Selling U.S. Gold Reserves

Where would you put it all?

October 25, 2010

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714720_golden_eggFor debt-aficionados, there’s an intriguing solution for the U.S. balance sheet. While the price of gold soars, U.S. gold reserves have a book value of $11 billion. But that’s at an official price of $42.22 an ounce. What if those reserves were marked to market at, say, $1300 an ounce?

Certainly a windfall in non-traded assets. What if the U.S. Treasury started to sell? Would there be enough vaults to hold it? Evidently, storage space for gold is in short supply as bank vaults, over the decades, were converted to fancy restaurants, suggests The Globe and Mail.

That’s always the problem for gold bugs: where do you store the glistering stuff? And why would you want to?

Kenneth Rogoff, he of financial crisis fame, writes:

“With soaring deficits, and a rudderless fiscal policy, one does wonder whether a populist administration might recklessly turn to the printing press. And if you are really worried about that, gold might indeed be the most reliable hedge.

“Sure, some might argue that inflation-indexed bonds offer a better and more direct inflation hedge than gold. But gold bugs are right to worry about whether the government will honor its commitments under more extreme circumstances. In fact, as Carmen Reinhart and I discuss in our recent book on the history of financial crises, This Time is Different, cash-strapped governments will often forcibly convert indexed debt to non-indexed debt, precisely so that its value might be inflated away. Even the United States abrogated indexation clauses in bond contracts during the Great Depression of the 1930’s. So it can happen anywhere.”

That said, gold may not be the best inflation hedge, given a penchant for speculation.

“After adjusting for inflation, today’s price is nowhere near the all-time high of January 1980. Back then, gold hit $850, or well over $2,000 in today’s dollars. But January 1980 was arguably a “freak peak” during a period of heightened geo-political instability. At $1,300, today’s price is probably more than double very long-term, inflation-adjusted, average gold prices.”

Over at the Big Picture, money manager Barry Ritholtz argues there is no way to value gold objectively, since it has no earnings.

“People have tried to develop a model for the price of the precious metal, but it always is relative to something else — inflation, interest rates, Oil, Silver, etc. Indeed, an inability to objectively value Gold — other than what someone else is willing to pay for it — is why I am not enthusiastic about any more than a 5% position. With no objectively ability to value it, we are left with technicals, historical comparisons, and the Greater Fool theorem.”

“Let’s consider 3 different ways to contextualize the price of Gold: 1) Relative to the US Monetary Base; 2) Gold versus the SPX; and 3) On an Inflation adjusted basis. All three of these suggest Gold has more upside over the next few years.”

While gold has been a successful trade trade for Ritholtz for the past five years, he’s hesitant, half expecting that curse of overvaluation, when gold features on a Time magazine cover.

And you know what was on the magazine covers only five years ago?

Let’s leave the last word to Rogoff: “Yes, gold has had a great run, but so, too, did worldwide housing prices until a couple of years ago.”

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