THE FOOL'S GOLD AT FORT KNOX

A country may amass vast gold reserves, but if it’s built on the illusion of wealth, it’s only fool's gold — shining bright but lacking true value.

The mysterious massive flight of gold out of London to US, the clamour for audit of the secretive Fort Knox, the huge US national debt, and the Secretary of Treasury's talk of monetising assets to fund the Sovereign Wealth Fund proposed by Trump, all these provide a fertile ground for all sorts of conspiracy theories about gold reserves. It is disappointing when a well-respected conservative voice jumped into the fray. Glenn Beck, a former CNN host, speaking on his Blaze Media a few days ago, said that someone in US with deep pockets is buying the gold. The innuendo is the US government. He brought up the hazy theory of the government accumulating gold and together with all existing gold reserves kept at a book rate of US$42/ troy oz, a revaluation scheme is on hand which will wipe out the national debt.

Well, the US government simply hasn't got the resources to buy up these massive amount of gold shipped from London. With the US national debt at US$36.5T and gold at US$3,000/oz, it will take 12.16B oz or 379,000 metric tons of gold to pay off the debt. As at 2023 the total gold ever mined to date in the world was 208,874 metric tons. There just isn't enough gold in the world.

Regardless, Trump's comment that he is ushering in "the golden era" is taken as a cryptic message by diehard conspiracy theorists. There is something going on with gold.

China has the highest reserves in the world of US$3,455B, US is third with US$910B. If gold is excluded, China is still #1 with foreign exchange reserves of US$3,264B. US has a small forex reserves of only US$228B which is even lower than tiny Singapore's US$365B. The reason is simply because most international trade is conducted in US$ so unlike other countries, the US does not need to hold its own currency in reserves. Forex reserves is essentially meant to provide a country with sufficient liquidity for importation of goods. It is also seen as a backing for its own fiat currency. In the case of US, since it maintains only a small amount of forex reserves, their gold reserves is crucial as a backing for the dollar.

As at December 2024 the US' holding of 8,133 tons of gold is the highest in the world. Germany follows at a distant 2nd place with 3,351 tons. China is 5th with 2,280 tons. The US keeps its gold in several places, the major ones are Fort Knox, Kentucky (5,484 tons), West Point Mint NY (1,680 tons) and Denver Mint, Colorado (1,362 tons).

Neither the Federal Reserve nor the US Treasury take part in leasing out gold to bullion banks. That means all the gold should be intact at its place of storage. There have been visits by notable personalities to Fort Knox, including President Eisenhower, congressional delegations, secretaries of the Treasury, and one public delegation. But there has never been any independent audit conducted, ever.

During the Great Depression, the US was under severe spiral deflation brought about by excessive supply from overproduction, especially in the agricultural sector. GDP down, banks and businesses go burst, unemployment skyrocket. To fight deflation, the government needed to inject inflation. At the time, the US was still under the gold standard system. Without an increase in gold reserves, it cannot increase money supply to spur the economy. Something had to be done with gold to get out of the depression.

In 1933, by executive order, Roosevelt confiscated gold coins, bullion and gold certificates. Compensation was set at US$20.67/oz. Private individuals can no longer own gold bars. This allowed the government to control gold. After confiscation in 1934, by the Gold Reserve Act (1934). the gold reserves at the Fed were transferred to Treasury. The price of gold was then reset at US$35/oz. That means from 0.0484 oz, every dollar can now be exchanged for only 0.0286 oz of gold. That effectively devalued the dollar by 41%, thus allowing for more money printing and liquidity into the market.

The US gold reserves is like in a quantum state of superposition. They are in two places at the same time.

Most people do not know the US gold is in both the Federal Reserve as well as in the Treasury Department. The US gold reserve of 4,200 tons was originally held by the Fed but in 1934 the ownership was transferred to the US Treasury. In turn the Treasury issued gold certificates to the Fed based on US$35/oz. In the Treasury, the gold is carried at cost of US$42.2222/oz. So the Treasury has ownership of the physical gold, and the Fed has the paper gold. By law, those gold certificates cannot be redeemed for gold.

During the Great Depression, there was massive dislocation of currency values. UK and Germany had already left the gold system in 1931. In 1944, currencies were realigned by the Bretton Woods Agreement. US$ was fixed to gold and convertible at US$35/oz. All other currencies were pegged to US$.

The Treasury gold reserves was 4,200 tons in 1934. After Bretton Woods, US gold reserves began to build up rapidly and peaked at 20,000 tons by 1958. Several reasons accounted for this. As US$ became the major reserve currency, many countries sold gold for dollar to build their forex reserves. US received substantial gold for war reparations. After WWII many countries were broke and had to pay for imports with their gold reserves. US gold mining production enjoyed a boom ride.

Then the Triffin Dilemma manifested. This is something I wrote about BRICS here. As international trade exploded, US needed to print dollars to provide liquidity to the world. Sooner or later it runs out of gold to back the dollar. It was suspected Uncle Sam printed more dollars than the gold it had to back it. Inflation follows, exacerbated by military spending on the Vietnam War and President Lyndon Johnson's social spending programmes (Democrats buying votes programmes). Loss of faith in the value of US$ drove many countries to convert their US$ forex reserves to gold. France's President de Gaulle was outspoken over the value of the dollar. A popular story had de Gaulle sent warships to US when he was denied France's request for return of gold. The truth is US never reneged on the guarantee of convertibility under Bretton Woods Agreement.

The rush to convert dollar to gold depleted US gold reserves. In 1971 President Nixon had no choice but to suspend convertibility of the dollar, and Bretton Woods Agreement collapsed. US gold reserves had decreased to 8,133 tons by 1971 till today.

In the same year, the Smithsonian Agreement was signed to fix world currency system. US$ was devalued to US$38/oz of gold and other currencies re-aligned to the dollar and allowed to trade within a 2.25% band. In other words, currencies were re-pegged to the dollar. Several currencies like British Sterling, Deutschemark and Yen became stronger than US$. However, confidence in the convertibility of the dollar could not be revived.

The arrangement proved unsustainable. By 1973 the peg to US$ collapsed and almost all countries maintained floating rate in the new era of fiat currencies, ie paper money backed by nothing.

In 1973 the dollar became fiat and devalued to US$41.2222/oz. That has been the book value of gold reserves carried in the book of the Treasury till today. Most central banks hold gold reserves in their books at cost. This has been the case with the Monetary Authority of Singapore. Singapore's gold reserves at Dec 2024 is 219.96 tons with a book value of US$18.451B which means the cost is US$2,611.42/oz. This suggests the major part of MAS' gold is of recent acquisition.

The US Treasury revaluation resulted in gains of (4,200 tons from US$20.67/oz to US$35) + (8,133 tons from US$35/oz to US$42.2222/oz) = US$3.82B. Actual figures may differ given there could have been some sales of gold during the relevant periods). This gain is transferred to an 'Exchange Stabilisation Fund' (ESF)

The US does not manage its foreign exchange rates like other countries maintain floating rates by interfering in the forex market in daily open market operations, buying and selling to keep the rates within certain bands. The US Treasury uses the ESF only in certain special situations. For example in the Paris Accord the ESF was used to help stabilise US$ exchange rates with several countries during the first few years of floating rates.

When gold is revalued, nothing happens. It's just an accounting concept. The US Treasury assets of gold increased in value by US$3.82B and on the liability side of the books, there is a profit of the same amount. This profit item is simply transferred to an account called the ESF. Just accounting entries. There is no money involved. What it means is of the total assets of the Treasury, US$3.82B is reserved for use by the ESF. Say for example, US$1B of the fund is to be used for something. Treasury pays out cash so it's asset (cash) is reduced by US$1B and on the liability side, the ESF a/c is equally reduced.

The price of gold has shot past US$3,000/oz. Based on this price, the reserves of 8,133 tons at US$3,000/oz adds up to US$786.57B, hardly making a dent on the national debt of US$36.5T. There goes one conspiracy theory. It cannot even balance the budget which in the last 8 years averaged US$1.7T deficit.

A revaluation of US gold reserve at US$3,000/oz would see a paper profit of US$773.5B. This is just an accounting number which goes to increase the ESF. To make use of it, the gold has to be monetised. There were talk of possibility of selling some of the gold, ie monetise it, to partly fund the proposed Sovereign Wealth Fund. But if the budget is still negative, it would mean the government has to increase debt to get the funds to use. The good news is dipping into the ESF does not require Congressional authorisation, thus giving the Executive more leeway. The bad news is by law, the ESF is only meant to be used to manage the exchange rate. Another conspiracy theory shut down.

There she sits, all these gold, in Fort Knox and elsewhere. A so-called 'barbaric relic' of the past Gold Standard system. Revaluing it means depreciating the US$ against gold by 7,006%. Selling them off will shatter confidence in the dollar which no longer has gold backing and who knows how much it will depreciate against other currencies?

Uncle Sam is the leprechaun sitting there guarding all the glittering gold that represents wealth, stability and history, and wondering what to do with it. Meanwhile, the world around him is furiously trading gold, using it as a store of value and an economic foundation.

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