But whoever’s telling the truth, America’s gold reserves won’t solve its debt problems.

The Congressional hearing into America’s gold reserves has been very revealing this week; but perhaps the most revealing statistic is the audited value of what’s in there.

Either somebody got their decimal point in the wrong place, or the contents of Fort Knox are worth considerably less than I thought. There are 261.5 million ounces of gold held in reserve in the US. As of yesterday, those reserves were said to be worth roughly $320 billion. At $1501 an ounce that makes sense; I just thought the weight was much greater than that. (Am I alone in this view?)

That amount of gold wouldn’t even dent (let alone scratch) the surface of America’s deficit (let alone debt). The US deficit is 4.5 times the gold reserves; at $15.476 trillion, the US National Debt is 42 times bigger. If interest rates rose to 3%, the US Government would be paying an extra Fort Knox in interest alone.

As I say, I’m surprised the amount isn’t much more. But wannabe Presidential candidate Ron Paul thinks it might be a whole lot less than we’re being told.

You probably haven’t heard of Ron Paul. He’s the Republican Rep for Texas, and something of a lone star himself. You’ll have to make your own mind up about whether Republican libertarians are to your taste, but I don’t care what Congressman Paul’s labels are: he’s been something of a hero of mine since the last financial unpleasantness in 2008.

In a nutshell, Ron Paul believes that the bankers are crooked, the Government lies about all things fiscal, the real People of America have been dumped on for decades, and the Federal Administration should be about 10% the size it is. More specifically, he has been proved right about everything from deficit economics and Iraq to QE policies and bank bailouts.

But the bloke’s main hobby horse is that he thinks the Dollar should go back on the gold standard; and like The Slog, he believes the gold market is manipulated….and the US has far less of it in Fort Knox than it pretends. He was a key driver behind the Gold Reserves Transparency Act of 2011, since the passage of which a House subcommittee is now holding a hearing on whether it was enough. Basically, the hearing morphed into a debate about whether sufficient information is available to the American public about the amount of gold the U.S. holds.

Fort Knox gold audits have been secret for 25 years, and no full audit at all has been conducted since the early 1960s. The last President even allowed into the place was Harry Truman 61 years ago. Ron Paul wants to pass a Bill demanding a full public audit pretty much every year, and during the hearing two days ago, he grilled federal officials at length about their problems with the idea.

During the hearing, Paul suggested that the New York Fed has 5% of the U.S. gold reserves, with the ability to sell or swap gold with other countries secretly. (On that day, as the economic world took a plunge into the depths of despair, the gold price slipped $31. The polite way to describe this is ‘counter-intuitive’). The U.S. Mint insists that moving, counting and testing the gold would cost around $60 million. But I understand Paul has been told by the Fed Treasury that it would only cost $15 million. (The US Mint made $400 billion last year. That’s more than the Gold reserves!)

In defence of gold auditing policy, Treasury Department Inspector General Eric Thorson maintained that independent annual audits of the U.S. Government’s deep storage gold reserves have been conducted annually since 1993. But his choice of words was weaselly-careful to hide one crucial fact: the auditing firm – KPMG – only audits the Treasury’s audit. In short, KPMG checks the Fed’s sums: it has no more idea than you or I whether the numbers are true or not.

Since 2006, The Slog (in its former incarnation as notbornyesterday.org) has been arguing consistently that the gold price doesn’t behave like a free and open market commodity should. It rises and falls at the wrong times, it falls very quickly, the falls are closely correlated to the NYSE openings (10.00 am), and the movements of gold internationally do not correspond to the declarations made by the countries involved.

Until early 2010, China insisted it had only $300 billion in gold. Suddenly, it announced gold reserves of $1.3 trillion. Its claims to have mined this within China are risible – although with South African technical help, it is now mining more and more of the stuff.

The market in paper-tracker gold is a similar case in point. From 2009 until two months ago, I had a gold tracker account with RBS. Each time the ‘market’ price fell, I’d ring bullion dealers. On every occasion, they couldn’t sell me anywhere near as much bullion as I wanted, arguing (quite truthfully I think) “demand vastly exceeds supply”. Since when did a massively under-supplied market show regular falls of $35-50 for no reason….other than the US Fed wanted to (a) defend the Dollar (b) stop a run out of stocks and into gold, or (c) stop a run out of US Bonds and into gold?

In conclusion, let me put it this way: if everything inside Fort Knox is above board and hunky-dory, why are the Fed and its associated auditors so shifty about letting some real auditors in to take a look? Frankly, they have plenty of excuses and rationales – but no reasons.

Two years later: Currency wars get going in earnest


January 4th 2013: the day the gloves came off