by Edwin M. Truman, Peterson Institute for International Economics
Op-ed in the Financial Times
October 12, 2010
© Financial Times
Gold is back in the news. Its price is soaring in what some analysts say is a reflection of a weak economy and a lack of confidence in government policies. Naturally, investors are looking at a new sure thing in the expectation that prices will continue upward. My advice to the US government, however, is that this may be the best time—to sell. Doing so would help President Barack Obama and Congress reduce indebtedness at little cost.
It is an article of faith in bullion markets that the United States will be the last country to dispose of its gold stock. For 30 years it has had a no-net-sales policy for reasons ranging from resistance by US gold-producing interests to concerns about the international monetary system. That assumption may remain plausible. Yet the administration has an obligation to reexamine its policy.
The market price of gold has risen for more than a decade propelled by low interest rates, the hype of the bullion dealers (holding large inventories) and no doubt the normal amount of fraud and misinformation accompanying asset price bubbles. The Financial Times has reported that the precious metals industry expects the price to increase by a further 11 percent over the next year.
Meanwhile, 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 proposal has several other benefits. First, the United States would be obeying the maxim to buy low and sell high. Second, it would be performing a socially useful function. Demand for gold exceeds normal production, driving up the price. To the extent that the gold craze is being fed by concern (rational or irrational) about government policies, public welfare would be enhanced by giving citizens something tangible to hang around their necks or place in safe deposit boxes. Third, if the price is a bubble, as seems likely, the sooner it is burst the better for the average investor.
Some people point to possible costs. Aside from political pressures from those who want to protect the value of their holdings, above or below ground, two principal arguments are made against US gold sales. The first is that such sales would disrupt the market. But the US government can be cautious in its sales, avoiding disruption of gold sales programs of other countries, as it has in the past. There is little risk. In recent years, sales under the Central Bank Gold Agreement have dwindled, and some other central banks are buying gold. (The United States is not a party to the agreement.) Also the International Monetary Fund has completed more than three-quarters of its own planned sales of 403.3 metric tons.
Another counterargument is that the United States should hold onto its stock in anticipation of the return to a monetary system based on gold by itself or with other nations. Returning to the gold standard would reinstate a system that has not existed for a century, however. It is not going to happen. The gold standard was associated with unstable prices, wages, output, and employment. The current official discussions of the reform of the international monetary system do not include any advocates of a return to gold, and the IMF Articles of Agreement prohibit doing so. The sooner thoughts of a return to the gold standard are laid to rest, the better. A related argument for retention of the US gold stock is as a "rainy day" precaution. But after the recent economic and financial crisis and with the prospect of further misery for several more years, how much more rain must pour before the United States acts?
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