In every crash distressed investors have to sell assets to cover...

In every crash distressed investors have to sell assets to cover margin calls and cover loans. The most liquid asset that always gets a bid is gold, hence it too initially sells off. However, once the weak hands have finished selling their gold the price of gold is the first to recover. It has ever been thus. Governments can change the legal status of gold too. That is a hazard of owning gold. However, the pool of gold is small in comparison to the economy and the government may consider it to be trivial in this day and age and not move against gold if gold is not mobilised in moving against the government.

The shares of the gold mining companies are different. There are fewer instances of governments moving against them unless it is a revolution that puts a totalitarian communist regime in control. They always nationalise everything. But I digress. In 1929 gold was outlawed as money in the US and all the gold coin in circulation was called in. As history has shown, not all of it was handed over at all judging by the number of pre-depression coins in the hands of collectors. Even Australia withdrew gold sovereigns from circulation in that era. With the demonetisation of gold the price of gold was allowed to float and find its own level far above the official valuation of the initial US$32 per ounce and the present US$42 per ounce. That is why the gold miners are in existence today and operating at grades that were uneconomic when the price of gold was fixed. Clearly, gold has a role in the currency system as the base of all currency and that is one reason why there are buyers for gold produced by the miners. This is why I am hopeful that the government will not move against the miners. The government can mandate that all gold be sold at market price to the central bank as China has done. This is convenient for the government as it is economical in manpower to police it. The government will have a fair idea of people who bought gold from bullion dealers after the Cash Transaction Reporting Act was passed and buyers had to provide proof of identity with the bullion dealers. The level of effort to dig deeper into ownership beyond this point becomes onerous to governments so it may well be that they will be satisfied with this level of control.

Our government uses the institutions already established in order to carry out it's objectives. The Tax Office does not sell you up when you owe massive amounts of tax. The Commissioner uses the courts to do it. You will be bankrupted and an insolvency administrator will take over your affairs, sell your assets and pay your debts with what is realised (after his/her fees are paid). If there is anything left over you might be lucky enough to get that back. Government will need the stock market to operate after a major financial crisis and a financial restructuring, as shown by Russia after the collapse of the Soviet Union. Shares held outside of the banking system should be safe from expropriation and, as was the case in the US in the 1930's the shares of the biggest gold miner went up 400% as it was the only legal way to own gold. That is my worst case scenario.

My better case scenario is related to the 1979-1980 gold mania. The speculation in the shares of gold miners was spectacular. Gold miners at the end of a financial cycle are the most profitable companies on the stock market as the input costs fall and the real price of gold is high (it buys more per ounce) so the dividends are solid and probably the best of any share on the market. Institutions (insurance companies and superannuation funds) will need that yield to service their obligations, not only domestic ones but international institutions will want to buy in as well. This will drive the share price for the gold miners much higher if there is a solid demand for the shares. First the established tier one miners will be bid up, then the junior miners will be bid up then the promising explorers (the ones with an ore body that will become a mine) will be bid up and eventually any company with an exploration licence will be bid up. In Canada the shares of companies owning "moose pastures" went up insane amounts from a very low base. I am sure that many people lost a lot of money speculating on those shares.

Right now I think that it is far too early to sell my shares in DEG. The stealth rally in gold is still running. Warren Buffett has just made his position public and that means that managers in funds now have to get in to the gold market. It has not yet transformed into a public rally. We will know that it is a public rally when the nightly news carries stories about gold miners and investors who got lucky and people are lined up outside coin dealers to buy even silver coins (there won't be many gold coins in any coin shops). That is the time to sell my gold shares and buy other under priced assets with the after tax proceeds. Yes, we will have to pay capital gains tax on our profits but unless the law changes it will be about 25% of your capital gain. I can live with that.

How long will it take to become a public rally is the big question. I cannot answer that because it is a process that must be worked through. The signs will be there for all to see when it happens. Some people say that you have to have a plan on when to sell. Others like to sell down a bit so they get back their initial stake and have the rest as free carry. I don't know if I am that smart but I would consider myself a success if I managed to lock in around 70% to 80% of the final top. That may be difficult if it is a blow-off top which is going exponential.

Sir Issac Newton went broke because he sold out of the South Sea Company too early, got jealous of his friends making 100 bagger profits, bought back in at the top and lost the lot. You can learn a lot from history.