomplish domestically - and even more so globally.

As Lawrence Williams pointed out:

Back in 1933 the dollar was on the gold standard which meant that, in theory at least, each dollar could be exchanged for the same value in gold. Nowadays all currencies are effectively fiat money with no solid backing (except perhaps of a fiat dollar), and to revert to a gold standard would require an upward revaluation of the gold price beyond belief.

But, there is a precedent out there and while we think the idea is unlikely, it might appeal to someone who is prepared to try radical means to stabilize the economy if all other measures fail.

And - consider this thought - are shortages of gold coins from national mints due to a total underestimation of demand, or part of government policies to control gold flows into private hands. We think the former, but the conspiracy theorists no doubt have other views.

Whether it is demand, manipulation or government interference the results are inevitable. Investors want to own what they believe will go up and value and what has a historic reputation of holding its value during times of unusual uncertainty.

Gold and silver meet that description; the description of what investors want to own during times like these.

In the title of my article I also asked if the government might outlaw the ownership of a company like Silver Wheaton (SLW). "Don't be ridiculous Courtenay", which obviously I'm trying to be in order to make a point.

Whether we speak of gold, a gold-producer like Goldcorp (NYSE:GG), silver, or the "new and improved" Silver Wheaton Corporation, the government is capable of taking over, outlawing, or endorsing anything that it wants to.

If you would have told me even 12 months ago that the US government would "nationalize" Fannie Mae (FNM), Freddie Mac (FRE) and virtually take-over the largest insurance company in North America (NYSE:AIG), while "outlawing" the existence of companies like Lehman Brothers and Bear Stearns...I wouldn't have believed you.

I use Silver Wheaton as an example to also draw your attention to the fact that it has completed the acquisition of its rival Silverstone Resources, emerging as the number one and only pure silver stream company.

The deal was approved last Thursday with 0.185 shares of Silver Wheaton being issued to Silverstone shareholders for every share held. The all stock deal was valued at $190 million. [Thanks to Dorothy Kosich at Mineweb.com for bringing this to our attention].

During Silver Wheaton's annual general meeting, President and CEO Peter Barnes said the acquisition increases the company's total reserves and resources to 1.4 billion ounces of silver and 405,000 ounces of gold. The company forecasts sales of 17 million to 19 million silver equivalent ounces this year,

Noting that 70% of mined silver is produced as a by-product, Silver Wheaton management said acquisition also provides three new silver streams from low-cost copper mines: Minto in Canada, Cozanin in Mexico, and Neves Corvo in Portugal. The three operations will generate 4.5 million ounces of silver equivalent this year.

The merger gives Silver Wheaton a total of 12 silver stream agreements with eight operating partners.

In a presentation to shareholders, Barnes said the silver stream from Goldcorp's Peñasquito gold, silver, lead and zinc mine will add significant growth to Silver Wheaton. He estimated that approximately 70% of Silver Wheaton's revenue will come from four mines, Luismin, Yauliyacu, Zinkgruvan and Peñasquito.

During the past four years, Barnes noted that Silver Wheaton has almost tripled the ounces of silver backing every share.

Final question: What is more likely to happen? 1) Gold and Silver Wheaton are outlawed by the US government, or 2) Gold eventually goes to $1,300 an ounce and Silver Wheaton goes up to $20 a share?

My best guess is #2, and the likelihood of option #1 is probably slim to none.

Whether you own the physical stuff or a gold and silver proxy (think GLD, SLV, or CEF) the future is looking brighter with each passing week for patient and rational investors.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please remember investments can fall as well as rise. And they will! - Advanced Investor Technologies LLC accepts no responsibility for any loss or damage resulting directly or indirectly from the use of this content.

Disclosure: I do not currently own any shares of SLW or GG. I do own shares of the gold and silver ETF (symbols GLD and SLV) and CEF.