walkingstick » October 4th, 2013, 10:30 am • [Post 183] BRETT ARENDS'S ROI Archives | Email alerts
Oct. 4, 2013, 7:31 a.m. EDT Why Uncle Sam is hoarding gold
The Treasury says it won’t tap its gold stockpile, even to avoid a default
Grab any Wall Street trader in a bar, or any portfolio manager in his office, and he’s likely to tell you gold is finished.
It’s silly, nothing more than a shiny metal, a substance with little use and little real value, a “barbarous relic,” and the stuff of nothing more than superstition. Only a fool would own any gold in his portfolio.
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After all, its value has plunged by $500 an ounce in the past year, and $100 just in the past month. Gold hasn’t even rallied during the budget crisis: So much for its “safe haven” status.
There is just one nagging problem with this story line. One group of people disagrees. And I am not talking about wacko gold bugs in Arizona (“the ex-husband state”) with tinfoil on their heads.
I am talking about the people running the United States Treasury.
They remain firm believers in gold. Big-time.
This week I asked them if they would consider selling some of the country’s gold reserves to pay the bills if the budget crisis escalates later this month.
Their response? Not a chance.
The Treasury has considered that option, among the many others, and rejected it. “Selling gold would undercut confidence in the U.S. both here and abroad,” a spokeswoman said, “and would be destabilizing to the world financial system.” She was quoting an official position laid out last year in a letter to Senator Orrin Hatch, but so far apparently little noticed on Wall Street.
The Treasury’s position is, in a word, extraordinary. We hear all this skepticism these days about gold. Yet the Treasury itself considers U.S. gold holdings to be a key element in maintaining confidence in the country’s soundness—and the stability of the international financial system.
I thought gold was a joke. Totally over. I thought no one cared about gold. But if that were really the case, why wouldn’t the government just dump the holdings for whatever it could get?
To get the full measure of that statement, it is worth reminding ourselves of where we are now. The government has already shut down and there is a non-trivial risk that in just over two weeks it may actually default on its debts.
I’m not saying it’s likely, but I am saying the risk is real. To prevent that happening, Congress, which can’t even agree to keep open the Bunker Hill Monument for tourists, must agree to hike the debt ceiling. If it doesn’t, the federal government will quickly run out of money.
The Treasury has considered various scenarios and contingencies, officials say. They have concluded that delaying government payments across the board—from Social Security to debt interest — would be the least harmful approach
In other words, according to the official position of the U.S. Treasury, the promises and commitments of the government, and its “full faith and credit,” are actually worth less than gold. They’d rather default than lose their bullion.
The federal government has about 8,100 metric tonnes of gold, held in places like Fort Knox. At current prices that’s worth about $340 billion. That would only keep the government going for about a month, which tells you how little gold we really have in relation to our commitments.
Governments in Europe, including those in Great Britain and Switzerland, have sold off some of their gold in the past (much of it near the bottom of the market 13 years ago).
Josh Strauss, co-manager of the Appleseed mutual fund (and a gold fan), calls the Treasury’s admission extraordinary. “With gold on the ropes this year, investors are increasingly questioning the intrinsic value of gold,” he says. “Given the craziness in D.C., it seems to me that investors should really be questioning the intrinsic value of paper dollars backed by feckless promises.”
Strauss’s fund has a big position in gold. He owns, and especially likes, Central Fund of Canada CET -0.56% , a closed-end fund with gold and silver in its vaults. The shares trade for 5% less than their net asset value, and because it is a stock your capital gains, if any, will be taxed at the lower rates levied on shares, rather than at the higher rates levied on collectibles such as gold.
I confess I am a gold agnostic—neither a confirmed skeptic, nor a true believer. I try to keep an open mind. (I do see some value in owning it, since in the past it has often tended to do well when other assets, such as stocks and bonds, have done badly.) But the Treasury’s comment is really remarkable. The Treasury suspects that if the government just sold its gold, all those “gold skeptics” who run the financial markets would panic.
What does that tell you?
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