Finance November 2010

Uncle Sam’s Mysterious Hoard

In lean times, why is $300 billion worth of government treasure simply sitting in vaults?
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Barry Thumma/Associated Press

The Federal Reserve Bank of New York, a neo-Florentine fortress of sandstone and limestone in Lower Manhattan, covers a city block. A battery of structural and technological defenses makes it perhaps the world’s most secure bank; it can be sealed off in less than 25 seconds. On a recent visit to its subterranean vault, beneath 80 feet of bedrock, I walked along a narrow passageway through a 90-ton steel cylinder that can create an airtight and watertight seal. On the other side was a vault with neatly stacked walls of 27-pound yellow bricks—one of the largest collections of gold in the world.

Standing next to this mass of concentrated wealth all but paralyzes one’s sense of financial proportion. But after the initial awe of this King Midas moment, a question nagged: what’s the point?

Nearly 40 years after President Nixon suspended the dollar’s link to gold, the United States still sits on far more of it than any other nation: official holdings total 8,965 tons, or roughly 260 million troy ounces, according to the Treasury Department. (Most of it is stored in Fort Knox, Kentucky; the New York Fed holds about 11 million troy ounces, along with gold reserves from other countries and international organizations.) Gold is easily convertible into cash, and America’s mountain of metal is now worth more than ever: assuming the recent market price of $1,200 a troy ounce, the value of the federal stock exceeds $300 billion. Yet in an age of soaring deficits, our gold reserves earn no income, incur huge storage and security costs, and serve no practical purpose, short of a politically unthinkable renaissance of gold-based money (see “The Tea Party’s Brain,” page 98). Why?

Getting straight answers (or any answers at all) from Washington about our hoard of gold is weirdly difficult. Yes, the government can downsize its holdings, said Congressman Brad Sherman, a member of the Subcommittee on Domestic Monetary Policy and Technology, through a spokesman. No, it’s not a good idea, he added, offering no elaboration. When I called to interview the subcommittee’s chairman, Representative Mel Watt, his office begged off in an e-mail, advising only that he “hadn’t studied this particular issue as of yet.”

Repeated calls and e-mails to the White House press office went unanswered. The Treasury Department referred me to the section on gold in the U.S. Code. When I pressed for more information, a public-affairs official e-mailed back: “Gold? Don’t you have anything better to write about[?]”

“I don’t think that any change in the gold policy is even on the screen,” said Dale Henderson, a visiting professor of economics at Georgetown University. “It’s a bit of a mystery to me.” As a research economist at the Federal Reserve, Henderson co-authored a study in 1997 called “Can Government Gold Be Put to Better Use?” Yes, the paper concluded: selling or loaning out some or all of the reserves is preferable to doing nothing. “It’s an opportunity cost for the government,” Henderson told me. “The country has this gold and is borrowing to finance its activities. If we’re trying to maximize the return on the country’s assets, then we should borrow a little less and sell some of the gold.”

Under current law, income from the sale of gold must be used to reduce the national debt. But nothing would stop Congress from rewriting the regulation to permit other uses. By Washington’s corpulent spending standards, $300 billion may seem modest, but it’s hardly trivial: it could, for example, reduce our $1.3 trillion budget deficit by more than 20 percent; finance Social Security for nearly six months; or fund unemployment benefits for several years—in effect, create a stimulus package without pushing us further into debt.

So why hasn’t the U.S. cashed in, as several European central banks have done recently? For one thing, the Federal Reserve’s ability to print money at will—despite the risk of inflation—makes the case for selling gold less persuasive, explained Martin Murenbeeld, a veteran gold analyst and the chief economist at DundeeWealth. And some analysts worry that selling gold would be seen as a frantic effort by Washington to balance its deficit-laden budget. In turn, the market might demand higher yields on Treasury bonds, thereby minimizing if not overwhelming the revenue gains from liquidating gold.

Barry Bosworth, a senior fellow at the Brookings Institution and a former economic adviser in the Carter administration, said that the wisdom of selling would depend on what the government did with the proceeds. Reducing the nation’s gold stock to finance, say, an increase in the strategic petroleum reserve might be savvy, he said, depending on the future price of oil. But selling gold, or any other national asset, to fund consumption just looks like a “gimmick.”

That doesn’t change the fact that a handsome pile of America’s wealth lies fallow at a time of pressing need. But a few thousand years of history remind us that gold is money that’s immune to government profligacy and all the other hazards that terrorize fiat currencies like our own. Which is why the most plausible explanation for the government’s gold hoarding is political. In a world of rising debt and fears of sovereign default, gold is popular once more—an online poll by Parade magazine in February found that 87 percent of readers believed America shouldn’t sell its reserves. And a sell-off would likely trigger protests from gold investors, whose numbers have grown dramatically in recent years. Owning the commodity, on the other hand, allows the government to enjoy the aura, if not the substance, of monetary prudence—a state of grace otherwise lacking in budgetary matters these days.

As Murenbeeld said, “The best reserve-currency system is gold, because no other central bank can print the damn thing.”

James Picerno is the editor of The Beta Investment Report.
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James Picerno is the editor of The Beta Investment Report.

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