Gold: At What Price?

The Need for a Public Debate on the Fate of National Gold Reserves. By John Young.

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gold at what price

Gold, once the foundation of currencies worldwide, may be on its way to becoming just another com- modity. Key to whether gold in the future is a worth- while or worthless investment will be the decisions of national treasuries, central banks, and international institutions about whether to sell significant shares of their gold reserves. Already, such sales have happened, and others are planned. Thus central banks, rather than mining companies or gold buyers, may have the most influence over the future price of gold.

Central banks and international financial institutions hold more than 34,000 tons of gold. This is more than 13 times the annual production of the world’s mines; if sold, these reserves could satisfy gold demand for more than 8 years (current demand is approximately 4,000 tons per year). Of this demand, 85% is typically used for jewelry.

According to some investment analysts who follow gold markets, since 1971 when the International Monetary Fund prohibited its member countries from using the gold standard, central bank-held gold reserves have been, “the spent fuel of an obsolete monetary system” (Economist, 1992). Central banks have, in fact, been slowly but steadily selling their gold holdings for three decades.

The United States, as the world’s largest holder of gold reserves (8,600 tons), holds 54% of its reserves in gold. U.S. citizens deserve a voice in a broader public debate on the future of U.S. gold reserves, even from a purely financial perspective.

A case can be made that current U.S. policies are cost- ing U.S. taxpayers billions. At market prices, the value of U.S. gold reserves has declined from $215 billion to $73 billion since 1980 – not to mention the interest that might have accrued from placing the proceeds in other investments such as government securities. For example, Australia, which sold two-thirds of its gold holdings two years ago, has recently calculated that it has earned US$506 million more since the sale than it would have if it had held on to its reserves. A Swiss commission has estimated that every Swiss household

could earn $450 per year if that nation were to invest its gold holdings in foreign-government bonds; the Swiss National Bank, once among the world’s greatest gold enthusiasts, is likely to begin sales of up to half their reserves this spring.

At the same time that we lose money on our “invest- ment” in gold, U.S. taxpayers have subsidized the gold mining industry through the giveaway of billions of dollars of gold ore and public lands. We also continue to pay out millions of dollars in federal and state- financed clean-ups of mining disasters or abandoned mines. Mining-dependent communities, at the mercy of global markets, may end up holding the bag for clean-up if the mining company goes bankrupt; any major program of gold sales should address not only clean-up costs associated with abandoned and bank- rupt mines, but also the development of programs for worker transition and alternative forms of economic development for communities that have relied heavily on gold mining.

There is growing evidence that the fundamental over- supply of gold, along with continued, even accelerat- ed, gold sales by central banks, may continue to exert downward pressure on gold prices. For both environ- mental and economic reasons, the American public may well question the wisdom of continuing to hold very large reserves of an asset that has been losing value for decades. Since the U.S. holds the largest reserve of gold in the world, the U.S. stands to lose the most if other governments sell first.

This paper explores these issues and makes the case for a public debate on this issue…