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June 17, 2009

The Gold Storage Solution: Switzerland
by Doug Casey

A BIG GOLD Special Report

At Casey Research, our task is to accurately forecast trends, do it early, and help investors profit from what we've found. Without claiming infallibility, we've gotten it right more often than not, and by distinctly profitable margins.

But research to anticipate what to expect is the easy part.It's the when-to-expect-it-to-happen that's tricky, and waiting for a predicted trend change or crisis sometimes can test our confidence. The crisis we warned about years ago is now here, and its arrival has altered many of the rules for investing.

If you're reading this report, you probably followed our earlier advice and have accumulated a nice-size crisis insurance policy in the form of physical gold. Now you need to decide what to do with that stash of Midas cash. It may have been born in a corner of your sock drawer, but perhaps now it's stress-testing an attic rafter. Unlike gold ETFs and mining shares resting digitally in your brokerage account, physical gold brings with it questions of space and place: how and where to store it.

As to the how, the most common methods for storing physical gold will be obvious to most investors: concealment, a home safe, or a bank safe deposit box. In BIG GOLD, we recommended using a home safe because 1) it keeps the gold under your immediate control, and 2) it eliminates any risk that storage at a bank carries: emergencies don't schedule themselves bankers' hours; if a "bank holiday" occurs, access to a safe deposit box will be lost when it's needed most; and a court can order the seizure of its contents, or the IRS can freeze your assets.

So that's it? A one-size-fits-all storage solution?

No, not quite.

As your gold holdings grow, or if you already own sizable weight or are considering a large purchase, keeping all your golden eggs in one steel-and-combination-lock basket may not be the right solution. As we encourage above, having some gold in your immediate control assures that you can see yourself and your family through any calamity. Now ask yourself: can I keep a secret and not discuss it with anyone? Loose lips can only lead to a late-night, ski-mask-clad, armed visitation. How about the "security" company that installed the safe - how tight are their lips?

Further, keeping large amounts of gold in your possession exposes you to a latent threat: political risk. Or in 'round the water cooler jargon, a "government gold grab."

Think it won't happen in the good ol' U.S. of A.? Consider the surge of government pushiness over just the past six months. The U.S. government has usurped the free market by subsidizing entire industries and embarking on mega-dollar "stimulus" spending schemes, committing trillions to its efforts - money it doesn't have and must borrow or print. With tax receipts falling off and government debt exploding, the government's hunt for revenue could lead to increasingly desperate measures.

We've seen the 1933 black-and-white version of this script, in which the plot develops into a presidential diktat forcing delivery (confiscation) of gold owned by private citizens to the government in exchange for compensation at the price it finds most convenient. Will the temptation again prove too great? We don't know. What we do know is that once the credits roll, it's too late to start preparing.

So the final storage question must be confronted: where should your gold be stored?

Sending Out an SOS: Swiss Offshore Storage

One fundamental rule of investing that hasn't changed is diversification, and the principle applies to the locations you choose for storing gold bullion. Follow the principle where it leads, and you find yourself thinking about "internationalizing" your gold by holding some of it in another country. But it should be the right country.

So exactly where is where?

The answer is the safest country with the most secure facilities: Switzerland. Yes, still Switzerland.

For our money, er, gold, we can't think of a country with a stronger legacy of respect for private property. The country traces its formation back to 1291, and the first Swiss Confederation was formed in 1353. Complete independence came in 1648, when the Treaty of Westphalia recognized the final separation of Switzerland from the Habsburg Empire. Over the 361 years following the treaty, Switzerland has maintained its neutrality and shunned foreign military entanglements. Now that's shock and awe.

The country's domestic politics are characterized by stable, non-intrusive coalition governments. Such habitual civility, together with Switzerland's long tradition of respect for individual privacy, has kept this small, largely alpine country atop the list of the world's most trusted safe havens.

The Franc: Swiss Hit or Swiss Miss

The global financial and economic crisis has recently found its way into Eastern Europe, and the troubles brewing there center on the Swiss franc. The apparently dire situation led economist Arthur P. Schmidt to predict that Eastern Europe's difficulties would pour over disastrously into Switzerland. His predictions grabbed the headlines and a bit of attention.

So, in keeping with the Casey, "Intensely Curious, Focused on Facts," we dug behind the headlines. Here's the big nothing we found.

Engaging in a carry-trade-like gamble, individuals and businesses in Poland, Ukraine, Croatia, Hungary, Latvia, and Belarus borrowed heavily in Swiss francs, attracted by low interest rates. They crossed their fingers for trouble-free repayment as, for a while, their currencies strengthened against the franc. But that strength didn't last. The global economic slowdown hit Eastern Europe hard, and their currencies fell sharply against the Swiss franc, turning mortgages and other franc-denominated debts into horrible burdens. Said fingers are now doing a lot of pointing at who's to blame. The size of the problem, according to Schmidt, is 230 billion Swiss francs (US$200 billion), and the difficulty of collecting on the loans supposedly threatens Swiss banks with huge losses that could bankrupt the country. Schmidt refers to Iceland's recent national bankruptcy as a model.

We don't blame him for trying, but the report incorrectly assumes that all the Swiss franc loans to Eastern Europe originated at Swiss banks. They didn't. In fact, it's Austria's banks that have the greatest exposure to Eastern Europe. The day after the headlines, Credit Suisse released a report citing the latest figures from the Swiss National Bank that show Swiss bank loans to Eastern Europe totaled just SF33 billion (US$28.7B), or 6% of Switzerland's GDP. In contrast, Iceland's banks had lent over 1,000% of GDP.

Our conclusion: we see no evidence of an impending banking crisis or national bankruptcy in Switzerland. Heidi is safe.

To read the full report and learn all about Swiss specialist depositories, click here.

Doug Casey, Chairman
Casey Research, LLC.

Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained herein is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed herein are those of the publisher and are subject to change without notice. The information herein may become outdated and there is no obligation to update any such information. Doug Casey, entities in which he has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in these publications. Corporate policies are in effect that attempt to avoid potential conflicts of interest, and resolve conflicts of interest that do arise in a timely fashion. No portion of this web site may be extracted or reproduced without permission of the publisher.

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