Five Reasons to Internationalize
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
The following is a true account. A recent one. In a developed country, one of the world’s ‘banking centers’ no less…
Andreas was panicking.
His bank was closed. And as he was quickly discovering, all the banks in his home country were closed. He couldn’t get to his own money.
At first, he was sure it was a mistake, so he drove to another branch. But it was also closed. He tried the ATM and that’s when he learned the hard truth: ATMS were shuttered and no cash withdrawals were permitted.
This was a problem. Today was payday and Andreas needed to withdraw some currency for the weekend. The family needed groceries… his wife was eight months pregnant… and his parents relied on him for financial support. This would be more than inconvenient; how was he supposed to feed his family?
Back in the car he turned the radio on. The news was on every station: all banks in the country were closed for the next two weeks, while the country negotiated a potential bailout of its financial system. Another broadcaster announced that once the banks reopened, there would be a restriction on how much cash could be withdrawn, as well as a ban on transferring money outside the country.
As the hard truth sunk in, Andreas realized just how stuck he really was. His paycheck was in the bank. His savings account was with the bank. His credit card was tied to the bank. What was he supposed to do? Would he need sell some possessions just to get some cash?
As he sat there dejected, he wished he’s listened to his uncle who’d told him to keep some gold outside the banking system and outside his home country of Cyprus…
This scene replayed over and over again in 2013. The banks closed, they banned withdrawals, they stayed closed for weeks, they severely limited withdraws when they reopened, and they forbade transferring money out of country.
It was then, that the world become acquainted with the term “bail-in.”
Depositors with large balances, still unable to withdraw any sizable amount, saw their accounts automatically “taxed” to stabilize the banking system. No notice, no warning, no permission, no due process. We’re taking it, thank you very much.
To top it all off, even though the Cypriot government eventually agreed to a bailout from the European Central Bank (ECB), most of the restrictions put in place lasted a full year. The final caps were not lifted until April 2016, a full three years later!
Needless to say, it devastated depositors. The banking system didn’t just falter; it betrayed them.
Why were so many citizens left destitute? Well, many thought a banking shutdown couldn’t happen in their country. Most believed the government would never allow such a thing. This wasn’t such an unreasonable assumption: Cyprus is an advanced, high-income economy … it is a major tourist destination, with beautiful beaches, stunning vistas, and world class food and wine. For many people, it was paradise.
Most citizens didn’t think they needed to prepare for a banking crisis in such an advanced and law-abiding country. In fact, it was a small nation known for banking. Not unlike Switzerland or Singapore. So, most people had no backup plan. They assumed everything would keep on working, despite years of mounting warning signs.
Then paradise became their nightmare, literally overnight. If citizens had done just a little planning, they could’ve avoided some of the worst parts of the bank freeze…
The whole idea behind international diversification with gold and silver is that any one government doesn’t have total control over your financial options. It allows you to escape the whims of a single governing electorate. It frees you from absolute dependence on any one political system.
Further, you’re not exposed to the breakdown of a single economy. If your home country encounters financial or economic issues, other countries may not.
Call it “Politician Insurance.” It’s not much different than having life insurance and fire insurance.
Having a little (or a lot) of money overseas—i.e. international diversification—puts a little extra distance between you and your politicians. It is not a panacea and does not protect against every conceivable risk, but this extra layer could give you more time and flexibility to act or react when it is needed most.
There are five common risks you are exposed to if you don’t have some gold and silver stored outside your home country. You can use this checklist to determine your own level of exposure:
#1: Capital Controls
Capital controls exist when the government restricts capital (currency) from leaving the country.
You may think that since you don’t live or work or even travel outside your home country that you don’t need money outside of your borders. But you’re looking at the magician’s left hand, while the trick is happening in his right hand.
Cross-border controls almost always include, or lead to, other forms of capital control, precisely as Andreas and other citizens of Cyprus found out. The government could;
Enacting cross-border capital controls—the magician’s left hand—means that all wealth is trapped inside the country. Money cannot move, escape, or flee. Now the trick in the magician’s right hand can take place, because once the door is closed, your capital—all your capital, if you haven’t diversified internationally—is vulnerable to confiscation, taxation, regulation, inflation, or any other control the government deems necessary.
And don’t assume the laws of the land will protect you. What may be illegal today could easily be made legal, or even deemed “prudent” in a serious economic or monetary crisis. In fact, history shows that in times of crisis, governments have repeatedly changed the rules. Just look how frequently the tax code has changed.
In this scenario, you would be a victim of whatever policies and restrictions the government imposes. And you’d have no recourse. Who are you going to complain to?
On the other hand, if you have some gold and silver stored outside your political jurisdiction, you now have a layer between you and the trap.
#2: Asset Seizures
If you’ve never had your assets frozen or seized by a government or other legal entity, know that it’s a horrible experience. One day all your cards are turned off, and you have no access to your own money, yet you have to somehow come up with the
funds to fight back!
Worse still, with the rise of civil forfeiture laws in the US, and reports of the IRS leaning on new laws for ‘flash seizures,’ it can happen from simply being suspected. No conviction, no indictment, no due process.
A “freeze or seize” comes with no warning. It’s standard protocol to give the victim no notice. If you’ve made no financial arrangements ahead of time, it’s too late.
If you have some gold and silver stored outside your political jurisdiction, however, you should have access to funds to fight back. And eat.
Our highly litigious society demands we all have a backup plan. Especially if you have a positive net worth.
#3: Confiscation or Nationalization
Gold is not part of the monetary system like it was during Roosevelt’s nationalization in 1933. But that doesn’t mean gold couldn’t be confiscated today.
Debt levels are unsustainable in most developed countries. And current debt is only the tip of the problem: unfunded liabilities are an enormous overhang that have no chance of ever being fully paid (in current dollars), even in the most optimistic growth scenarios.
Global debt loads necessarily means that heavy-handed solutions will have to be pursued in some degree. Even if they try to inflate the debts away, the sheer size of these liabilities will sooner or later force governments to enact policies to keep their economies afloat. And one way to grab some revenue could be to confiscate gold.
Unfortunately, that’s not the only path to a gold confiscation.
It hasn’t been widely reported, but a few major foreign holders have been dumping US Treasuries. If this trend were to accelerate and get out of control, the first response by the US government could be to reassure foreign investors and sure up the debt. Well, the US is the largest holder of gold reserves, at 8,133.5 tonnes. If they sold these 261,498,100 ounces at $1,300 gold, they’d net $340 billion. If they sold them at a $2,000 gold price they’d have $523 billion.
Sounds like a lot of money, but these amounts are woefully inadequate to pay off the debt, which is near $20 trillion today, roughly 40 times bigger than all US gold reserves priced at $2,000. They’d need more, a lot more. Where could they get it?
How about gold ETFs, gold pool accounts, and institutional and exchange holdings?
Confiscation of private holdings would be problematic, but if a government gets desperate enough it could certainly try. It’s happened before.
However, if you have some of your holdings allocated in a private, foreign depository, you have one extra layer between those holdings and the initial attempts at confiscation. It’s no longer the “low hanging fruit”.
Last, confiscation may not be about gold at all, and yet internationally stored bullion could still save you. How would you handle a bank bail-in? Pension confiscation? Mandatory IRA investments in government debt? There are any number of creative “solutions” a government could enact in a crisis. Foreign held gold could give you a little room to maneuver when everyone else is panicking.
#4 Limited or Unsatisfactory Medical Care
Medical tourism is a booming industry. Many people find they can get less expensive medical care, or quicker care, or higher quality care in a different country than their own.
Offshore health care is generally less expensive than in North America. It is frequently quicker. And in a few places it has progressed to the point where it is just as good or better.
If you have medical issues, or they develop as you age, or if you have parents you need to take care of and want to explore other options for them, you may find offshore medical care an attractive option.
But how will you pay for it if a national crisis forces capital controls? Bank bail-ins or freezes? A punitive tax to wire money outside the country?
Internationally stored bullion keeps this option alive and kicking (pun intended).
#5 Diminished Investment and Pleasure Options
One of the first realizations many investors have when internationalizing themselves is the new opportunities suddenly available to them.
By using an overseas depository for some of your gold, you’d have a ready source of funds for options that may not be available in your domestic location, such as…
The world is a big place, and there are many options for business, investment, and pleasure outside your home country. Many doors closed to you now could open—if you have assets outside your country when it’s in the throes of crisis.
Even if these things are not of interest now, would you like to have the option when you’re older? Or how about for your kids or grandkids? Or what if your country is financially locked down in some capacity? Remember, it’s about planning, about giving yourself future options.
International Diversification, Here I Come!
As you can see, there are a number of likely scenarios where having some bullion stored outside your home country could put you at a real advantage, or even save you financially.
And here’s the kicker: even if nothing bad happens, you’re no worse for the wear… you’ve lost nothing, suffered no inconvenience, spent no more on storage than you would domestically, and yet have given yourself options you could potentially take advantage of someday.
How much gold should you store internationally? This is a personal decision, obviously, but the basic answer is this: not so much that you shift just as much risk to another country as you had at home, but enough to make a difference if capital controls or any other lock-down is instituted in your home country. For most investors, that’s less than 90% of your total gold holdings but a lot more than 5%. Find what would suit you and your family’s situation best and get started today.