What Governments (Probably) Do With Their Gold
Posted: Fri Aug 26, 2011 1:35 pm
Have you ever noticed that countries and Central Banks own a lot of gold, but nobody knows the exact amounts that each country owns? If gold were such a barbarous relic, there wouldn't be a need for the secrecy.
We've talked about this before, but recent calls for the US to sell its gold to cover its debts got me thinking about the secrecy involved with government gold holdings and transactions. If you think about it, countries don't ever need to sell their gold on the open market if they have debts to pay. And it wouldn't make any sense to use the open market to sell and exchange gold because it would likely have a negative effect on the market price of gold.
During the 1980s I was given a tour of the New York Fed's Gold Vault. You may remember the vault's appearance in the 1995 blockbuster, Die Hard: With a Vengeance, where Jeremy Irons broke into the vault and stole its holdings.
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Anyone can tour the vault. You just need to make reservations far in advance. And I highly recommend it. It's a very unique experience.
Before you arrive, they send you the following brochure...
http://www.newyorkfed.org/education/add ... dvault.pdf
The vault is actually a relic from the gold standard era. In 1924, the New York Fed opened up their gold vault and gave all the countries of the world the ability to store their gold in this awesome vault for free.
Here's an old video that shows how it worked during the gold standard era:
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The brochure, above, also tells us:
A lot of people seem to think that our gold reserves just sit around collecting dust. And in fact the Gold Stock reported by the Federal Reserve rarely ever changes:
http://www.federalreserve.gov/releases/ ... hist10.txt
...But, the Federal Reserve's Gold Vault — and its international exchange system — is still operational. In fact, it is one of the two largest gold vaults in the world — currently storing about 7,000 tons of gold. Alas, most of the gold belongs to other countries right now — stored in their respective cages. Gold is simply moved from cage to cage when transactions take place.
The Gold transactions between countries still take place on a regular basis. But, here's where it gets interesting. The cages that represent each country's gold holdings in the Fed are not labeled by name. They are labeled with a secret number. The brochure explains it like this:
And if the US needed more gold, couldn't the Fed could just print money to buy up more gold slowly from the open market? This would drive up the price of gold even more (and likely add to inflation) — a stealth Quantitative Easing with gold, if you will. Alternatively, they even buy more gold directly from a country that actually wanted dollars.
It would seem as if the US government could always be a buyer of gold and just give gold bars away to other countries in exchange for stuff, or favors — never needing to "sell" it on the open market or have the public ever know about it. As long as the reported Gold Stock value stayed the same each month (still recorded at the "official" $42.2222/ounce), I'm not sure anyone would ever know.
Maybe I'm misunderstanding how the Fed's balance sheet works. But, what is clear is that another nation could take some of their own gold reserves and just give some of it to another country in exchange for a nuclear warhead or two. We'd never know about it. The gold just moves from one anonymous cage to another.
If I had to answer the question of what governments do with their ultra-secret — and supposedly barbarous — gold, my guess is that they use gold regularly as their chips in a game of international poker. If the government starts to run low, we just buy some more at the real market price with our 'printable' dollars from people who actually want those dollars. Then our officials proceed to make public statements about how gold is useless so that nobody pays attention to the poker game behind the scenes. I'm sure I'm missing something in my logic, so maybe someone else more knowledgable than me can correct my errors.
We've talked about this before, but recent calls for the US to sell its gold to cover its debts got me thinking about the secrecy involved with government gold holdings and transactions. If you think about it, countries don't ever need to sell their gold on the open market if they have debts to pay. And it wouldn't make any sense to use the open market to sell and exchange gold because it would likely have a negative effect on the market price of gold.
During the 1980s I was given a tour of the New York Fed's Gold Vault. You may remember the vault's appearance in the 1995 blockbuster, Die Hard: With a Vengeance, where Jeremy Irons broke into the vault and stole its holdings.
[align=center]
[/align]Anyone can tour the vault. You just need to make reservations far in advance. And I highly recommend it. It's a very unique experience.
Before you arrive, they send you the following brochure...
http://www.newyorkfed.org/education/add ... dvault.pdf
The vault is actually a relic from the gold standard era. In 1924, the New York Fed opened up their gold vault and gave all the countries of the world the ability to store their gold in this awesome vault for free.
Here's an old video that shows how it worked during the gold standard era:
[align=center]
[/align]The brochure, above, also tells us:
And if we look at the explanation of the Federal Reserve's Balance Sheet, we see:When the main vault of the New York Fed was opened in September 1924, foreign-owned gold on deposit was valued at $26 million (at the official price at that time of $20.67 a troy ounce). Holdings rose to about $458 million by the end of 1931, then fell sharply during the Great Depression. The economic problems of the United States, a slump in world trade, the lack of confidence in the international monetary system, and a desire to provide a boost to their troubled economies prompted many nations to recall their gold. By 1935, foreign gold deposits had fallen to about $9 million, even though the official price of gold had been raised to $35 a troy ounce by the Gold Reserve Act of 1934.
The threat of war in Europe reversed the trend of Depression-era withdrawals and brought a virtual flood of gold to the New York Fed for safekeeping. More than $1 billion poured in between 1936 and 1939, when Germany invaded Poland. By the end of the war in 1945, foreign gold reserves stored at the Federal Reserve Bank had risen to more than $4 billion.
There was a slight outflow of gold from the Bank’s vault in the two years immediately following World War II. During this period, many nations swapped their gold for the U.S. dollars needed to rebuild their war-ravaged economies. After that, the economies of foreign nations recovered, and their exports to the United States began to rise. As a result, there was a shift in the U. S. balance of payments toward larger deficits.
As nations with trade surpluses with the United States accumulated more dollars than they needed, they often exchanged their dollars for gold. The gold coffers of these nations in the New York Fed’s basement bulged. From 1947 to 1971, the year the United States suspended convertibility of dollars into gold for foreign governments, about $10 billion more was deposited in the vault, bringing the total value of gold holdings stored at the New York Fed to $14 billion at the “official”? price of $42.2222. Since 1972, there has been a gradual, but steady, net withdrawal of gold from the vault.
The value of deposits in the vault also has varied over the years because of changes in the official, as well as the market, price of gold. Today, all gold transactions occur at the market price of gold, but prior to 1971 gold transactions between nations were made at an official fixed price. The official U.S. government price of gold has changed only four times during the past 200 years. Since the passage of the Gold Reserve Act of 1934, which raised the official price of gold to $35 a troy ounce, the price has been raised twice: to $38 in 1972, and in 1973, to its current price of $42.2222 an ounce.
Because of the large disparity between the official price and the market price of gold, the official price has become irrelevant from a transactions perspective. Today, no nation is willing to sell gold at the official price, which is used by governments only for bookkeeping and reporting purposes.
The Fed's balance sheet records the Gold Stock at the "official" price of $42.2222 per ounce — even though the Gold Stock is worth far more than that.Gold Stock
The gold stock of the United States is held by the Treasury and consists of gold that has been monetized: the Treasury has issued certificates reflecting the value of the gold to the Federal Reserve in return for a credit for the same dollar value to the Treasury's accounts. The gold stock also includes unmonetized gold, against which certificates have not been issued by the Treasury (although virtually all the Treasury's gold has been monetized since 1974).
The value of the gold stock is recorded on Federal Reserve and Treasury books at $42.2222 per troy ounce, the so-called official U.S. government price established by international agreement and confirmed by Congress in 1973. If the Treasury buys or sells gold, however, the purchase or sale is executed at market prices.
Acquisition of gold, and its monetization by the Treasury, can affect reserve balances at depository institutions. Acquisition increases reserve balances. "Gold stock" and "Treasury cash holdings" rise, but the "U.S. Treasury, general account" balance falls. Monetization leaves the gold stock unchanged, but reduces Treasury cash holdings and increases the Treasury's general account. Monetization itself does not alter reserve balances, but these balances increase when the Treasury spends the proceeds or shifts the proceeds to the accounts that it maintains with depository institutions.
Source: http://www.federalreserve.gov/monetaryp ... nces_p.htm
A lot of people seem to think that our gold reserves just sit around collecting dust. And in fact the Gold Stock reported by the Federal Reserve rarely ever changes:
http://www.federalreserve.gov/releases/ ... hist10.txt
...But, the Federal Reserve's Gold Vault — and its international exchange system — is still operational. In fact, it is one of the two largest gold vaults in the world — currently storing about 7,000 tons of gold. Alas, most of the gold belongs to other countries right now — stored in their respective cages. Gold is simply moved from cage to cage when transactions take place.
The Gold transactions between countries still take place on a regular basis. But, here's where it gets interesting. The cages that represent each country's gold holdings in the Fed are not labeled by name. They are labeled with a secret number. The brochure explains it like this:
In other words, governments don't need to use the gold market for their transactions. They don't even have to liquidate their gold if they want to use it. Why would the US, or any country for that matter, ever sell its gold on the open market? They just deliver the gold directly to the accounts of other countries in exchange for just about anything it wants (Treasuries, dollars, potato chips, etc). Countries do this all the time and none of it ever needs to be reported to the public. And that's what happens in the New York Fed's gold vault on a regular basis.The Fed does not charge foreign countries for holding gold, but it does levy a handling fee when gold enters, is moved within, or is shipped out of the vault. Compartments are identified by number, rather than by the countries that own the gold within them, in order to keep each country’s gold holdings private. Only a few Bank employees know the identity of the gold owners.
And if the US needed more gold, couldn't the Fed could just print money to buy up more gold slowly from the open market? This would drive up the price of gold even more (and likely add to inflation) — a stealth Quantitative Easing with gold, if you will. Alternatively, they even buy more gold directly from a country that actually wanted dollars.
It would seem as if the US government could always be a buyer of gold and just give gold bars away to other countries in exchange for stuff, or favors — never needing to "sell" it on the open market or have the public ever know about it. As long as the reported Gold Stock value stayed the same each month (still recorded at the "official" $42.2222/ounce), I'm not sure anyone would ever know.
Maybe I'm misunderstanding how the Fed's balance sheet works. But, what is clear is that another nation could take some of their own gold reserves and just give some of it to another country in exchange for a nuclear warhead or two. We'd never know about it. The gold just moves from one anonymous cage to another.
If I had to answer the question of what governments do with their ultra-secret — and supposedly barbarous — gold, my guess is that they use gold regularly as their chips in a game of international poker. If the government starts to run low, we just buy some more at the real market price with our 'printable' dollars from people who actually want those dollars. Then our officials proceed to make public statements about how gold is useless so that nobody pays attention to the poker game behind the scenes. I'm sure I'm missing something in my logic, so maybe someone else more knowledgable than me can correct my errors.
