Wednesday, July 13, 2011

Will the US sell its gold reserve?

After my several doom and gloom posts lately, tonight I'd like to focus on a possible solution to the crisis. No, really, it's not a solution - it's just something that governments may mistake for a solution and therefore they'll do it, even if it's not.

Dump the gold reserves.

You see, of all the approximately 165 000 tonnes of gold that has been mined, more than 30 000 are locked up in different countries gold reserves. With gold seemingly reaching new all time highs every week, this would be a great time to sell. Most countries of course do not have gold reserves so big that selling them would actually solve the economic crisis, but there is still reason to believe a coordinated effort to dump the gold price may be in the makings.

When people don't trust the stock market, they have a tendency to put their money in commodities instead. Well, bonds as well, but if they don't even trust bonds (see; all my posts about the eurozone crisis), then commodities are all that remains. Most of all, investors are drawn to precious metals such as gold and to a lesser extent silver.

This leads to less money available on the stock market, which drags it down and with it goes economic growth and recovery. So what is a government official to do?

Well, they can always regulate, like I wrote about last week. But if that doesn't work, they can always dump the price of gold by selling all their reserves at the same time, causing investors to flee gold and forcing them back either into the stock or the bond market (most likely both).

Of course, this would have to be a co-ordinated effort. If only one country does it, it won't work. But if the EU, the US and a few other countries got together, it could.

Is this likely to happen then? Well first, let's accept the fact that the US government is trying to stop people from fleeing to commodities. Why else would they regulate it? Let's also accept that no country on earth are really fond of people buying commodities as opposed to shares and bonds. And finally, let's accept that international co-operation is at an (probably) all-time high. So why not co-operate to make investors go back to the stock market?

For a country that has a harder and harder time finding people willing to lend it money, destroying the alternative to doing must seem like a really nice way out. And right now, there are a lot of countries in that seat.

Plus, what do countries really have their gold reserves for? They're a left-over from the era of the gold standard. They don't have as big a function today as they used to. So if dropping them can lead to a recovery, then politicians are likely to ask why not do it? This would also cut the deficit (temporarily), and who wouldn't want that?

We also need to remember that the current government, being keynesian, believes that the only problem is the "animal spirits" - the "gut feeling" of the investors. The market is fine, the economy is recovering, now if only the investors and entrepreneurs would understand that, maybe it would become the case - that's how the thinking goes. Investors have become so used to buying commodities, they can't see the economy is fine and worth investing in again. They're irrationally pessimistic, it has become a habit after the past couple of years. If we can only dump commodity prices, they'll be forced to re-evaluate and understand what our wise leaders understood a long time ago: The crisis was over the 20th of January 2009 and the last three summers have been recovery summers. And so will the next one.

Another possibility is that instead of actually selling the gold reserves, the government simply starts to hint that they might do it. Speculation that the market is about to be flooded with gold will be enough to cool off the gold market for a long time. And also, the US may not need the help from other countries. If they sell of their reserve, other countries may decide that this is the right time to do the same, before the gold price drops too much.

Of course I don't support this solution. First of all I'm not sure if it would even do what it's intended to do, it would be completely unprecendented and the effects would be hard to predict. Second of all, there are functional problems in the economic system, whether the the US and the European governments want to admit it or not. Third, gold reserves are good to have in case there is a currency crisis. A smarter move would be to buy gold instead of selling it.

There are several other reasons as well, but I think this will do for now. Thanks for reading,

John Gustavsson


Keep the Gold at Ft Knox said...

What happens when China decides to buy it ALL UP at a bargain price.

What would this do for them down the economic road.

John said...

I'm not supporting this idea. I'm just saying it's something that a desperate government just might try, to disturb the market for a while. If investors see prices falling, they just might hurry back to the stock and bond market, and they wouldn't want to touch gold again for a while. Or at least that's what the government would be hoping.

China owning gold is not something I'd be worried about. Now, their dollar reserve on the other hand...

BOSMAN said...

I don't know John.

I think I like the idea of America having a little gold tucked away rather than just printing presses, ink, and paper.

John said...

Bosman, I obviously need to rewrite this post immediately!

I'm against this whole selling out idea, I'm just saying it will happen anyway. It was a prediction, not an opinion.

Quoting from the last part of my post:
"Of course I don't support this solution. First of all I'm not sure if it would even do what it's intended to do, [...] Third, gold reserves are good to have in case there is a currency crisis. A smarter move would be to buy gold instead of selling it."

We're in perfect agreement. Not that the size of the US gold reserve is anything to brag about (400 billion dollars when you owe 14.3 trillion dollars), but it's something I guess.


Donal said...

Dont think it will happen john because the expectation that it will happen will mean gold prices will plumit so there will be little point in dumping gold then as it wont provide sufficent economic stimulus.

John said...

Donal, they won't do it simply to get money. They'll do it, or hint that that will do it, to force investors back from commodities into the stock and bond markets.

Anonymous said...

...and in the process cause a global, economic catastrophe. Nations would be blaming other nations of manipulating the gold and currency market which could cause a major strife to break out which could lead to heated discussions and possible military actions...let's hope our President and Congress are smart enough not to do something so irresponsible.


Anonymous said...

The other possibility would be that dumping so much gold on the market could lower the price so drastically that it could be rebought at a cheaper price before the market has a chance to react...also very doubtful.


Anonymous said...

But more likely, by the time the sell went through, they would end up cutting into their own profits and lose money on the sale.