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Owning Gold Was Once Dangerous

By Alex Planes - Apr 5, 2013 at 11:33AM

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Learning from the market's past to understand its present.

On this day in economic and business history...

Gold, a favored financial redoubt of inflation-fearing investors, was for many years beyond the reach of law-abiding American citizens. It all began on April 5, 1933, when President Franklin D. Roosevelt signed Executive Order 6102, which effectively confiscated nearly all the privately held gold in the United States. The order was a far-reaching action, which declared that:

  • Gold hoarding was thereafter prohibited by any individual or business endeavor.
  • Anyone with gold was required to deliver it to a Federal Reserve bank by May 1.
  • Gold in amounts of less than $100 would be exempt from confiscation.
  • The only exceptions would be in cases of legitimate industrial or artistic use.
  • Gold was redeemable for $20.67 per ounce ($370 in inflation-adjusted terms).
  • Anyone found to knowingly violate the anti-hoarding order could be fined up to $10,000 or imprisoned for up to 10 years.

The criminalization of gold possession was in many ways a continuation of FDR's radical financial-system moves, begun only a day after his inauguration with the nationwide bank holiday that became a turning point in the Great Depression. The Dow Jones Industrial Average (^DJI 1.76%) had given up most of its gains following the monster pop from the end of the bank holiday: Its 56-point close the day before Roosevelt's order was within spitting distance of its pre-inauguration level of 54 points. Following the gold confiscation, the Dow took off. After a brisk rebound, it would never again close much below 90 points, and even this was only a floor for the index to bounce off in the bear markets to come.

Roosevelt's order was enhanced by a June edict that pulled the U.S. off of the gold standard after nearly $800 million worth of gold and gold certificates had already been removed from public circulation. In a year, the government unilaterally raised the price of gold to $35 an ounce, which swelled the value of the Federal Reserve's balance sheet at the stroke of a pen. Prior to these drastic acts and during the early years of the Great Depression, the dollar underwent the only deflationary episode in its modern history. After the bank holiday, the gold confiscation, and the abandonment of the gold standard, the dollar resumed a relatively stable pace of inflation that continued until the 1970s commodity shocks.

These shocks, in combination with President Richard Nixon's 1971 abandonment of gold convertibility, were motivating factors behind President Gerald Ford's 1974 relegalization of private gold holdings in the U.S. By 1977 the country returned to a state roughly approximating the pre-Roosevelt era, only without a gold standard or a fixed price to which the currency might adhere. The years following the relegalization of gold holdings experienced the greatest gold-price bubble in history -- a comparable rise in SPDR Gold (GLD 0.05%) today would bring its price to $3,600, the equivalent of $36,000 per ounce. How long will it be before we get "Gold $36,000" books to go along with Dow 36,000 from the dot-com bubble era?

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$33,212.96 (1.76%) $575.77
SPDR Gold Trust Stock Quote
SPDR Gold Trust
GLD
$172.85 (0.05%) $0.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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