Should the United States sell its gold reserves?

[True Federalist (진정한 연방 주의자)]

If 90% of homes were just for show or speculation what would the housing market look like?

About what it looked like before the bubble burst.  American homes almost all have an excess of square footage and many of them have extra features not because their present owners want them, but because they will supposedly help the resale value of the home.  Too many took the statement that "your home is your castle" literally instead of figuratively.

[angus]

Gold has value because people make believe it has value.

All true.  But exactly the same thing can be said about the US Dollar, or any fiat currency.

The intrinsic value of gold is woven into the sociological fabric of all societies and over a long time span.  After all, we don't say, "All the glitters is not fiat currency."  And we don't say, "Silence is dollar."  And we don't look for a pot of greenbacks at the end of the rainbow.  

Gold has been adored by man since at least 5000 BC.  Gold was included among the gifts of the Wise Men in the New Testament.  The Aztecs called it the teocuitlatl ("excrement of the gods").  The Arabs tried, unsuccessfully, for hundreds of years to turn common metals into gold in a practice now known as alchemy.  There are even restaurants that will put gold flakes and gold dust in your drink or food, just so you can splurge and satisfy the urge to waste money and show off to your friends.  

I think you're underestimating not only the technical importance of gold, but also the immense historical and sociological value of gold.  

[CitizenX]

Gold has value because people make believe it has value.

All true.  But exactly the same thing can be said about the US Dollar, or any fiat currency.

The intrinsic value of gold is woven into the sociological fabric of all societies and over a long time span.  After all, we don't say, "All the glitters is not fiat currency."  And we don't say, "Silence is dollar."  And we don't look for a pot of greenbacks at the end of the rainbow.  

Gold has been adored by man since at least 5000 BC.  Gold was included among the gifts of the Wise Men in the New Testament.  The Aztecs called it the teocuitlatl ("excrement of the gods").  The Arabs tried, unsuccessfully, for hundreds of years to turn common metals into gold in a practice now known as alchemy.  There are even restaurants that will put gold flakes and gold dust in your drink or food, just so you can splurge and satisfy the urge to waste money and show off to your friends.  

I think you're underestimating not only the technical importance of gold, but also the immense historical and sociological value of gold.  

Yes well there are plenty of sayings regarding fiat currency in our culture too.

Movies
A Fist Full of Dollars
For a Few Dollars More

Television
64,000 Dollar Question
Who Wants to Be a Millionare

Music
For the Love of Money
Money Ain't a Thing

Sayings
A penny saved is a penny earned.
Put your money where your mouth is.

We can do this all day long and it proves nothing.  The dollar is backed by the full faith and credit of the United States.  There is no government standing behind gold.  If people come to there senses and the price of gold collapses to less than $400/ounce no government is going to step in to prop up its price.

[CitizenX]

If 90% of homes were just for show or speculation what would the housing market look like?

About what it looked like before the bubble burst.  American homes almost all have an excess of square footage and many of them have extra features not because their present owners want them, but because they will supposedly help the resale value of the home.  Too many took the statement that "your home is your castle" literally instead of figuratively.

Well there was certainly speculative and greedy excess in the housing market but it never came close to what is currently going on in the gold market.  I've spent a substantial amount of time in Europe and I don't think American homes are ten times the size of European homes, or ten times nicer.  Only 10% of gold consumption is for industrial purposes.  The rest is jewelry and rampant speculation.  You would not say only 10% of the average American home is necessary and 90% is just for looks and speculation.  The average American home is about 2,330 sq feet.  That would mean a family of four should be living in a 233 sq ft home if your analogy was true.  Gold is an asset bubble the likes of which we haven't seen since the tech boom.

[CitizenX]

The dollar is backed by the full faith and credit of the United States.  There is no government standing behind gold.  If people come to there senses and the price of gold collapses to less than $400/ounce no government is going to step in to prop up its price.

It strikes me that this paragraph is full of statements about gold being intrinsically more valuable than currency.  And that is all the more reason that the government should not trade its gold for currency.

No government stands behind gold and yet it is highly coveted.  On the other hand, if no government stands behind the dollar, it becomes worthless.  The dollar is only valued because of "faith and credit."  Those are highly capricious intangibles, subject to whim and political expediency. 

Countries are right now expanding, not reducing, their gold reserves.  According to the IMF, Mexico bought 93.3 metric tons since January, increasing holdings from about 6.9 tons.  Russia and Thailand are also greatly increasing their shares.  Many emerging markets are beginning to diversify.  Presumably, they're doing it because the dollar is no longer as safe an asset as it once was.  With our debt equal to about 100% of our aggregate GDP, there's no reason to think that dollars are as precious as gold.  These strategies will likely drive gold prices higher.  262 million ounces of gold is a safer bet than 390 billion dollars.  But even if gold falls to 400 dollars per ounce tomorrow, I'd rather have the government keep its holdings today. 

Many have taken Ron Paul's comments in this regard at face value, but I think he's edging for an independent audit of the federal gold reserves.  Even though there are occasional internal audits, independent auditors oversee the process they are not given access to the Fort Knox vault.  Ron Paul been pushing for such an audit for a long time since he advocates some relationship between our gold reserves and our currency, and since any debate over selling the reserves must first begin with a thorough accounting, the comment was a good way to spur the fed into an independent examination its reserve.

Why would you rather have the government keep its holdings today if it can sell them and buy them back for less than a third of the price?  Seems like a good trade to me.  Its funny that you mentioned Thailand, Russia, and Mexico.  All of these countries in my short lifetime have made disastrous decisions that brought their financial systems and in the case of Russia and Thailand the wold's financial system to its knees.

Eventually these countries will need cash and they will stop buying, which will cause prices to drop.  Then they'll start selling which will cause further price declines.  Then everybody will sell which will cause a complete collapse.  When this will happen is anyone's guess.   But to hold gold out as a island of stability is giving people false hope.

Ron Paul is off on a lubricious financial tangent.  He is completely right that government spending is out of control.  He is right that we need to stop getting involved in every war that comes down the pike.  But his fanciful statements about gold do not help his credibility.

[angus]

I agree that the Mexicans have historically made bad decisions, the expropriation of the domestic oil industry in the 1930s being chief among them.  But in my lifetime the Thai Baht has increased its value relative to the dollar.  As for the Peso, it has recently stopped a decades-long slide against the dollar.  Last July we were in QR for three weeks and each time I used an ATM I got about 11.8 pesos per dollar.  This summer, it's still about 11.8 pesos per dollar.  These developing markets are performing well against the US, and at the same time bolstering their own reserves.

True, if the US unloads its 8000 metric tons of gold on the market, the value of gold will likely plummet.  King Philip II of Spain learned this the hard way when he had Francisco Pizarro and others loot Cuzco and bring back all that Inca gold, flooding the European market.  Spain was the world's richest and most powerful empire in 1530.  Fifty years later it couldn't even keep the Netherlands in line.  But their economy was based on gold.  Ours is not.  Moreover, it isn't clear that we could buy back that bullion, once sold.  It would quickly find its way into the reserves of developing countries at significantly discounted prices.  Prices that would not induce anyone to sell it back to us.  We'd be out of hard money, and we'd spend that 390 billion dollars in about three weeks, and we'd have nothing to show for it. 

[CitizenX]

I agree that the Mexicans have historically made bad decisions, the expropriation of the domestic oil industry in the 1930s being chief among them.  But in my lifetime the Thai Baht has increased its value relative to the dollar.  As for the Peso, it has recently stopped a decades-long slide against the dollar.  Last July we were in QR for three weeks and each time I used an ATM I got about 11.8 pesos per dollar.  This summer, it's still about 11.8 pesos per dollar.  These developing markets are performing well against the US, and at the same time bolstering their own reserves.

True, if the US unloads its 8000 metric tons of gold on the market, the value of gold will likely plummet.  King Philip II of Spain learned this the hard way when he had Francisco Pizarro and others loot Cuzco and bring back all that Inca gold, flooding the European market.  Spain was the world's richest and most powerful empire in 1530.  Fifty years later it couldn't even keep the Netherlands in line.  But their economy was based on gold.  Ours is not.  Moreover, it isn't clear that we could buy back that bullion, once sold.  It would quickly find its way into the reserves of developing countries at significantly discounted prices.  Prices that would not induce anyone to sell it back to us.  We'd be out of hard money, and we'd spend that 390 billion dollars in about three weeks, and we'd have nothing to show for it.  

Nobody makes trades like that with a single huge market order in any asset class.  You ease the stuff into the market with multiple limit orders placed by various broker dealers.   Once the price starts falling you stop selling.  Its not an all or nothing thing.

The price of any liquid asset is the dollar amount that was paid for the last transaction.  Gold cannot have a "price" of $400 if no one is willing to transact business at that level.  That's impossible.

[angus]

The price of any liquid asset is the dollar amount that was paid for the last transaction.  Gold cannot have a "price" of $400 if no one is willing to transact business at that level.  That's impossible.

Then there should be no worry of it collapsing to that level, as you suggested it might.

Also, you're incorrect, I think.

When UK chancellor Gordon Brown decided to sell off half his country's gold reserves in 1999, it helped to drive gold to a 20-year low.  I remember buying gold in December 1999 for about 250 per troy ounce.  And they did many auctions, as you suggest, not just one big dump on the market.  They reinvested the cash from the sale in foreign currencies, which have yielded some return, but not as well as the gold would have.  Brown's critics estimate that this ultimately cost the UK government about 7 billion dollars. 

But this is all speculation.  We can't say what the value of gold would be if the US dumped all or part of its load on the market.  The only thing we can say for sure is that it would no longer have that gold, and I would regard this as a serious loss.

[CitizenX]

The price of any liquid asset is the dollar amount that was paid for the last transaction.  Gold cannot have a "price" of $400 if no one is willing to transact business at that level.  That's impossible.

Then there should be no worry of it collapsing to that level, as you suggested it might.

Also, you're incorrect, I think.

When UK chancellor Gordon Brown decided to sell off half his country's gold reserves in 1999, it helped to drive gold to a 20-year low.  I remember buying gold in December 1999 for about 250 per troy ounce.  And they did many auctions, as you suggest, not just one big dump on the market.  They reinvested the cash from the sale in foreign currencies, which have yielded some return, but not as well as the gold would have.  Brown's critics estimate that this ultimately cost the UK government about 7 billion dollars. 

But this is all speculation.  We can't say what the value of gold would be if the US dumped all or part of its load on the market.  The only thing we can say for sure is that it would no longer have that gold, and I would regard this as a serious loss.

I really don't know what Gordon Brown's plan was.  When Gordon Brown decided to sell, gold was not anywhere near its current speculative heights.  Industrial consumption of gold has not quintupled, yet the price has.  Gordon Brown pulled the trigger waayyy to early in the boom bust cycle.  That doesn't disprove the existence of a boom bust cycle.

The United States wouldn't need to sell ALL its gold.  It would just need to sell enough to pop the speculative bubble.  Once the market was in a self sustained free fall the US would stop selling.  There would be two goals.  Goal number one would be to sell as much gold at the current inflated prices.  Once you unloaded all the gold the market can bear you pop the bubble.  When the bubble has burst and a full on panic has ensued you then go back in and as carefully as you sold you buy back your gold.  Classic market manipulation on a grand scale.  Only 10% of the gold market is based on actual fundamental industrial demand.  The rest is vanity and hoarding, pure emotion.  This is a market ripe for manipulation. 

[angus]

And I expect that as gold falls in price, it would simultaneously gain in credibility as a medium of exchange.  Everyone would want gold and the credibility of US dollar, already in doubt, would decline.  The bond market would suddenly fail as investors dump dollars for gold and other precious metals.  In the worst case, the dollar declines so precipitously that it ends up like the Wiemar Republic's Deutschmarks.  The Fed would have destroyed its own currency and no longer have the gold to back up a new currency.  Then again, the fed might also destroy itself, and that's precisely what Ron Paul wants, so there's another reason he may have made the comments.  

[CitizenX]

And I expect that as gold falls in price, it would simultaneously gain in credibility as a medium of exchange.  Everyone would want gold and the credibility of US dollar, already in doubt, would decline.  The bond market would suddenly fail as investors dump dollars for gold and other precious metals.  In the worst case, the dollar declines so precipitously that it ends up like the Wiemar Republic's Deutschmarks.  The Fed would have destroyed its own currency and no longer have the gold to back up a new currency.  Then again, the fed might also destroy itself, and that's precisely what Ron Paul wants, so there's another reason he may have made the comments.  

I have never seen an asset gain credibility by plunging in price.  Your post only serves to reenforce my theory regarding the illogical emotional attachment to this archaic relic.  Only time will tell.  Ten years from now gold will NOT be trading at $1500+/ounce.  Mark my words.

[Lief 🗽]

Yes, if only to get the Paulistas to shut up.

[fezzyfestoon]

Selling off around 3/4 of our reserves would be catastrophic to our international standing.  I'd go so far as to say we'd stand to lose a hell of a lot of our confidence abroad.  Even if just symbolically, having the largest gold reserves in the world back our massive debts.  If we were to liquidate that much of what we have saved away, the value of the country as a whole would likely crash.  That and the devaluation of gold that people have mentioned would be terrible.