Avoid the scrutiny of FATCA/FBAR/Form 8938 by putting your gold in an offshore safety deposit box

Cross posted from the Isaac Brock Society.

Simon Black (Do I Have To Report My Offshore Gold…?) asks whether custodial gold “accounts” (e.g., James Turk’s Gold Money) fall under FATCA provisions and his people think so. However, gold kept in a safety deposit box would not fall under FATCA:

What’s more, in all of those 544 pages, there is not a single mention of the words, “gold”, “silver”, or “precious metals”. So there’s still quite a bit of mystery with respect to the question, “Do I have to report my offshore gold…?”

I’m still having my team go through the rules; after an initial read, though, the language of the regulation does suggest that custodial gold institutions (like GoldMoney, etc.) should be reported. Offshore safety deposit boxes (like Das Safe) do not.

This is good news for “structuralists” like myself. In a discussion with Just Me, I learned that my suggestion of opening a few extra accounts to get one’s total over 25 (thus avoiding a detailed FBAR) could be “structuring”. Structuring is the practice of breaking up a single large transactions into multiple transactions below the reporting threshold. See what happened to this Greek American couple: My Big FAT IRS case. A US Person in Canada could withdraw funds from their FATCA covered account, until it is below $50,000, and then buy legal tender gold coins (Maple Leaf). These coins would go into safe storage–meaning it would be safe from burglers and from the snooping noses of the IRS, for such coins would not be reportable under FATCA, FBAR, or Form 8938. But almost certainly, it would be a violation of United States law for you or me to exercise our Canadian freedom to buy legal tender coins minted by the Royal Canadian Mint and legally purchased in a legitimate Canadian business, providing all kinds of jobs to Canadians. You would become a structuralist.

For those readers in Canada, I suggest that you take few seconds and take a deep breath. Breath in that Canadian air. Isn’t that good? That’s because you are breathing freedom–freedom from the tyranny of the United States.

Bear in mind also the ramifications of these legal tender coins for Form 8854. The current retail buy price of the Maple gold (1 oz of super fine gold, purity of 0.9999) is about $1650 (See Canadian PMX in the Toronto Area), but its face value under legal tender laws is $50 CDN. So let me ask the question: when reporting on Form 8854, does one report the legal tender value or the intrinsic value of legal tender coins? If you had ten million US quarters, you would have to report their face value on Form 8854 (US $2.5 million). It would be illegal to report only the intrinsic value of the coins (ca. $500,000). This is because the US quarter is a legal tender coin and its reportable value is what is marked on the coin. So therefore, if you have 6,000 Gold Maple Leaf coins, you would be required to report CDN $300,000 on Form 8854. Accuse me of being a structuralist vis-a-vis United States law. Just do it! But I am obeying the laws of Canada where I live.

There are some people who say that gold is not a good investment, such as the crony capitalist extraordinaire Warren Buffet. Others point to the gold chart and say that this is why gold is a bad investment. Well, I admit that that argument is slightly counter-intuitive.

Price setting mechanism for gold and silver is broken

The law of supply and demand should dictate that when a physical commodity is scarce and there is unsatisfied demand, that the price of that commodity will increase. Yet in the last few weeks, the world market price for the scarce commodities of gold and silver, which are still at least a week away from physical delivery in our local Canadian PMX,  has shrunk.  How is this lower price helping to assure that buyers and sellers are able to make transactions?  Lower supply of the physical item should result in a higher price, and instead, we see the price go down. Clearly, the price setting mechanism is broken, for if there is supply but no demand, the price goes down.  In this case, we have great demand but no supply.  So the price should go up.  The fact that the price has gone down is proof that the gold and silver markets are manipulated and not free.

Paper-Gold Fraud Now Out In The Open by Jeff Nielson

In Paper-Gold Fraud Now Out In The Open, Jeff Nielson makes the point, that I made in an earlier post, that the market price of gold is manipulated, offering the supply crunch of physical gold as the proof.  Here are some interesting tidbits:

The virtues of (actual) “free markets” are well-known to anyone familiar with basic market dynamics: they self-correct. If supply exceeds demand, the price falls to a sufficient level to discourage more supply and encourage more demand – until those simultaneous dynamics achieve equilibrium: supply and demand matching, with prices stable.

Conversely, where demand exceeds supply; prices must rise sufficiently so that more supply is encouraged and more demand is discouraged, until once again equilibrium is achieved. Thus a permanent supply-deficit is ipso facto proof of price-suppression.

The problem with the price-suppression of any kind of physical “good” is always the same, one inevitably runs out of inventory as the repressed supply and excessive demand caused by artificially low prices means that buyers will always outnumber sellers.

Now this should help explain why investor grade bars and coins are not available at bullion stores–the price is manipulated too low.  Buyers are readily available but sellers are scarce, and so physical metal is not available.

Disclosure:  I own Sprott Physical Gold Trust and Sprott Physical Silver Trust

Focus on what is real not what is safe

Monty Pelerin offers some investment advice and then asks his readers what they would suggest. I responded with the following comment:

Gold mining companies may be good in the sense that their assets (NAV–Net Asset Value) are largely trapped under ground and brought to the surface at a slow rate and sold for profit; thus they will still be recovering value from the ground when money has collapsed and gold is needed as a currency. I think the same is true of Canadian oil companies, which have large stores of oil and gas in the ground (i.e., NPV–Net Potential Value)–the Cardium and Swan Hills are largely, e.g., are known quantities exploited by vertical drilling and are now offer new yield through new technologies, i.e., horizontal drilling and multi-fracking. Billions of barrels remain in the ground, and EOR (Enhanced Oil Recovery) methods, such as the injection of natural gas, that companies like Petrobakken (see this post) and Crescent Point are beginning to employ promises to produce as much as 25% more recoverable oil from the fields–this means that these companies could increase their NAV by as much as 5 times, since their current NAV is based on 5% recoverable oil. The US has a lot of oil too, but the Canadian regulatory environment remains for now a far more favourable than in the US. Yet this remains high risk, and my portfolio which consists most of these oil companies and few miners is suffering YTD.

After your last post by Ann Barnhardt, and the news coming from Gerald Celente about how his cash was stolen from his brokerage account, one wonders if any brokerage account is safe any more.

Thus, the operative word in all this is risk. Nothing is safe. Perhaps the best thing is to focus on what is “real” as opposed to what is “safe”. Fiat money is not real, for our estimation of all that is denominated in nominal currency is actually a reification–the assigning of concrete value to an abstraction. What is real? Physical gold & silver, wine kits (see Wine as Currency), spam, beans, unused toilet paper, used aluminium beverage cans. What is reified? Bonds, derivatives, currencies, the value of gold in terms of fiat currency, etc. I have a canned spam collection, Monty Python not withstanding–mind you, I like spam. It has a long shelf life and is good food during times of crisis–that’s why my Korean family from Hawaii used to eat a lot of it–it could survive the sea journey from the mainland and was a staple during WWII.

Weimar America: I. It’s starting

I have been flabbergasted by the lag between the price of crude oil, now at $108, and the cost of certain Canadian junior and intermediate oil companies, whose share prices have not kept up with commodity prices.  The market seems to be saying, “Hey, I’ve seen this trick before.  I buy the oil companies, thinking I can take advantage of oil prices, and then the price goes down and I am left holding a bag of money-losing companies.”  Well that could be true.  But then again, this could be the start of Weimar America.

In Weimar Germany, when hyperinflation started, people initially slowed down their buying of consumer goods because they felt that the prices weren’t normal, and that they should soon fall back to some level of sanity.  But instead, prices continued to rise.  Thus, they were forced to pay higher prices.  They soon learned that the time to buy was immediately after receiving money.  One of my professors who was a boy during Weimar Germany recounted how, the moment his parents were paid, he had to rush with their money to the market before the prices went up.

Now this is happening all around us.  I know that Ben Bernanke is saying that high prices are due to commodities, and that they will come back down.  But I doubt that you can come up with a single time that he’s ever made an accurate prediction. Here are some signs that Weimar America is now here.

(1) Car prices:  I bought a RAV4 in February because the price hadn’t changed in over a year and because Toyota Canada offered me free 36 month financing.  I felt that car prices would be going up because of commodity prices.  The earthquake in Japan has shut down parts factories and now production will cease in Toyota’s North American plants.  Similar shut downs will likely occur to other manufacturers around the world who depend on parts from Japan.  Supply will go down and this will cause car prices in the near term to increase steeply.  But don’t expect prices to go down once those Japanese factories are back online.  This is a catalyst for pushing prices steeper, where they must go.

(2) Oil prices:  The crisis in Libya and in other oil producing countries has lead to $108 WTI and $121 Brent.  The crises are not going away, because many are caused by instability due to food inflation.  Don’t expect crude to come back down in price.

(3) Precious metal prices:  Despite those who call gold a bubble, gold seems to have found support at $1400.  Silver has been experiencing unreal gains.  Investors who want to have some exposure to physical metal would do well to establish a starting position lest prices don’t come back down.

(4) Flight of capital:  Wegelin & Co., a Swiss bank that caters to wealthy clients with beaucoup bucks to invest is leaving the United States and has written up a eight page, double column, writ of divorce, entitled, “Farewell America“, explaining that the new bank regulations that the Obama led government has put into place are not worth the trouble.  Besides, they say, the USA is now in a major debt situation that it can’t get out of because (1) Foreign creditors are now decreasing their net debt to the US; (2) the US is running its entitlement programs as a ponzi scheme; and (3) Federal Reserve Bank is monetizing the Federal debt.  They are recommending that their clients completely leave the United States.  They won’t be coming back until things are fixed, if then.

Here is a salient excerpt from “Farewell America”:

The sensibilities of their own capital market: this is what the smart guys in the IRS have very probably failed to take into account. Their onesided regulatory proposals, focused on maximizing the tax take, are based on the entirely unproblematic and undisputed attractiveness of the USA as a place of investment for investors from all over the world. We believe this assumption to be utterly wrong. Why?

A glance at the USA’s debt situation suffices to show that apart from oil, there is really only one element of strategic importance that the USA will need in the coming years: capital. The (declared) public debt – national, state and community – amounted to some 70 percent of GDP in 2008. With the absorption of further debt in the wake of the financial crisis, by 2014 the level of explicit debt is likely to be significantly above 100 percent of GDP. By then the interest will have doubled from around 10 percent of total public revenue to around 20 percent, on moderate assumptions.

This is generally well known. What is generally less well known is that in the USA too, as in so many ailing European states, this explicit perspective reveals less than half the truth about what has been implicitly promised by the state in the way of future benefits. Correctly accounted – that is, as probable future payment flows discounted to present values – the picture would look a good deal bleaker. There are studies, such as the one by the Frankfurt Institute in November 2008, that reckon with a total level of debt for the USA of up to 600 percent (!) of GDP.

April 7 is my “Farewell America” date.