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> America should open its vaults and sell gold
> By Edwin Truman
> Published: October 12 2010 14:01 | Last updated: October 12 2010 14:01
> 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. Naturally, investors are looking at a new sure
> thing in the expectation that prices will continue upward. 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.
>
> It is an article of faith in bullion markets that the US will be the
> last country to dispose of its gold stock. 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.
>
> EDITOR’S CHOICE
> beyondbrics: Bric Bullion series - Oct-12
>
> In depth: Gold - Oct-12
>
> Analysis: Gold: Value locked in- Sep-26
>
> Interactive: What’s driving gold? - Sep-24
>
> FTfm: ETFs - Gold shines among the favoured - Sep-12
>
> The market price of gold has risen for more than a decade propelled
> by low interest rates, the hype of the bullion dealers (holding
> large inventories) and no doubt the normal amount of fraud and
> misinformation accompanying asset price bubbles. 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.
>
> Meanwhile, the US Treasury holds 261.5m fine troy ounces of gold.
> 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 $340bn. 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 2¼ per cent of
> gross domestic product. (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.)
> Based on the average interest cost from 2005 to 2008, this reduction
> in debt would trim the budget deficit by $15bn annually. Thus, the
> Obama administration would be doing something about the US fiscal
> debt and deficit without reducing near-term support for the ailing
> economy.
>
> This proposal has other benefits too. First, the US would be obeying
> the maxim to buy low and sell high. 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 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.
> Third, if the price is a bubble, as seems likely, the sooner it is
> burst the better for the average investor.
>
> 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. There is
> little risk. In recent years, sales under the Central Bank Gold
> Agreement have dwindled, and some other central banks are buying
> gold. (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.
>
> Another counter argument 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. It has not existed for a century; and
> will not make a comeback. Official discussions of the reform of the
> international monetary system do not include any advocates of a
> return to gold, and the IMF articles of agreement prohibit it. The
> sooner thoughts of such a return are laid to rest, the better. 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?
>
> The writer is a senior fellow at the Peterson Institute for
> International Economics in Washington
>