The last-minute decision to raise the debt ceiling last month put an end to the federal government shutdown and helped the nation narrowly escape default. Unfortunately, the hastily crafted deal is far from a long-term solution. When Congress and the White House revisit the issue in February, tax hikes and spending cuts will be weighed once again; it's likely that Washington will continue to kick the can down the road by lifting the debt limit higher.
As politicians scramble for ways to address the nation’s mounting debt, one thing that has been ruled off-limits is selling the nation’s gold reserves.
In the days leading up to the debt-ceiling showdown, Wall Street Journal and MarketWatch contributor Brett Arends echoed a question first posed by Republican Senator Orrin Hatch: Would the Treasury sell any of its bullion to help pay the bills? Quoting the Department’s official response to Senator Hatch, a spokeswoman explained that the Treasury would not part ways with its bullion for fear that such action could “undercut confidence in the US” and consequently destabilize global markets.
The notion that the federal government would rather postpone Social Security and debt interest payments than pawn off some of its gold is revelatory, to say the least. The position is also at odds with Bernanke’s response to Representative Ron Paul during a candid exchange in 2011, when he stated that the Fed holds gold on its balance sheet merely to keep with longstanding tradition.
The Treasury’s decision to hoard gold in the face of default is symptomatic of how central banks across the globe currently view gold. In a year marked by widespread skepticism, central banks have been clinging to their bullion, with global reserves standing at more than 32,000 tonnes.
According to the World Gold Council, central-bank gold sales are at the lowest levels since 1999, when the Washington Agreement on Gold—a “gentlemen’s agreement” between some of the world’s most powerful central banks—placed limits on selling gold.
Still, historically large-scale liquidations of gold reserves aren’t unprecedented. Switzerland has opened its vaults before; and Great Britain sold off nearly two-thirds of its gold reserves, or roughly 13 million ounces, between 1992 and 2002 to raise funds.
So what are investors to make of the Treasury’s admission? At its core, the stance suggests that the federal government assigns more value to gold than its own promises. Or maybe the federal government’s hedging its bets against its own reckless expansion of the monetary base. The very mention of not wanting to disrupt international markets by unloading its gold surely alludes to this. Some speculate that the Treasury has lent out its gold reserves and therefore couldn’t sell its bullion even if it wanted to. Though we prefer not to read too far into conspiracy theories, the fact that the Treasury has not been audited since the Eisenhower Administration nonetheless raises some red flags.
With a new year just around the bend, 2013 will probably go down as a year that most gold investors will want to forget. However, the future for gold shines brighter with each tacit endorsement from the most unlikely of candidates—print-happy central banks. Though it’s worth mentioning that a complete liquidation of the Fed’s 8,100 metric tons of gold would only be enough to finance the government for about a month, the fact that the Fed and central banks across the globe are hoarding gold suggests that retail investors would be wise to take notice and keen to question the intrinsic value of dollars backed by feckless promises.
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