Savvy investors will already choose physical gold to avoid the counterparty risk of futures accounts, ETFs, and other forms of paper gold. But the jurisdiction of gold storage represents another, often overlooked counterparty risk.
When disaster strikes and the global financial system is plunged into chaos, your gold is more valuable than ever — not just to other investors, but to governments and central banks as a means of controlling the economy.
Throughout history, authorities have intervened and seized the gold of citizens — not only in fascist regimes like Stalin’s Russia and Mao’s China, but in the land of the free when President Roosevelt confiscated gold to bailout the Federal Reserve in 1933. To avoid being left high and dry, investors should factor the risk of such an event happening again into every decision about where to store gold.
Today, bullion buyers today are often confronted with the choice between vaulting gold in the small Alpine nation of Switzerland, and the economic superpower of the United States. Both are developed nations that promise a degree of prosperity and stability. But different laws, history and culture mean only one country is a truly safe bet.
Political and Economic Stability
The United States of America is the largest and most powerful economy ever to exist, and is perhaps now the greatest it’s ever been. (At least if we listen to president Trump!) But beneath the surface, the U.S. faces several threats that make the country an inferior choice for storing gold.
As America plays the global policeman, it increasingly risks getting sucked into wars. During the Obama presidency alone, America attacked an average of one country a year, dramatically raising the geopolitical risk of using the country to store gold. This is reflected in the rank awarded to the nation by the World Bank’s political stability index. The USA comes in at number 69, below the communist nation Cuba at 58, and the African nation of Namibia at 59.
Years of dysfunctional warfare have also sunk the United States ever deeper into debt, and the country now runs the risk of debt-induced instability, hyper-inflation, and social unrest. At the end of the fiscal year 2019, the United States’ national debt to GDP ratio was 79% — and coronavirus response measures have since added to the burden.
While some economists argue debt doesn’t threaten stability, The U.S. government has a track record of defaulting on obligations; either by creating new currencies as in the revolutionary war and the civil war, or with President Franklin D.Roosevelt’s infamous Executive Order 6102 in April 1933 during the Great Depression, which meant private gold owners were obliged to take their bullion to a bank and exchange it for dollars.
Switzerland is a neutral nation that has stepped back from Europe’s political shenanigans since the middle ages, but still maintained an army to defend incase of invasion. This nonpartisan status is reflected in the country’s role as host to the headquarters of multiple international organisations, and its economy focused on commerce, finance, and foreign investment.
The Swiss people have a reputation for prudence, and the Swiss economy is characterized by low inflation, stability, and relatively low debt. Compared to the United States’ 79% Debt to GDP ratio, Switzerland’s was just 33% in 2019.
Both Switzerland and the States harbour a historic fondness for gold. In America, this dates back to when “there’s gold in them thar hills!” became a catchphrase for prospectors heading west, and in Switzerland, since Celts and Romans panned for gold in mountain streams.
But while America gave up the gold standard in 1971 under President Nixon, the Swiss franc remained 40% backed by gold until 1992 when the country joined the IMF. Even today, a good chunk of the population would still prefer to go back to gold-backed money — as shown by the failed referendum of November 2014 which proposed a restoration of 20% gold backing for the Swiss franc.
The sheer scale of the United States means it can lay claim to having the largest official gold holdings in the world. But when measured per capita, Switzerland is actually home to the world’s largest gold reserves. This is due to the country’s status as a hub of the gold industry.
Each year, around 70% of gold mined makes its way to Switzerland to be refined before being cast into bars, coins, jewelry and other forms for industrial use, and as the majority of gold vaulting companies are also based in Switzerland, this creates a deep and liquid market for physical gold trading.
Industry Regulations and Banking Secrecy Laws
You can fly into the United States with any amount of gold worth under $10,000 without telling a soul. But if you are carrying more than $10,000 of gold, you will be flagged as a potential money launderer and required to fill out a FinCEN 105 form to explain your activities to the authorities.
Switzerland on the other hand has no limits on what you can carry in. Besides the baggage weight restrictions for travelers on commercial airlines! This laissez faire attitude and lack of currency restrictions have helped give Swiss banks an infamous reputation as the final resting place of the ill-gotten gains of banksters. And while banking requirements today are more stringent than ever, Switzerland still grants a greater degree of privacy and seclusion than its American counterparts.
The repatriation of gold from America
If you’re still unconvinced that Switzerland is the best place for your gold, then you only need to look at the moves of central banks.
Since the crisis of 2008 when faith in the financial system was shaken, European central banks have been pulling gold out of American vaults and back to Europe: The German Bundesbank took 300 tons of its 1,500 tonne gold reserve from the U.S. to Frankfurt in 2013, and Holland then followed suit in 2014, returning 122.5 tons of Dutch gold reserves to Amsterdam from New York.
Turkey, Hungary and other European countries have since made similar moves, citing the need for absolute security in times of crisis.