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Why will Capital Controls Boost Silver Prices? [Transcript: 2012 Virtual Silver Conference]

January 31, 2012 - 4:30pm

The following is the transcript of Julian Phillips’ presentation at today’s Virtual Silver Investment Conference.To listen to the audio and view the slides associated with the presentation, please attend the conference here.


My name is Julian Phillips, and I'm very pleased to be talking to you on the SilverSeek Investment Conference 2012.I think it's a most opportune time for silver in particular, as well as gold, because of events that have been taking place in the last two years.But in fact, these events were initiated way back in 1971, when the gold price was delinked from the monetary system and allowed to float.At the time, the dollar was devalued against silver – sorry, against gold, all the way through to the mid-1980s.


But during that time, certain precedents were set, and today I'm going to be talking to you about why world capital controls boost silver and gold prices.For a start, what are capital controls?These are often misunderstood and given obtuse labels, but in fact, they in their simplest definition are any restraints on capital in and outflows of one sort or another and in all forms.They would include, for instance, the management of an exchange rate.They might go as far as to be exchange controls where every single movement of capital or money in and out of a country is monitored by the central bank.


So why, you might ask, are capital controls needed in the first place?Well, it's either because a country is experiencing too large a flow entering the country and not able to absorb and use it, for instance, carry trade inflow seeking high interest rates, and it may be that so much is coming in that it's beyond the monetary base able to cope with it.Inflows then force up the exchange rate, damaging the trade competitiveness of a nation.For instance, Switzerland and Japan of late.


Or maybe a country wants to stem the outflow of capital, which would undermine the economy if it continued.Argentina before the peso was reinstated was a classic case.Who knows?We might see Greece follow the same story in the near future.


Capital controls, what sort of examples can we tell you about?We've mentioned exchange rate interventions.It could be that interest rate levels are actually manipulated to attract or discourage capital inflows.It may be that taxes, such as withholding tax on dividends or interest payments, are used.There may be restraints on foreign direct investments, such as you see happening in China now.


We have provided you with certain articles that have been produced by the Gold Forecaster in the past, which we hope you are able to enjoy through your subscription to the Silver Forecaster or to the Gold Forecaster.


In essence, the need for capital controls are because a nation is suffering from some form of distress because of the inflows and outflows.And we're living in a globalized world such as never before seen, where capital is free to rush from one place to another, seeking value, profits, or simply the preservation of wealth.And in today's world, these amounts are considerably larger than any tsunami could ever be.


However the lack of capital controls in the major developed world is significant, and partly responsible for the flows that we're seeing at the moment.What is not being publicized is the real damage these are doing to the banking system and to the trade competitiveness of each nation suffering from them.


Now the currency world is rather like a tree, with the US dollar as the tree trunk, and which – with every other currency as one of the branches.Now most currencies are the same sort of shape and completely different from the precious metals, and that's why precious metals are being sought out today by investors seeking to get away from the ailments that currencies are suffering from.


And we'd like to explain one rather dramatic possibility so that you can get the full importance of potential capital controls.And we'll take a scene that might well happen now in view of the delay to the solution to the Greek debt crisis.Imagine, if you will, that Greece is now going to leave the euro zone, and the drachma's going to be reinstated.We would expect that ahead of the return to the drachma, while Greece is still using the euro, they would impose capital controls, which under the Maastricht Treaty are allowed for short periods of time.


This – these capital controls will give Greece time to institute full exchange controls, and thereafter, we would expect to see a two-tier currency.The first tier would be the commercial drachma through which international trade would pass, and that would trade probably at a similar level to the euro at this time.On the other hand, you would have the financial drachma, which would control inflows and outflows of capital.


Now the withdrawal of capital from Greece would be so dramatic that we would expect the financial drachma to trade at a 60 percent discount to the commercial drachma.The results on the price of gold and silver in Greece would be a multiplication by 100 over 40, which would adjust to the lower value of the financial drachma.And in so doing, the value and preservation value of gold would be emphasized tremendously in the developed world.


We would think that such a most, whilst isolated to Greece, would certainly disturb the world of banking as well as many other nations where the possibility of such controls would come into play, and more so the fright that the currency world would get would precipitate even more capital flows from the weak to the strong currencies.And when I say strong, I don't mean either strength of the dollar, I mean the very liquidity of the dollar and the fact that it is the tree trunk, because the dollar has its own problems, as you well know.


Many countries have in the past controlled even precious metals, because they see this as detracting from the currency world.Indeed, it's common knowledge that both bankers and governments are loathe to rely on gold and silver in a full monetary sense because they're prevented from expanding or contracting their money supplies as they wish.They are always held accountable by the gold price.


A way to control gold and silver has been in the past either through direct sales of in particular gold, and we've seen that in the silver world too, by Russia and India and China in the past, but more so in the gold world, where the European central banks have been selling gold since the turn of the century.And prior to that, both the IMF and the United States as well as other countries such as Britain have been selling gold through those years, the objective being to discredit gold to some extent while enhancing the acceptability of currencies.


You might well ask yourself, is this possible in the United States?We would say most certainly so.In fact, the COMEX exchanges, both silver and gold, were examined by Senator Joe Lieberman, who was tasked with finding controls over speculation in the commodities market.He revealed the drafts of three bills that would sharply curtail the activities of financial investors in the commodities market.The most extreme proposal was going to prohibit private and public pension funds with more than $500 million in assets from investing in agricultural and energy commodities traded on a US futures exchange, foreign exchange, or over the counter.


A second proposed bill would direct the Commodities Future Trading Commission to establish total limits on the share of a commodity market held by financial investors.A third proposal would direct the Futures Regulator to impose speculative position limits on any stakes not related to real hedging activities, an action that could limit the commodity swaps activities of big investment banks such as Goldman Sachs.


Well, these were not imposed, but what has happened is that the large banks have virtually withdrawn from the COMEX markets, and you've seen that in the huge drop in the net long speculative positions held in both the silver and the gold markets there.In the gold market at one time, for every $100.00 on the gold price there was a matching of 100 tons held in net speculative long positions.Today, this has fallen by more than half.


Has the danger of these controls dissipated now?We believe not.In fact, with the worsening national debt crises, and alongside them the dangers to the banking system, which have never been more dramatic, the use of gold in the monetary system is coming back onto the global agenda.As the head of the World Bank, Mr. Zoellick, put it, there is a need for a value anchor for currencies, and we believe that at some point in the not so distant future, national governments will see fit to appropriate, confiscate its institutions' gold, and likely that of their citizens, to maximize their gold holdings at a time when gold will find an active use in shoring up confidence in currencies, which will be rapidly losing such.


This will not be in a classic restoration of a gold standard, but in a system tailor made for these days.Under this system, for instance, if the US government wanted to limit investing in gold because the government wished to control the gold market, the above proposed controls would be imposed on holders of the largest gold ETFs, and even extended to confiscating individuals' gold, wherever held, even overseas, under the threat of penalties in the owner's land of residence unless that gold were repatriated.So holding gold overseas by itself will not be sufficient.Who knows whether an official from the Fed will knock on your door and say, "Either you repatriate your gold or you face penalties within your own country against other assets"?


To this end, we will shortly be announcing – we will shortly be announcing the arrival of two companies which you will see on the slide there in front of you that these two companies are joining to form a system whereby your gold can be held in Switzerland without being confiscated and without harm to the owners of this precious metal in your home jurisdiction.


And that's the key to holding it cleverly overseas.Not sufficient, as I said, to hold it just overseas.It must be held in such a way that you don't face home penalties, and we will ask that you look in our Gold Forecaster newsletter and our Silver Forecaster newsletter for details of their arrival when they are announced.


How will gold and silver prices benefit in the event of capital controls or confiscation?Well, the climate as we've described when these measures are introduced will be one of falling confidence in currencies, and at the same time, that implies that the prices of both silver and gold will be rising.Let's assume, for instance, that governments like China want to increase their gold holdings.It's not really sufficient that they buy themselves and hold.It's good that they encourage their citizens to buy gold, and in fact, the current law, again, a form of capital control, makes it illegal to export gold from China.So they're – the Chinese are increasing the national gold holdings, both private and official, quietly and firmly making it really happen quickly.


How will silver benefit, you might say.I've been talking about gold.Well, if gold comes under the control of governments, silver will become the individual's wealth preserver, and continue, we believe, to reside in a relatively free market.Because silver is consumed industrially and is mainly an industrial metal, governments are unlikely to seize it.


So what happens then, we believe, will be the silver price will leap to levels unheard of as it replaces gold at an individual's level in portfolios of individuals and institutions.So we do believe that silver will outperform gold in the future, even when gold is confiscated by governments.


Clearly, if governments are going to do such, don't expect to see a fixed price, as we saw under the time when gold was confiscated in 1933, subsequently revalued or the dollar devalued to $35.00 an ounce, a 75 percent appreciation in the gold price.Expect it to be a floating price, just as currencies are floating today.And with that floating price, silver too will float against gold as it does today, but at considerably higher levels relative to the size of money supply worldwide, if it is to relate to money in this world.


In fact, we've seen it in the last two years used as collateral, so more than simply a price relationship, we're seeing gold used as something more valuable than its price by way of guaranteeing loans to the extent that the availability of loans in national hands increases, as does the interest rate level is lowered because of this guarantee.However, we don't expect to see any public announcements on this front.We believe it's happening quietly out of sight of the public, but it's certainly preparing the way for a gold market, and more than that, a better silver market for investors in the next few years.


So we at Silver Forecaster recommend silver simply because we believe that this will outperform gold, and you will continue to enjoy it even in the event of government taking over the gold market.So we wish you happy investing and hope that you subscribe, as you can see on our slide, to the Silver Forecaster and/or the Gold Forecaster, so that you can keep in touch with the developments in these markets, both from a technical point of view and from a fundamental point of view, and we will do our utmost to ensure that you're in a position to be not just a wise investor, but a successful investor.Thank you.


[End of Audio]


To listen to the audio and view the slides associated with the presentation, please attend the conference here.

Julian Phillips - SilverForecaster.com

Julian Philips' history in the financial world goes back to 1970, after leaving the British Army having been an Officer in the Light Infantry, serving in Malaya, Mauritius, and Belfast. After a brief period in Timber Management, Julian joined the London Stock Exchange, qualifying as a member. He specialised from the beginning in currencies, gold and the "Dollar Premium". At the time, the gold / currency world exploded into action after the floating of the $ and the Pound Sterling. He wrote on gold and the $ premium in magazines, Accountancy and The International Currency Review.

Julian moved to South Africa, where he was appointed a Macro economist for the Electricity Supply Commission, guiding currency decisions on the multi-Billion foreign Loan Portfolio, before joining Chase Manhattan the the U.K. Merchant Bank, Hill Samuel, in Johannesburg, specialising in gold. He moved to Capetown, where establishing the Fund Management department of the Board of Executors.

Julian returned to the 'Gold World' over two years ago and established "Gold - Authentic Money" and now contributing to "The Silver Forecaster"

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