March 22, 2006

U.S. Central Bank Gold Sales

Why is it that you never hear the phrase U.S. Central Bank Gold Sales? In the news yesterday were two stories of European central banks and their gold - it seems the German Bundesbank now refuses to part with 600 tons (about $10 billion) of atomic element number 79 under the terms of the Washington Agreement, while future prime minister Gordon Brown is being roundly criticized for selling much of the U.K. stash at far too low a price a few years back.

But the U.S. central bank and their gold?

Why is that you never hear anything about the gold at Fort Knox being put to some good use, like maybe helping to balance the budget or paying for a new spy plane or something?

We'll get to that in a minute.

According to this report, the German central bank is causing problems for the politicos in Berlin by hoarding useless gold bars in a vault somewhere when they could instead be sold at today's lofty prices and the proceeds invested somewhere to earn four or five percent per annum.

"Gold is an essential part of the currency reserves of the Bundesbank," said Axel Weber, Bundesbank president. "Decisions on the manner and size of reserves are taken autonomously."
...
Mr Weber said no decisions had been taken about possible gold sales in future years. According to the Bundesbank’s annual report, it held 3,427.8 tonnes of gold at the end of 2005 – with just five tonnes sold for minting coins.

The bank is the largest holder of gold among the 15 signatories to the gold agreement. The cash-strapped Berlin government has stepped up pressure on the Bundesbank to sell gold, and for the interest on the proceeds to be used to fund research and education projects.

Based on Axel's comment, there doesn't seem to be much room for Ms. Merkel to negotiate, however, maybe a German named Axel just feels compelled to sound gruff when interviewed by the financial press about the new lady boss in Berlin.

This response is in striking contrast to what one might expect of the equivalent relationship here in the States. It is doubtful that Ben Bernanke will ever utter any form of the word autonomous in regard to a Bush Administration request, having toiled at the White House for more than six months last year prior to securing his appointment to the top spot at the Fed.

Across the English Channel, the Times reports that the Chancellor of the Exchequer is taking some heat for selling most of their useless gold bars five years ago at the market bottom - timing is everything they say.

The Chancellor sold 395 tonnes of Britain’s gold reserves between 1999 and 2002, generating $3.5 billion. At yesterday’s London closing price of $554.10 he would have generated more than $7 billion (£4 billion).

Vincent Cable, the Liberal Democrat treasury spokesman, said: "The decision to diversify Britain’s foreign reserves away from gold is a sensible one and one I have supported but the Treasury’s impatience over timing has obviously been very costly."

Based on information from the World Gold Council via the always helpful Wikipedia, it appears that the Brits knocked themselves out of the top ten in gold reserves in addition to losing out on an extra few billion in paper money.

Note that resource rich and mining crazy Canada appears nowhere in the top twenty, or in the entire list of forty for that matter - here's one explanation for how the useless gold bars fled their vaults.

Which brings us back to the original question of the day - why don't you ever hear about the U.S. selling its gold? Over 8,000 tons! Just sitting there! If the proceeds could be used to help out with squaring the books on Capitol Hill, and they do seem to need some help, then shouldn't our elected officials start clamoring for the U.S. central bank to start emptying the vaults?

Mark Cuban of Broadcast.com and Dallas Mavericks fame wondered the same thing last year and, while not too handy with a calculator and maintaining a less than optimal knowledge of money, he does ask the obvious questions.

Where gold acted as the ultimate hedge against the devaluation of currency in the past, that is no longer the case. Gold is priced in dollars. Not services or other commodities. If the markets and economies were to crash, a basement full of gold bullion would just take space. I couldn’t imagine farmers trading chickens and milk cows or fresh vegetables for gold bullion. For guns, ammunition, gas and oil, yes. For gold no.

Nor could I imagine a scenario where our currency was completely devalued and a gold standard was reinstituted. The reality is that our population , and the world population has gotten too big. There isnt enough gold in the world, let alone in the US to reconstitute a new currency based on gold.

So to get to the point. Its easy to understand why the US needs to maintain oil reserves. Without, the country could grind to a halt. Government oil reserves would at least allow us to fight over who got to keep their lights on and their cars running.

What I don’t understand is why we still keep $10 billion dollars worth of gold stashed in depositories around the country.

My suggestion, let’s sell it.

Mark is right. Useless gold bars collecting dust in vaults in Kentucky and New York - taking up space, requiring guards, barbed wire fences, and security cameras seems to make no sense at all today. Selling 8,000 tons at $550 an ounce would net over $140 billion dollars - that's almost half the current budget deficit and then there would be a stream of income on the invested proceeds of $6-7 billion a year which would help make ends meet in the years ahead.

Of course, the way things are looking right now, maybe the better plan would be to hang on to the entire pile for at least a few more years - that 8,000 tons of gold could be worth near $300 billion if gold prices continue rising at their current pace. That would close the gap for an entire year of deficit spending.

Maybe it is best not to repeat the mistake of Gordon Brown by selling too early - perhaps the Bundesbank has this in mind as well. Maybe that explains why you never hear the phrase U.S. Central Bank Gold Sales.

Or, maybe there is some other reason...