Working Papers

Selling the Gold Stock as Bailout of Last Resort

Michael Lewis quotes a senior Bundesbank official on selling the gold stock to meet an ECB insolvency:

The E.C.B. itself might face insolvency, which would mean turning for funds to its solvent member governments, led by Germany. (The senior official at the Bundesbank told me they already have thought about how to deal with the request. “We have 3,400 tons of gold,” he said. “We are the only country that has not sold its original allotment from the [late 1940s]. So we are covered to some extent.”)

The IMF bailed itself out by selling its gold stock. Why not the members of the ECB?

posted on 21 August 2011 by skirchner in Economics, Financial Markets, Gold

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Monetising the US Gold Stock

Monetising the US gold stock is a tried and true method of keeping the bond bailiffs at bay:

the nation owns about a quarter billion ounces of gold, valued at the quaint old figure of $42 2/9 per ounce. This stock serves as collateral for about $11 billion of gold certificates on the books of the Federal Reserve. The Treasury and the Fed could swap the old certificates for new ones based on a value closer to the current market price of $1,650 per ounce. To balance its books, the Fed would credit the Treasury’s account an additional $400 billion or so. This should be enough for even our improvident government to run for a few more months. Such an accounting transaction has the attraction of being done before in identical circumstances, as pointed out by my colleague Alex Pollock. In 1953, the Fed similarly “monetized” the gold after the Congress failed to pass an increase in the debt ceiling. This by the way, highlights the bipartisan nature of debt-ceiling dramatics. At the time, Republicans held the presidency and majorities in both chambers of the Congress.

Plenty of irony there for gold bugs.

posted on 30 July 2011 by skirchner in Economics, Financial Markets, Gold

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Be Careful What Jim Grant Wishes For

A gold standard won’t do what Jim Grant says it will:

Supporters of the gold standard like to point out that since creation of the Fed in 1913 the dollar has lost 95% of its value.  Well in 1913, the dollar was convertible into an ounce of gold at $20.86 an ounce.  So while the dollar has lost 95 percent of its value, gold has appreciated even more rapidly than the dollar has depreciated.  If gold had kept its value in 1913, its value today would be somewhere between $400 and $500 an ounce.  Accept for argument’s sake the claim of supporters of the gold standard that the recent run up in the value of gold was caused by a loss of confidence in the dollar.  Would it not be reasonable to conclude from that assumption that if the dollar were made convertible into gold, people would then start selling off their gold, the threat of dollar depreciation having been eliminated?

But wait.  If people started selling off their gold, the value of gold would decline.  If the real value of the gold fell from its current value back to its value in 1913 when the dollar was convertible into gold at $20.86, the value of would lose two-thirds to three-quarters of its value.  We are talking about two or three hundred percent inflation.  Does that make feel more confident about the value of your savings?

posted on 19 July 2011 by skirchner in Economics, Financial Markets, Gold

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Conservatives and Libertarians for Dumping the Gold Stock

We have previously noted the irony of those who worry about an over-supply of fiat money taking refuge in a commodity in which governments hold stocks that dwarf annual production. We also noted that the pro-free trade social democrats at the Petersen Institute had suggested liquidating the US gold stock to reduce US government debt and interest payments.

Now conservative and libertarian US think-tanks are saying it too. It is consistent with their long-standing support for the privatisation of government assets. Of course, it is a lazy approach to debt reduction, but a lazy debt reduction is better than none.

Dumping the gold stock without tanking the gold price is easier said than done, but the RBA was able to discretely offload 167 tonnes in 1997, yielding a handsome profit on the old Bretton Woods parity price and adding income producing assets to the RBA’s portfolio (contrary to Paul Cleary’s FOI beat-up).

In Australia, sales of public trading enterprises Qantas, Telstra, CBA and the airports yielded $61 billion during the 1990s and 2000s, making a large contribution to the reduction in net debt from $96 billion in 1996-97 to a negative net debt position in 2005-06 before the terms of trade boom really took off. Peter Costello knew a lazy policy option when he saw one. One of the problems facing the current government is that it has to do debt reduction the hard way. And the gold stock’s long gone.

UPDATE: Portugal is under pressure to sell its Nazi gold back to Germany.

posted on 17 May 2011 by skirchner in Commodity Prices, Economics, Financial Markets, Fiscal Policy, Gold

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The RBA Didn’t ‘Lose’ $5bn on its 1997 Gold Sales

Paul Cleary has not done himself any favours beating-up the product of The Australian’s latest FOI request of the Reserve Bank:

The decision to sell 167 tonnes of the bank’s reserves has cost the nation about $5 billion based on today’s soaring price of almost $1400 an ounce…

The RBA’s sales pushed the world gold price down to an 11-year low, returning just $2.4bn for the gold that was sold via a single broker engaged without a tender.

The same amount of gold would be worth about $7.4bn today.

This analysis ignores two inconvenient facts. The gold was sitting on the RBA’s books at the Bretton Woods parity price, so the RBA booked a sizeable profit on the sale even at 1997 prices. The suggested $5 billion ‘loss’ ignores the return on the income producing assets the RBA purchased with the proceeds of the sale. It is likely these assets have underperformed gold recently, but historically, the real returns to gold have been negligible compared to other assets. As one of the world’s biggest producers, Australia is naturally long gold. There is no diversification value in relocating gold from the WA goldfields into vaults under Martin Place.

The 1997 RBA gold sale should give gold bugs pause. As we have noted previously, above ground gold stocks dwarf annual production, so the gold price is best viewed as a stock rather than a flow equilibrium. There is a certain irony in people who fear an over-supply of fiat money taking refuge in an asset in which central banks hold substantial stocks that could be dumped on the market at any time. At least one US think tank has advocated selling the US gold stock of 261.5m ounces to yield a quick and dirty profit for the US Treasury. The RBA was able to offload 167 tonnes without too much difficulty.

posted on 11 January 2011 by skirchner in Economics, Financial Markets, Gold

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Sell the Gold Stock, Burn the Gold Bugs

Ed Truman makes the case for the US Treasury to follow the IMF and offload its gold stock:

the US Treasury holds 261.5 million fine troy ounces of gold. The government has been sitting on that gold 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 United States were to sell its entire gold stock at the current market price, it would reduce the gross government debt by 2.25 percent of gross domestic product. Based on the average interest cost from 2005 to 2008, this reduction in debt would trim the budget deficit by $15 billion 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 would of course be incredibly lazy public policy, but should nonetheless give gold bugs pause. As I have noted previously, there is a certain irony in people who fear an over-supply of money taking refuge in an asset in which governments hold substantial stocks and for which the price is arguably in a stock rather than a flow equilibrium.


posted on 22 October 2010 by skirchner in Economics, Financial Markets, Fiscal Policy, Gold, Monetary Policy

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Inflation for the Long-Run

Jim Hamilton points to his Phillips curve relation, which is forecasting deflation over the near-term.  For the long-run, he suggests we should look to the fiscal theory of the price level:

The value of the new Federal Reserve liabilities ultimately will be determined by the long-term fiscal soundness of the U.S. government….Inflation is not something you should be afraid of for 2010. But what we need is a convincing commitment from the government to both near-term stimulus and longer-term fiscal responsibility in order to be assured that it’s not a concern over the next decade.

And that’s not what I’m seeing from the U.S. Congress.

Meanwhile, Thomas Frank contemplates an evil plot to stick it to the gold bugs: putting Fort Knox on eBay.  Not that it would work, but there is a certain irony in those who fear inflation taking refuge in the one real asset that is potentially the most vulnerable to a surge in supply from central banks and governments.

posted on 21 January 2010 by skirchner in Economics, Financial Markets, Fiscal Policy, Gold, Monetary Policy

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HSBC to Retail Gold Bugs: Get Your Own Damn Vault, Ours is Full

Gold is all about capital gain (or loss, as the case may be).  After storage and insurance costs, gold has a negative yield.  These costs may be about to go up, with retail gold bugs being booted out of gold storage facilities to make way for institutional investors.  From the WSJ:

Amid gold’s rise—it has gained 32% this year and reached a record on Monday—investors have been loading up on bullion and coins. One big problem now is where to store it. The solution from HSBC, owner of one of the biggest vaults in the U.S.: somewhere else.

HSBC has told retail clients to remove their small holdings from its fortress beneath its tower on New York City’s Fifth Avenue. The bank has decided retail customers aren’t profitable enough and is demanding those clients remove their gold to make room for more lucrative institutional customers…

HSBC’s decision has created a logistical nightmare for both the investors and the security teams in charge of relocating the gold, silver and platinum to new vaults across the country…

HSBC is telling clients to either move their metal, or prepare for it to be delivered to their doorsteps. In a July letter, seen by The Wall Street Journal, HSBC said the precious metal “will be returned to the address of record… at your expense,” unless instructed otherwise. HSBC recommended clients move their holdings to Brink’s Global Services USA Inc., which has a vault in Brooklyn, N.Y.

posted on 25 November 2009 by skirchner in Economics, Financial Markets, Gold

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Gold Price a Stock Rather than a Flow Equilibrium

With the nominal US dollar gold price posting record highs, I have an op-ed in today’s Age discussing the role of central banks and exchange rates in the determination of the gold price.  Gold is a stock rather than a flow equilibrium and central banks command a large share of global stocks.  However, exchange rates also have a large influence on the local currency returns to gold:

US dollar weakness has a positive valuation effect on the US dollar gold price, in the same way that it makes oil more expensive in US dollar terms. While a rising US dollar gold price is seen as symptomatic of a declining US dollar, this is true of US dollar commodity prices more generally.

Like other commodities, gold’s gains look less impressive in terms of currencies other than the US dollar. The Australian dollar exchange rate is positively correlated with the US dollar gold price, so that gains in US dollar terms are usually offset by Australian dollar appreciation. For an Australian investor, gold may be a good hedge against Australian dollar weakness, but actually increases exposure to US dollar weakness.


posted on 17 November 2009 by skirchner in Economics, Financial Markets, Gold

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Gold as an Option on the End of the US

Spengler (aka David Goldman) makes the case for gold as a hedge against the Obama Administration:

The scurrilous fringe of financial journalism likes to speculate as to when China will dump the dollar, without asking the obvious question: what would China do in the absence of the dollar? The billion people who inhabit China’s interior are no substitute for the 300 million in the American market. They have a fraction of the purchasing power, they have little access to financial services, they have no credit bureaus to calculate their capacity to carry debt, and they have no means to make liquid their limited assets through mortgage markets. Perhaps over a dozen years of Herculean efforts, the situation might be changed - but that is then, and this is now.

The world not only is stuck with the United States for the time being, but wants to be stuck with the United States. But the Barack Obama administration’s attempt to substitute government spending for collapsing consumer spending makes US assets less attractive, while its attempt to diminish America power on dubious ideological grounds forces other countries to act as rivals, unsuited and unwilling as they might be to do so.

That is why options on the end of the US are trading well in the form of the gold price. Gold will have no official role unless America’s international role really does collapse, and the world is reduced from a system of trust (or imperial dictates, which amounts to the same thing) to a kind of barter at the international level. That would be a situation much to be abhorred, but it is not to be excluded. The world may need an alternative to the dollar if Obama persists in his present course.

posted on 17 September 2009 by skirchner in Economics, Financial Markets, Gold

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When Gold Bugs and Reality Meet

A Wired story on the rise and fall of E-Gold:

In a sparsely decorated office suite two floors above a neighborhood of strip malls and car dealerships, former oncologist Douglas Jackson is struggling to resuscitate a dying dream.

Jackson, 51, is the maverick founder of E-Gold, the first-of-its-kind digital currency that was once used by millions of people in more than a hundred countries. Today the currency is barely alive.

Stacks of cardboard evidence boxes in the office, marked “U.S. Secret Service,” help explain why, as does the pager-sized black box strapped to Jackson’s ankle: a tracking device that tells his probation officer whenever he leaves or enters his home.

“It’s supposed to be jail,” he says. “Only it’s self-administered.”

There are some remarkable parallels between this story and the Paypal Wars.  Contrary to the hopes of the cypherpunk and cryptoanarchist movements, on-line payments systems have not been able to effectively challenge the power of the state.  I would agree with Richard Timberlake’s assessment (quoted in the linked article) of the original intentions behind E-Gold.


posted on 11 June 2009 by skirchner in Economics, Financial Markets, Gold, Monetary Policy

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Convenience Shopping for Gold Bugs

Gold vending machines.

posted on 29 May 2009 by skirchner in Economics, Financial Markets, Gold

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US Government Debt Default – It’s Happened Before

Alex Pollock reviews the US government’s 1933 decision to repudiate its gold clause obligations:

The United States quite clearly and overtly defaulted on its debt as an expediency in 1933, the first year of Franklin Roosevelt’s presidency. This was an intentional repudiation of its obligations, supported by a resolution of Congress and later upheld by the Supreme Court.

Granted, the circumstances were somewhat different in those days, since government finance still had a real tie to gold. In particular, U.S. bonds, including those issued to finance the American participation in the First World War, provided the holders of the bonds with an unambiguous promise that the U.S. government would give them the option to be repaid in gold coin.

Nobody doubted the clarity of this “gold clause” provision or the intent of both the debtor, the U.S. Treasury, and the creditors, the bond buyers, that the bondholders be protected against the depreciation of paper currency by the government.

Unfortunately for the bondholders, when President Roosevelt and the Congress decided that it was a good idea to depreciate the currency in the economic crisis of the time, they also decided not to honor their unambiguous obligation to pay in gold.

The fact that the US defaulted on these obligations demonstrates that a gold standard is only a very weak constraint on government once the decision is made to go off it.  The gold standard fails an important test that all monetary institutions should satisfy, namely that they be politically robust.  It is noteworthy that private and public debt defaults are often associated with the failure of fixed exchange rate regimes, because those who borrow in foreign currencies at the former parity can face a sudden increase in their debt burden.

A floating exchange rate regime, by contrast, is much less likely to give rise to the need for default on debt obligations.  In the case of the US, the ability to borrow in its own currency shifts exchange rate risk to its creditors.  Although this currency risk might be reflected in interest rates, in practice, this seems to be a relatively minor influence on interest rates.  For countries like Australia that are also heavily dependent on foreign borrowing, the exchange rate risk is typically swapped out.  The exchange rate can then carry most of the adjustment to an external shock, without causing significant problems for domestic borrowers.

posted on 27 January 2009 by skirchner in Economics, Financial Markets, Gold

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