RSS Feed MenuRon Paul has said that he wonders if there’s gold in Fort Knox and says he’ll introduce legislation demanding an independent audit of the government’s gold reserves. The audit is unnecessary and, even if it were a good idea, the entire 8,133.5 tons of gold the government keeps on hand is an anachronism. In the long term, the country should study it.
An independent audit is unnecessary because there’s simply no evidence that the government has sold any gold without disclosing it. Gold prices sit near record highs and the United States government is the largest holder of gold in the world by a significant margin. Given that the United States holds about $317 billion worth of gold valued at the current price of around $1,200 an ounce, any significant sale of the reserves would have depressed prices. Instead they’ve risen. Even if the government had somehow sold the gold, it seems nearly impossible that its physical custody could have been transferred to someone else without a lot of people noticing. (In private sales, physical custody rarely changes hands.)
In any case, the reasons for the United States to continue holding so much gold seem a little anachronistic. The country’s practice of maintaining the world’s largest gold reserves began after World War II when, under the Bretton Woods system of fixed exchange rates, the United States let other nations redeem dollars for gold at a set price. The entire system existed to establish fixed exchange rates between the world’s major currencies. But it never worked particularly well and underwent a number of revisions (most prominently in 1968, when the price of gold was allowed to float.) In 1971, the Nixon administration ended all government-backed convertibility to gold and let the dollar float freely in international markets. By the mid-1970s, all other major currencies floated as well. But the dollar remained the single largest form of foreign exchange reserves for most of the world’s economies and, therefore, a de facto world currency.
In theory, the ability of the government to redeem some outstanding dollars for gold undergirds this system and the continued (although weakening) status of the dollar as the world’s reserve currency. The dollar’s widespread holding in reserves, in turn, increases the value of dollars and lets the United States run higher budget and trade deficits than it otherwise could. But the relative strength of the U.S. economy and military has a lot more to do with this than holdings of gold: $317 billion, after all, is only about 2 percent of the U.S. GDP.
With a lagging economy, the United States probably does need to hang onto most of its gold. A flight of other countries from the use of the dollar as a reserve currency—which could happen—would simply cause too many problems. In the longer term, however, economists should look into the wisdom of keeping the gold reserve.
Gold, after all, is basically an economic sucker bet. It has only a handful of industrial applications and most of the world’s gold is in jewelry. Unlike modern currencies (which are backed by national economies) and even other commodities (oil, aluminum, coal) with industrial applications gold really has value only because people pretend that it does. It can’t be used directly to make much of anything or to buy goods. Even if the U.S. holds on to some form of commodity-based reserve, it’s unlikely that 70 percent of it should exist in the form of gold.
In short, there’s no reason to audit the U.S. gold reserves. In the long term, however, the country may want to consider getting rid of them.
CO Independent // Aug 31, 2010 at 1:36 pm
@JimBob:
>> CO Independent. No one except my wife knows what I have in those boxes. Not the bankers or the government. Like millions of Americans I have safety deposit boxes.
By FDR’s 1933 executive order safety deposit boxes were sealed and could not be opened without the presence of an IRS agent. Any gold you in your safety deposit box was confiscated at the bank. It never left the building.
They don’t need to know what you have in the safety deposit box. If it is in the bank they own it.
WillyP // Aug 31, 2010 at 1:41 pm
paolo,
Right. I think you’re a certified kook if you believe that. Let me quote Mssr. Bastiat:
“Yes, like all other barren dreams formed to promote universal felicity. The extreme facility of the means which you recommend is quite sufficient to expose its hollowness. Do you believe that if it were merely needful to print bank-notes in order to satisfy all our wants, our tastes, and desires, that mankind would have been contented to go on till now without having recourse to this plan? I agree with you that the discovery is tempting. It would immediately banish from the world, not only plunder, in its diversified and deplorable forms, but even labor itself, except in the National Printing Bureau. But we have yet to learn how greenbacks are to purchase houses, which no one would have built; corn, which no one would have raised; stuffs, which no one would have taken the trouble to weave.”
http://bastiat.org/en/what_is_money.html
easton // Aug 31, 2010 at 1:48 pm
$317 billion out of a what, $13 trillion debt?
Yes, freaking duh. What, you mean unless it were 1 trillion or more it would not be worth it? How little you understand of basic economics.
Anyway, I am not saying all 317 billion, that would kill gold prices, no, more like 50 or 60 billion.
I don’t see the harm, and I see the benefit. 50 billion less owed is better than owing 50 billion. Poor WillyP simply can’t grasp this. I paid off my wife’s car in total though it is but a small portion of the bill because it was good not to owe the money on it. Poor, poor WillyP can’t even grasp this most elemental of ideas.
paolotheseer // Aug 31, 2010 at 1:51 pm
Dont quote someone else.
Start thinking for yourself.
The mere act of printing money does not make us richer.
Money has no value, right?
The questionis whether it enables WEALTH TO BE GENERATED.
Does it enable more ECONOMIC TRANSACTIONS TO TAKE PLACE.
Money is the LUBRICANT. It’s not WEALTH.
We can all sit in our basements, hoarding, counting our gold coins, and watching “the value of gold go up”.
Supremely pointless.
Unless you are earning commision on the sales. Smile …. Here comes a message from our valued sponsor …. Goldline!
Newsprism // Aug 31, 2010 at 1:53 pm
Sure, we should sell the gold off. But first, melt it down and mint gold coins with images of a gravestone reading, RIP USA.
WillyP // Aug 31, 2010 at 1:55 pm
paolo,
I quoted somebody else because he addressed your fallacy 150 years ago, and they are the same principles now as then. I’m sorry you’re weird and have a fetish for counterfeiting. I would recommend not voting and you might feel better.
As for the “lubricant,” see here:
http://www.americantusk.com/engines-lubricant-thins-out.html
easton // Aug 31, 2010 at 1:55 pm
WillyP: nobody on this site understands economics (well that’s not quite true. there are about 1 or 2
Yeah, and it sure as hell ain’t WillyP. So let me get this right, if you had some stock that was at a premium and could use that money to pay for one year of your childs college, you wouldn’t sell it unless you could pay all 4 years, your mortgage on your house, your electric bill, your car payments, etc.
I am literally astounded at how tiny is your grasp of the most basic forms of economics. Um… WillyP have you ever heard of buy low, sell high? Gold is very high now, we have a lot of debt. You can use gold to get money to pay off some small portion of debt.
I feel like I am trying to teach Homer Simpson economics.
easton // Aug 31, 2010 at 2:12 pm
paolotheseer, poor WillyP simply can’t grasp any of this. He reads some pretty words, struggles to grasp the meaning, and feels like he understands something. But basic common sense is beyond him.
You know WillyP, on Yap they had Stone money, big impossible to move circular stones that were assigned value by the chiefs and everyone went along with it. And it worked. For countless generations it worked.
You know nothing of history or economics. In fact, you don’t even seem to be having any argument whatsoever.
Short term as I said, buy gold, fine, knock yourself out. The world could descend into a new dark ages.
But being that South Africa has huge unmined reserves and that the regime that is running is is not the kind I would place any bets on, you would be a fool to assume that some Mugabe type nutjob taking over would be the end of your delusions of the permanent value of gold.
And no one here can dispute this.
Seriously, imagine if Mugabe were President of South Africa and not Zimbabwe, he would have flooded the market with gold.
Gold might be a good bet, or it might be a suckers bet, but it is a bet dependent on the stability of South Africa.
paolotheseer // Aug 31, 2010 at 2:12 pm
Please don’t provide any more links to second-rate thinkers. Particularly not to 2nd-rate hack blogs.
You gotta think for yourself.
WillyP // Aug 31, 2010 at 2:49 pm
easton,
you’re genuinely contemptible and don’t require or merit any further of my attention.
paolo,
bastiat is a second rate thinker? would you like to read the same thing in the writings of copernicus, jefferson, condillac, hume, menger, mises, or hayek?
“paolo” – that sounds like a catholic name. perhaps aquinas? is that first rate enough for you?
i do think for myself. but that does not imply that i disagree with whatever has been said before in the past.
CO Independent // Aug 31, 2010 at 4:15 pm
>> Yeah, and it sure as hell ain’t WillyP. So let me get this right, if you had some stock that was at a premium and could use that money to pay for one year of your childs college, you wouldn’t sell it unless you could pay all 4 years, your mortgage on your house, your electric bill, your car payments, etc.
>> I am literally astounded at how tiny is your grasp of the most basic forms of economics. Um… WillyP have you ever heard of buy low, sell high? Gold is very high now, we have a lot of debt. You can use gold to get money to pay off some small portion of debt.
>> I feel like I am trying to teach Homer Simpson economics.
Easton, you rarely write more than a few words with out betraying what a fool you are, and this post was no exception.
“Gold is very high right now, and we have a lot of debt” so says Easton. Gold is high compared to what? To what you believe it should be? And did it ever enter your mind that perhaps the price of gold and the level of debt are correlated?? Gold is high in relation to its price level ten years ago, but gold is low in relation to the size of the fed’s balance sheet. If you believe that the Fed can successfully draw down its balance sheet and that the US government can successfully manage its quagmire of debt and unfunded obligations then gold probably looks overvalued to you. Good luck with that.
Again, gold is a store of value, and if you possess physical gold it is independent of government interference. You can argue until you are blue in the face, but the empirical data demonstrates that gold has been one of the strongest investments since Nixon pulled the US off the gold standard in 1971, outperforming every other asset class of which I am aware.
Paolo, you confuse money with credit. I don’t have time to school you today, but there is one word that refutes your position: Greece.
WillyP // Aug 31, 2010 at 5:41 pm
extremely interesting, the case of Yap stone money. I had never heard of it. I’ll have to read a bit more. It’s fascinating.
Either way, imagine for a moment if someone invented a machine that created new Yap stone money at no cost. Imagine they flooded Yap with these “counterfeited” stones. What would happen to the value of the original stone money, assuming it was indecipherable from the counterfeit stone money?
Surely it would dilute the purchasing power of the stone money; surely it would cause a transfer of wealth to the Yap stone money counterfeiters; surely it would still be inedible, provide no shelter, and not keep the villagers warm or protected.
In other words, money is a medium of exchange, nothing more nothing less. When gold is used as a conductor, it is not money, technically. When cigarettes were used as currency in in POW camps, they acted as money. When the gold is seized and all that’s left is paper bank notes, they serve as money, too.
But when the printing presses spin out of control and flood a people with worthless bills, it does not make them any richer. All it does is transfer wealth, dilute purchasing power, and cause the “business cycle.”
Letter From Washington – Gold, Taxes, And Who In Congress Is Going To Lose // Sep 2, 2010 at 8:23 am
[...] Here I look at some recent disputes about the U.S. gold reserves. What surprised me, researching the article, is that the gold reserves are so tiny in relation to our GDP or even the number of dollars held as reserve currencies. Obviously, something other than the gold in Fort Knox is encouraging people to hold dollars in reserve. Even if the U.S. somehow collected all the gold in all of the world’s reserves it still wouldn’t have gold equal to more than maybe 6 or 7 percent of GDP. [...]