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3 Political Risks of Gold Investing

The political risk of gold investing means that the government can change laws and regulations that may harm your investment in gold. These government interventions can happen in the country of the investor or in another country. Both would have an impact on the gold price, as supply and demand, or the invisible hand of the market will be disturbed.

political risks of gold 3 Political Risks of Gold Investing

First, prohibition of gold ownership: It is thinkable that the government prohibits the possession of gold and requires gold holders to sell their asset to the government at a fixed price.

In 1934 Franklin D. Roosevelt passed a law that made it illegal to possess gold. The only exception was gold for industrial and artistic purposes. The price was fixed at US$ 20.67 for which one ounce of gold had to be exchanged. The US congress passed this law to prevent private gold to become a competing currency. The possession of gold by private citizens with only legalized 39 years later in 1973 by President Gerald Ford.

Second, nationalization of gold mines: Politicians could also nationalize gold mines or heavily tax companies that produce and trade in this precious metal.

In 2005 Chavez, the Venezuelan president announced the confiscation of the property held by Crystallex, a Toronto-based gold-mining company. This resulted in a drop of its share price by 50 per cent in a single day. Besides that, the dictator levied taxes on many foreign countries or nationalized whole industries.

Third, fixed gold price: The government could first, limit and control gold trading by restricting the amount of gold to be sold or by determining a fixed price.

Before 1972 the gold price either directly (classical gold standard) or indirectly (Bretton Woods System) determined the value, and the exchange rates of the currencies of most Western Nations. Therefore, their governments determined a fixed gold price. During this time, the gold rate was not volatile which made trading and speculating in this precious metal a futile act. Even though currently the gold price follows the law of the market, future governments might reintroduce a fixed gold rate so that the national currency can be pegged to this metal. Or the government might decide that gold trades for a too high rate. The US Commodities Futures Commission already has the authority to dictate a trading halt for futures. This might be used on gold futures.

How to anticipate and circumvent these government risks? First, an investment in gold mines should occur only in stable countries, such as Canada and Australia (unless high risk investments are desired). Second, it might be wise to distribute personal gold reserves to several countries, in case of confiscation. Third, investors should always be well-informed about world news which can influence the gold price.

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