Do the US gold reserves still have any economic importance since the United States ended the gold standard in 1971? I mean I know the gold itself still has value. I’m wondering whether it would matter if the US government decided to sell the gold off? Would a sell off have any impact on the US economy(i.e. cause inflation, effect the US debt, etc.)?
Not in any plausible circumstance.
The Fed puts cash into the system by buying assets, and pulls cash out by selling assets. These assets today are normally US bonds. Hypothetically, gold could be sold instead to pull cash back out of the economy. But why? If it came to that, problems would be so serious anyway that it would be hard to see how gold would help.
The US Government does sell gold coins. If you add up the quantities of each size of coin there, you could calculate exactly how much gold it sells each year. The gold is required to be mined in the US, but I don’t know if they buy new gold or just use up some of the reserves.
A bit of googling found this report of the total quantity of gold held by the US government. Comparing the quantity with that in the report of a year earlier, the difference is in fractions of a troy ounce. Which means they’re buying new gold to mint those coins.
The total amount of US gold reserves is about $11 billion. That’s maybe 6% of GDP.
Selling it would have some effect, but it’s hard to know what. In basic terms the US would be $11 billion richer, a meaningless amount given the size of the economy.
Practically, the monetary benefit would be smaller, as a “fire sale” would lower prices on gold.
Economically, it’s hard to know what the effect might be, but probably small. The international economic system now is sophisticated to the point that gold probably makes little difference compared to the flow of manufactured goods, services, and actually useful resources like oil.
There is a potential psychological effect and it is possibly a potent one–some gullible portion of the US population has been erroneously conditioned to think of gold as a magic reserve against disaster. If the US government liquidated its reserves it’s possible it would cause some kind of economic panic.
I think the short of it is, gold doesn’t matter and the cost of maintaining secure gold vaults is cheap compared to the possible panic created by getting rid of the reserves.
If you read the note at the bottom, that amount is based on a $42/ounce nominal price of gold. The note also says that at a recent market price, the gold is worth about $330 billion. Still only a fraction of what the US spends in a single year.
Gold bugs would freak, but likely no one else. They have this fantasy that the US will go back on the gold standard. Selling it would rip that fantasy to shreads.
Note that there are ongoing costs with keeping the gold safe. E.g., Fort Knox and certain mint locations. Could close that down if people were actually rational about gold.
It’s handy to have a small amount of gold on hand for its actual useful manufacturing processes. But the gold vault at the NYC Federal Reserve Bank has an incredible amount (or other people’s gold) that could be bought on the spot if a tiny amount was needed for something.
Note that Russia has been buying gold lately but they have a smaller, crappier economy that is subject to sanctions. If the Ruble was considered a stable currency for international business it’d been a different ball game. That’s what you get if you have nasty dictators in charge. A stable economy is all about trust.
More like 0.06%. US GDP is about $19.3 trillion. (Per dtilque’s correction to a more realistic price for the value of the gold reserves, the gold reserves are worth about 1.7% of US GDP, or a bit over 8% of current US annual government expenditures of nearly $4 trillion.)
As others have noted, the gold reserve is far too small to have any significant effect on the general economy. The only thing it can affect is the price of gold. The United States government can drive down the price of gold anytime it wants by dumping gold in to the market.
Thanks, I appreciate all the replies. Judging by the replies, it seems like the gold reserves are something of white elephant for the US government in that they are extremely valuable, but they really don’t serve any useful purpose.
I believe the Federal Reserve of New York holds some of America’s gold reserves in its vault, along with that of many other countries. (This is the vault that was robbed in the third Die Hard movie.) As I understand it, if one country wants to pay another country, sometimes some of the gold is transferred just within the vault (where the money is in separate rooms, one for each country or organization). So does this have economic importance? Perhaps, as it makes international trade and exchange easier.
Not really a white elephant. As you note, the gold reserves are extremely valuable. But they’re just a pittance in comparison to the size of the whole American economy.
This is the simple fact that refutes the argument for going back on a gold standard.
A lot of religion being echoed in this here chamber.
Gold value is not fixed. Why would it be? The US can always peg the economy to gold if it wants to. What happens isn’t that the economy shrinks down to fit the arbitrary gold price of today… the price of gold inflates to fit the peg.
People have this wacky set of religious beliefs. They think the dollar is some kind of constant (who knows why). They think prices are set by the free market. They think derivatives have no impact on markets. And several other suppressed premises.
Now, do I believe the US will go on the gold standard? Of course not. Our entire foreign policy since WW2 has been ram the dollar down their throats, and if they wont swallow them, bomb them until they do. A return to the gold standard would nuke the US economy from orbit - deficit spending doesn’t work well on a gold standard, and how many years have we had a surplus in the last… half century? The US govt will ride the dollar’s extraordinary privilege until it is worth virtually nothing (it’s down to $0.04 on the original dollar now).
Gold reserves are valuable, however, in the face of a changing global monetary system. The petrodollar is not infinite (another religious belief oft touted) and monetary systems have always changed with time (and debt accumulation). Eventually, the myriad forces aligned against the dollar will prevail. When that will happen is what is difficult to predict. Most indicators suggest very soon, but indicators are often wrong. These self same indicators have said “very soon” for at least a decade and it keeps not happening. But when it does happen, gold reserves can function as liquidity. What else are we going to use? Barrels of oil? What currency wouldn’t collapse if the dollar collapses?
And before you mention the SDR, you might want to look into its contents. The SDR is in part a gold backed currency, even if the backing is minimal.
Thanks for correcting my numbers, MEbuckner and dltique.
I hope I’m not misunderstanding you, but your point seems to be that the dollar is a fiat currency whose value basically reflects a consensus that the dollar has value. This is true.
It is no less true that gold is also a fiat currency–there’s nothing inherently useful or valuable about it except to make pretty jewelry and in some electronic applications.
Gold money was useful when economies were smaller as way to make economic exchanges easier–as you say, no one wants to exchange barrels of oil. When gold outlived its usefulness as way to facilitate transactions, the world moved to paper and now electronic money.
Before you mention the SDR, you might want to look into its contents.
US dollar: 41.73
Chinese yuan: 8.33
Japanese yen: 8.09
Pound sterling: 10.92
Anyone who does the arithmetic will find that the room for gold in this basket is: 0.00.
And since the rest of the world has gold and they aren’t going to do anything crazy with their currency, the US dollar goes completely, I mean completely nuts. Deflation like mad.
It would leave a smoking crater behind.
That is religion of the apocalyptic variety.
Any functional economic system, any one. Is based on trust. Trust is not a religion.
Then you don’t know what fiat means. A commodity isn’t fiat, by definition. Fiat is when something is declared as valuable, usually by an institution, without it actually having that value. It costs less than $0.10 to make a USD (of almost any denomination) and reasonably less than the face value of the bill to counterfeit one in a manner that would be very difficult if not next to impossible to discern. Not so with precious metals. You can’t make gold (okay, all you nuclear physicists/alchemists go away, I know nuclear transmutation has been done we’re talking practical), and while you can make something that looks like it, it wont have the same properties whereas if you got ahold of a US printing press, it would.
This is when you fall back to the assumption that the gold value denominated in dollars is fixed. In theory, you could have an economy based on one atom of a substance. The amount of a substance is irrelevant, except when it comes to ease of settlement.
Gold at I believe $10,000/oz or so covers the entire M2 money supply with reported US gold stocks. The idea that gold has to be valued at what it is now is patently false.
Also, gold never outlived its usefulness, an alternative with more desirable characteristics (namely, unlimited debt for the foreseeable future and exorbitant privilege) came about and the US pounced on the opportunity to screw over most of the countries it traded with. We’ve bombed almost every country that has tried to go back to a gold standard (that was Kadafi and Houssein’s major sin), the two exceptions being a possible China and Russia gold backed currency or exchange in the future, whom we have initiated trade wars and sanctions against, coincidentally. I’m not judging these actions, mind you - after all, that’s what realpolitic looks like, and given half the chance any other nation on the planet would screw the US right back - but the US was in a unique position to take advantage of the fallout from WW1 and it didn’t hesitate to make use of it (again, realpolitic).
People have this insane notion that you need to hand out gold coins and accept physical gold at markets to have a gold standard. All a gold standard means is that you don’t print dollar bills unless you also have acquired more gold bullion. Everything else, digital currency, fractional reserve banking, etc, doesn’t change a hair. Most of those things predate the fiat system. The reason the US hates the idea of a gold standard is we profit HUGELY off of being the only people in the world who can produce US dollars. Of course we want a dollar standard. You have to come to us to get any money! You have to compete with our treasuries for any loans! You have to trade with us first to trade with any other country! That’s why the gold standard died. Well, that and we can abuse the tar out of the money supply and cheat people out of their principle purchasing power that they lend us through debt by devaluing the currency through inflation.
Eh, I was misinformed about the backing of the SDR. The fact that it’s all fiat currencies intimately dependent upon the dollar means that if the dollar goes, the SDR goes with it. Hard to provide liquidity with a currency that just lost at minimum 40% of its value, and that’s before you factor in how the collapse of the dollar would effect the others.
And this doesn’t question your other premises?
Gold is what it’s worth now in US dollars because there is a certain relationship between the cost of extracting more of it and the cost of everything else. If we were to want to have enough gold to back the entirety of the money in circulation, it would have to become the case that the cost of extracting more of it would change in order to maintain that balance. That is, if we set gold to have a certain value based on the value of the dollar today, then gold mining either becomes much more or much less profitable. Given that there’s not nearly enough gold to cover the economy right now, that would mean that we would have to artificially move gold prices higher, making it much more profitable to extract. People would pour tons of money into the research of how better to extract gold, but it wouldn’t be in order to create wealth - it would only be to create money.
Money is not wealth. Money is what is used to denominate wealth. The market is most efficient when people are driven to create wealth, and not money, because money is inherently useless.
No, because I don’t spend much time on the SDR. I do spend time researching other premises. The SDR is a rather silly contraption that gets mentioned a lot by conspiracy theorists and by bankers with lofty, wild ideas about economics. If it does work as some kind of miracle in the middle of the largest economic event in human history, I’ll be mildly surprised. But, the likelihood of that happening is quite low.
No. Consider: A peg is introduced. Gold is extremely profitable to mine, since it costs x and you get, say 10x in profit. Gold rush ensues. Gold floods into the market. More gold than the peg times the dollars in circulation. You print an amount of dollars equal to the additional gold. Eventually you run out of gold that can be extracted at less than the peg. You have your new, stable money supply.
Yes, that’d suck. It’d be explosive. There’d be at least one massive deflation and one massive hyperinflation as things reset. The reason being, transitioning from sound money to fiat created an economic madhouse. Normalizing the madhouse is extremely painful. The alternative is to make the madhouse worse, until it cannot function at all and then things go off the rails. You still get the wild currency swings, but you have no idea where you land. Probably in a gold backed system. Less probably, but still very possibly a Sea-Peoples/Bronze-Age style (or Roman, if you prefer) collapse. Either way, it sucks worse.
The premise that “there’s not enough gold” is patently false. There isn’t enough gold at current valuations, sure. And yes, a peg would certainly create a gold rush, sure, but the beautiful thing about gold is that you can’t make it. All of the cheap gold would be extracted until the price to extract more was equal to the peg. Supply and demand. See above.
Right now it doesn’t make sense to try to mine gold because it isn’t worth it. If you make gold the unit of account (limiting the total amount of currency you can print without defaulting by changing your peg), then it’s extremely worth it. For a time anyway, because the gold is finite (and its profitability is on a curve, not linear, as it gets exponentially harder and harder to extract what’s left). Paper, however, you can print into oblivion. And we do.
This is largely irrelevant to the discussion at hand. And it’s extremely ironic, considering the drive in the current paradigm of the status quo is to create mountains of additional fiat. A great many (even possibly most?) central banks are printing right now, through one mechanism or another. Several emerging economies are either in or bordering on hyperinflation.