Seeking Alpha

Golden Economizer's  Instablog

Golden Economizer
Send Message
Golden Economizer has been brokering residential mortgage loans and real estate in Los Gatos, California since 1993. He has a B.A. in Economics from the University of Virginia. He is an advocate of free markets, sustainable lifestyle, limited federal government and an asset backed currency. He... More
My blog:
The Golden Economizer
  • America Should Open Its Vaults and Sell Gold - What gold? A response to the former Assistant US Treasury Secretary 0 comments
    Oct 16, 2010 1:56 PM | about stocks: GLD
    October 15, 2010

    This article was originally published in the London Financial Times by Edwin M Truman, former Federal Reserve economist and former assistant U.S. Treasury Secretary. I added a few thoughts of my own.

    Chris Powell of gata.org writes “For years Truman has been turning up at the center of the gold price suppression scheme, but GATA and its supporters might agree with him in principle on this one, insofar as getting central banks out of the gold business is the first step toward a free market in gold.”

    When I ran a google search on “No Gold Left in Fort Knox”, I got 275,000 results.


    America Should Open Its Vaults and Sell Gold

    By Edwin Truman
    Financial Times, London
    Tuesday, October 12, 2010

    The original article can be found here:

      www.ft.com/cms/s/0/2bbd4dbe-d5fe-11df-94dc-00144feabdc0.html

    or google search:  Edwin Truman gold

    Gold is back in the news. Its price is soaring in what some analysts say is a reflection of a weak economy and a lack of confidence in government policies. (Stating the obvious) Naturally, investors are looking at a new sure thing in the expectation that prices will continue upward. (Subtly criticizing gold investors by calling it a “sure thing,” and insinuating that gold is in a bubble, with no supporting facts) My advice to the US government, however, is that this may be the best time -- to sell. Doing so would help President Barack Obama and Congress reduce indebtedness, at little cost. (If the dollar price of gold WAS ACTUALLY at a multi year peak, it might be the best time to sell, but that is clearly not the case. Only a return to sound fiscal and monetary policy by the federal government would cause that to happen, and what are the chances that politicians will suddenly turn honest? Also, the entire REPORTED gold supply of the United States Treasury and federal reserve would only bring in less than $400 billion at current prices. The fed creates that much currency for free in two seconds to spend on needless foreign wars, bailouts for its cronies, stimulus that doesn’t create jobs, and Mrs. Obama’s 20 Whitehouse staffers (servants). Not to mention, the US ACTUALLY OWNS ZERO OUNCES OF GOLD BULLION as reported by the Reagan Gold Commission in 1982. It is all owned, however much is now left, by the federal reserve as collateral for the national debt.)

    It is an article of faith in bullion markets that the US will be the last country to dispose of its gold stock. (Idle speculation to cover the fact that it’s already been disposed of) For 30 years it has had a no-net-sales policy for reasons ranging from resistance by US gold-producing interests to concerns about the international monetary system. That assumption may remain plausible. Yet the administration has an obligation to re-examine its policy. (What policy? You can’t sell what you’ve already sold.)

    The market price of gold has risen for more than a decade (and the dollar now buys 65% as much goods and services as a decade ago, so what’s your point?) propelled by low interest rates, the hype of the bullion dealers (holding large inventories) (Hype, what hype? Inventories? What inventories? Those are the LAST reasons that people are buying bullion today at these prices), and no doubt the normal amount of fraud and misinformation accompanying asset price bubbles. (blah, blah, blah Can you provide a few facts, please?) The Financial Times has reported that the precious metals industry expects the price to increase by a further 11 per cent over the next year. (A blatant underestimate. Gold has been appreciating an average of 17% annually in dollar terms over the past decade, and is currently accelerating.)

    Meanwhile, the US Treasury holds 261.5 million fine troy ounces of gold. (I’ll believe THAT when I see the results of next year’s audit. And only if they assay the bars, not just count’em) The government has been sitting on it since the Great Depression, receiving no return. At the current market price of $1,300 per ounce, the US gold stock is worth $340 billion. The Treasury secretary, with the approval of the president, has the power to sell (and buy) gold on terms that the secretary considers most beneficial to the public interest. Revenues from sales must be used to reduce the national debt.

    If the US were to sell its entire gold stock at the current market price, it would reduce the gross government debt by 2 1/4 per cent of gross domestic product. ( A drop in the bucket. About 1/4th of our current annual deficit, 1/10th of our annual federal budget) (US net government debt would decline by essentially the same amount because the US gold stock, listed as an asset on the balance sheet, is valued at only $42.22 an ounce.) (Yes, this would reverse the effect of a falsified accounting entry) Based on the average interest cost from 2005 to 2008, this reduction in debt would trim the budget deficit by $15 billion annually. (How wonderful! This would lower our current $1.5 Trillion dollar annual budget deficit by a staggering 1%, on a one time basis, and our entire national cache of gold bullion would be gone forever. This amounts to less than a rounding error.) Thus, the Obama administration would be doing something about the US fiscal debt and deficit without reducing near-term support for the ailing economy. (Yes, they would be making a token gesture to camouflage the extent of government’s continual theft of the people’s savings through inflation of the money supply.)

    This proposal has other benefits too. First, the US would be obeying the maxim to buy low and sell high. (Oh, please! When did the US govt ever buy any gold bullion? They stole it from the people in exchange for worthless bits of paper. Not to mention all the gold that was deposited with the fed during the 1930’s by Europeans seeking shelter from the invading Germans, which the US govt has still never returned. And sell high? Compared to what? The govt paid $20.67 an ounce for the gold they confiscated under threat of imprisonment from the US citizens in 1933. Adjusted for inflation, they would be getting about the same amount of federal reserve notes back. This sale will obviously never take place.)

    Second, it would be performing a socially useful function. Demand for gold exceeds normal production, driving up the price. To the extent that the gold craze (another slight to gold investors) is being fed by concern (rational or irrational) about government policies, public welfare would be enhanced by giving citizens something tangible to hang around their necks or place in safe deposit boxes. (Well, that is true enough. Getting the gold back into the hands of the people would be a positive thing. But this is a meaningless threat for the purpose of continuing to suppress the true market price of gold in today’s dollars. The federal government has little or no physical gold to sell. Jawboning the price down is the only weapon left in the arsenal now to prop up the failing dollar) Third, if the price is a bubble, as seems likely, the sooner it is burst, the better for the average investor. (I can’t see how exactly, please explain. Wouldn’t this depend on when the investor purchased, and whether or not he was savvy enough to sell at the peak?)

    Some people point to possible costs. Aside from political pressures from those who want to protect the value of their holdings, above or below ground, two principal arguments are made against US gold sales. The first is that they would disrupt the market. But the US can be cautious in its sales, avoiding disruption of the sales programmes of other countries, as it has in the past. (Sure, if it had any actual bullion left to sell) There is little risk. In recent years, sales under the Central Bank Gold Agreement have dwindled, and some other central banks are buying gold. (A lot more central banks are buying now than the few central banks that are actually selling) (The US is not a party to the agreement.) Also the International Monetary Fund has completed more than three-quarters of its own planned sales of 403.3 metric tons.* (In 2009, the world’s central banks became net buyers of gold bullion after 19 consecutive years of net selling. The parties to the most recent Central Bank Gold Agreement failed to meet their sales quota for the first time. This year (2010) I would be extremely surprised if they managed to meet even 1/4th of their quota, that is, if the agreement doesn’t disintegrate completely. Central bankers are not stupid enough to continue selling a finite, appreciating asset such as gold in exchange for one that is constantly inflating and will eventually become worthless, just like every other fiat currency has throughout history. Today the world’s longest running fiat currency is the British Pound, one of the weakest currencies among all developed countries, and at greatest risk of failure.)

    Another counterargument is that the US should hold on to its stock in anticipation of a return -- by itself alone or with other nations -- to a monetary system based on gold. But returning to the gold standard would reinstate a system associated with unstable prices, wages, output, and employment.(On the contrary, the most stable period of wages and prices in history was during the classic gold standard from 1590 up until 1914, when the classic gold standard was finally abandoned to finance WWI. It was never fully reinstated, although gold coins continued in circulation as US legal tender until 1933) It has not existed for a century; and will not make a comeback. (On the contrary, China has already been laying the ground work for a gold backed currency by initiating currency swaps with Indonesia, Brazil, Australia, and other countries that have natural resources to sell, accumulating gold secretly until June 2009 when they announced that their central bank had increased their holdings by 400 tons, and legalizing gold ownership by their citizens for the first time since the Maoist revolution. Not only did they legalize it, they are encouraging it. You can now buy gold coins as small as 3 grams at any post office in China, and their govt has been running advertising campaigns on TV urging the citizens to put their retirement savings into gold and silver bullion (that much more to confiscate once the time comes). Once this gold backed currency is established, the US dollar will have no value at all other than the current exchange value into Chinese currency at that day’s exchange rate, and for payment of US taxes. On that day, both the Chinese Yuan and gold coins will become accepted as payment for purchases in the United States.) Official discussions of the reform of the international monetary system do not include any advocates of a return to gold (big surprise, the monetary bigwigs want to preserve the status quo), and the IMF articles of agreement prohibit it. The sooner thoughts of such a return are laid to rest, the better. (Better for whom? The money printers, of course.)

    A related argument is to keep the US gold stock as a "rainy day" precaution. But after the recent economic and financial crisis and with the prospect of misery for several more years, how much more rain must pour before the US acts?

    End of London Financial Times Article

    *On September 28, 2009, the IMF's Executive Board approved gold sales of nearly 13 million ounces, representing one eighth of the Fund's total holdings. During October and November 2009, the Fund sold half of this quantity to the Reserve Bank of India, the Bank of Mauritius, and the Central Bank of Sri Lanka. On September 7, 2010, the Fund sold 10 metric tons to the Bangladesh Bank. They have been selling the rest gradually into the market to suppress the gold price, but not very successfully. The recent surge in gold prices may indicate that this quantity has been exhausted.

                          http://www.imf.org/external/np/exr/faq/goldfaqs.htm

    We must have owed those countries a big favor. Dozens of countries around the world would have been more than glad to exchange some of their country’s reserves, composed of depreciating assets such as US Treasuries and Agencies, and various foreign currencies, for any hard asset, especially precious metals. My guess is that Sri Lanka, Mauritius and Bangladesh have some sort of natural resource that the US govt needs, probably rare earths. And India is a valuable ally in a very strategic location. We probably need them as a place to spy on Pakistan and China, and as a place to refuel our ships.

    The IMF declined to reveal the price at which it sold 200 tons of gold bullion to the Central Bank of India on November 3, 2009, but the closing price that day at the NYBOT was $1084.50 The IMF claims on their website that their gold sales are conducted at market prices.

    Looking at last week’s price of $1379.50, it looks to me like India got a pretty good deal, a 27% profit in less than a year, with many more years of appreciation to come. How long can these sales continue? Certainly not indefinitely with the annual world production of gold falling short of demand now for over ten straight years, and considering that the quantity of physical gold ostensibly held and traded by the world's central banks, bullion banks, and futures exchanges is significantly overstated, according to gata.org

    Edwin Truman's entire article is just one big smokescreen to preserve the misconception that the US govt's gold supply is still intact and the same as they claimed to have forty years ago. If that was true, why would the federal reserve be so adamant about not allowing an audit of Fort Knox? This would be routine at any private corporation, is required by law, and would only serve to quiet concerns if the gold WAS STILL ACTUALLY THERE AND UNENCUMBERED.

    "Gold is a barometer of the common stock of a country, and right now gold is sniffing out weakness in the management of the United States as a business."

    James Sinclair, gold investor

    Mr. Sinclair became famous in the business community when he sold 900,000 ounces of gold at an average price of $810 in early 1980, just before the price peaked.

                                            goldeneconomizer.blogspot.com/


    Disclosure: No positions

    Disclosure: No Positions
    Stocks: GLD
Back To Golden Economizer's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.