The Myth of Gold Confiscation and “Collector’s” Coins

As more and more ordinary citizens become concerned about fiat money’s instability (not to mention government overreach with the Snowden and NSA scandals), metals dealers are increasingly able to prey upon these fears to unload suboptimal gold products at steep prices. In particular, you may have heard rumors about government gold confiscation and why you should purchase gold collector coins to dodge such a program. So this week, we’re considering the history of gold confiscation and what it means for your metals investment strategy.

Gold confiscation fear-mongers typically cite the historically important confiscation undertaken in the United States by President Franklin D. Roosevelt in 1933. With Executive Order 6102, FDR forbid the hoarding of gold based on the logic that withholding that money from the economy prevented a recovery from the Great Depression. FDR ordered that holders of gold bars and bullion sell them to the government at about $20 per ounce, and then dramatically raised the price for gold to $35 per ounce shortly afterwards. Although there was no forcible confiscation, Americans largely voluntarily complied with the act out of a mix of fear and patriotism.

The act included an exception for “gold coins having a recognized special value to collectors of rare and unusual coins,” which is the precise clause gold dealers harp on when pushing their over-priced “collectibles.” However, it was unclear which coins in particular (and how many of them) would meet this criteria. Indeed, the ambiguity may have encouraged people to err on the side of caution, turning in more rather than less gold for fear of prosecution. In effect, the federal government greatly inflated the value of its own assets through the confiscation maneuver, making possible a huge wave of expenditures on war and Great Depression social programs.

That motivation doesn’t exist today. Because US dollars are no longer backed by gold, the government had to find another way to artificially seize our wealth. Enter the Federal Reserve’s quantitative easing, which doesn’t require physical confiscation of any sort of asset, let alone gold. A heightened unease about the Fed’s endless QE, combined with the recent crisis in Cyprus, where the government forcibly extracted value from individuals’ bank accounts, has made people nervous about confiscation once again. But notice that the Cypriot confiscation was achieved entirely on paper – no physical moving of money or gold required.

That doesn’t make the Cypriot savings haircut right or fair, of course. However, it reminds us that if your government wants to take money, it will do so in whatever way is easiest and most beneficial to itself. In FDR’s era, a physical gold confiscation happened to pack the most punch. But now that paper money isn’t backed by gold, the Fed is happy to inflate away your savings instead, sparing itself the hassle of a confiscatory buyback. So in today’s monetary landscape, purchasing physical gold has actually become a safer choice, as compared to holding all of your savings in bank-deposited fiat dollars.

Even setting all of that aside, shady gold dealers’ claim that you should buy collector’s coins as protection against confiscation still doesn’t hold up. First of all, there’s no reason to assume that the collector’s coins exception included in FDR’s confiscation would be included once again. No legal rules exist as to which gold materials are confiscateable. Moreover, a coin’s age or selling price is not necessarily a reliable indicator of its actual rareness or collectibility anyways.

Note that unscrupulous dealers love to jack up the prices of fairly common pre-1930 coins like $20 double eagles, $10 eagles, or $5 half eagles. Even when the coins are far from mint condition, these dealers may scare you into buying them for their alleged “unconfiscateability.” The reality of the matter is that many of these coins didn’t even survive FDR’s executive order, and were brought back to the US only recently after having been sold post-confiscation to Europe! There are many of them on the market, and they’re nothing special.

It’s unlikely that gold confiscation will occur again in the United States – the costs to the government now would outweigh the benefits. However, it’s becoming clear that the government will likely continue to “quantitatively ease” the economy while inflating away the value of your savings. Don’t misguidedly attempt to protect yourself against the speculative danger of confiscation with numismatics of doubtful quality. Instead, focus on protecting yourself against the known danger of loose monetary policy with the proven value of standardized gold bullion and bars from reputable dealers.

Testing Your Gold and Silver

Even if you know all the ins-and-outs of buying precious metals and are buying from a trusted dealer, there might come a time when you feel the need to test a gold or silver product for purity.

What follows is a brief synopsis of the most reliable methods for testing gold and silver. We encourage you to do your own research and watch some YouTube videos to become more familiar with each technique.

1. Know how the product should look. This might seem like a no-brainer, but simply researching the exact identifying marks of a coin or bar can help you to spot fakes. We posted a YouTube playlist last year that shows how to identify authentic Morgan Silver Dollars, one of the most commonly counterfeited products. Also, many gold products and larger silver products come with certificates of authenticity when they are delivered directly from the point of origin. Talk to your trusted metals dealer about which products come with certificates so you don’t have to worry about verifying authenticity or purity in the first place.

2. Know your karat markings. Authentic gold and silver jewelry will usually be stamped with karat markings denoting the purity – read more on Wikipedia and familiarize yourself with the European vs. US markings. This information is essential for the following tests.

3. Test the density and weight. Silver and gold have very specific masses and simply weighing products and conducting a water displacement test can tell you if a product matches up with its supposed metal content. You will need a scale that measures to 1/100th of a gram and a water container that measures volume in millimeters. If you’re testing for pure gold, you will need to know that it’s density is 19.32 grams/milliliter. Pure silver is 10.49 g/mL. Then follow the directions on this page. This test will tell you if the gold or silver is not pure, but does not guarantee that it is 24-karat. For instance, if a gold product has been corrupted with tungsten, the density will be nearly identical.

4. Conduct an acid test. As a noble metal, gold will not corrode or discolor when in the presence of certain acids, while many base metals will. Acid test kits are cheap to purchase online and sometimes even come in kits that include a scale and vial for testing the density as well. Keep in mind that an acid test can slightly mar a legitimate product if it isn’t 24-karat gold. Here’s a great video from the Gemological Institute of America on how acid tests work.

5. Use an x-ray or sonogram. These methods are not viable for most our readers because the machines are expensive, but we included them for the sake of thoroughness. Using x-ray and sonogram technology allows you to look inside a bar of gold or silver and spot air pockets or other metals. This is often how large banks or mints confirm the purity of their larger bullion bars.

6. Have it professionally assayed. Local jewelry shops are often happy to conduct one or more of the various tests we’ve laid out here for free simply to gain your business.

There are a few other very simple and rather old-fashioned tests that you can do very quickly. They will tell you if a product is a definite fake but can’t guarantee purity if the product passes the test, so we don’t recommend relying on these methods.

First, run a powerful magnet over the product to see if there are any base metals in it. Gold and silver are not magnetic, so if the magnet pulls the metal you’ve got problems. This is not foolproof, since many counterfeiters are smart enough to use non-magnetic metals when faking gold or silver.

Second, there is the “sound test” or “tuning fork test.” This involves balancing a gold or silver coin on one finger while lightly tapping it with another coin of the same metal. Pure gold and silver will have a high-pitched tone that resonates for a few moments, much like a musician’s tuning fork. Plated products or fake products will produce a dull sound that disappears immediately.

Finally, there is the classic bite test, which you’ve probably seen in an old Western movie when a gold miner bites down on a coin to see if it dents. Gold is a soft metal and your teeth will leave a physical impression on it. However, we don’t recommend this test as you risk hurting your teeth and leaving unattractive marks on pure products. Plus, if it’s a bar, there could be a slug of base metal in the center that your teeth can’t reach.

In the end, the most important thing to remember is to shop with a well-known and trusted metals dealer. Doing so will decrease the chances of getting a fake product in the first place. Also, if all these science experiments just make your head spin, then don’t buy products from sources that get their inventory primarily from other customers! There are plenty of dealers out there who can get gold shipments directly from the mint or refinery where the product was created and/or professionally tested for purity.

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