May 23, 2024

Gold and Debt – What Would Benjamin Franklin Have Said?

Benjamin Franklin, one of the most eloquent wordsmiths in American history, coined one of the most famous quotations of all time in a letter to Jean-Baptiste Leroy in 1789.

“Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.”

Contemplating the nation’s growing indebtedness lead me to wonder what immortal phrase Ben Franklin would conjure up to describe the current state of our financial affairs.

Recently and without much public drama, the national debt ticked up by another trillion dollars.  Including off balance sheet liabilities for social security, medicare and a host of other government guarantees brings the true national debt figure up to around a cool $70 trillion.

The majority of the public is either unable to comprehend how much a trillion is or doesn’t much care.  One way or the other, however, the debt falls upon the backs of American families who are already being crushed by zero rates on savings, job losses, lower income and a higher cost of living.  Viewing the debt burden per household gives us a perspective on how bleak our economic future may become.

The official national debt per America’s approximately 118 million households is $136,000.  Throw in the off balance sheet liabilities and we get up to $593,000.  Consider that the median annual household income is only $49,445 and has been declining for the past 20 years.

Are things really as hopeless as they look?  Doesn’t the United States hold the world’s largest amount of gold reserves?   The good news first – yes the U.S. owns 8,133.5 metric tonnes of gold, more than twice as much as second place Germany with 3,395 metric tonnes.   The bad news is that at today’s undervalued gold price, total U.S. gold reserves are only worth $454 billion.  Gold reserves per American households amount to only $3,847, a fraction (0.65%) of total household debt.

Exactly how the Fed’s Frankenstein experiment in fiat money creation will end, nobody knows – but it won’t end well for most of us.  Right now, increases in both the value of gold and the amount of debt seem as certain as death and taxes.  I wonder how Ben Franklin would have phrased it?

Will Central Banks Continue To Increase Their Gold Holdings?


Central banks continued to add to their gold reserves in August with three countries adding a total of 643,000 troy ounces to their reserves.

According to the Wall Street Journal, the largest central bank purchaser of gold during August was Thailand which purchased 300,000 troy ounces, bringing their total gold holdings to 4.4 million ounces.  The Bolivian central bank purchased 225,000 ounces increasing their total reserves to 1.36 million ounces and the central bank of Russia purchased 118,000 ounces which increased total reserves to 27.2 million troy ounces.

After selling gold reserves for many years, central banks began purchasing gold around 2000.  Over the past several years central banks have sharply accelerated their purchases of gold to diversify away from the U.S. dollar which is no longer considered to be a safe asset.  China and Russia, large buyers of gold, have been particularly critical of U.S. monetary and fiscal policies and are actively seeking to reduce their reserve holdings of U.S. dollars.

Will central banks continue adding to their gold reserves?  For some insight on this matter, consider the following facts.

In August Russian Prime Minister Putin said that the United States is “not living within its means, shifting the weight of responsibility  on other countries and in a way acting as a parasite.”  Putin also said that a new reserve currency is necessary to protect against a “systemic malfunction” of the U.S.  Putin has reason to worry since Russia has almost half of its reserves in U.S. dollars.  In 1998 Russia had gold reserves of 14.7 million ounces compared to 27.2 million ounces after its latest purchases.  Despite the fact that the Russian central bank has the eight largest official gold holdings in the world, gold amounts to only 8.2% of total reserves.

China, which holds $1.2 trillion of U.S. treasury debt, has the most to lose from the continuous debasement of the U.S. dollar and has become harshly critical of U.S. economic policies.  After the U.S. debt downgrade in August, China said that America must “cure its addiction to debts” and “live within its means.”   China is actively seeking to diversify its reserves and reduce its holdings of  U.S. dollars.  The latest reports show total Chinese gold reserves at 1,054 tonnes compared to 395 tonnes in 1988.   Gold holdings amount to only 1.6% of total Chinese reserves.  China’s 33.9 million ounces of gold is currently valued at only $54.2 billion.  By comparison, the gold holdings of the SPDR Gold Shares ETF (GLD) total 39.9 million ounces valued at $65.6 billion.  Expect China to add dramatically to its gold reserves in the future.

Gold purchases by central banks during 2011 are forecast to be 336 metric tonnes, approximately 13% of total yearly gold mine production.  Central banks during  the second quarter of 2011 purchased four times the amount of gold purchased during the comparable quarter of 2010.  Given the fragile state of the world fiat money system, it is likely that central bank gold purchases could expand dramatically going forward.

Only 7 countries or institutions currently hold more than 1,000 tonnes of gold – the United States, Germany, the IMF, Italy, France, China and Switzerland.

Total official world gold holdings by central banks and the IMF currently total 30,707 tonnes, valued at approximately$1.6 trillion which, coincidentally, is the size of this year’s budget deficit for the United States.  Total gold holdings of the world’s central banks amount to only a fraction of the value of paper currencies that have been exponentially created.

All of the gold mined throughout history totals only 178,000 tonnes or about 6 billion ounces valued at $9.6 trillion.  Central bank holdings amount to only 17% of the total gold supply available.

Despite increasing gold prices, gold mine production has been stagnant.  Most of the easy to mine, high grade ore deposits have already been exploited.  New total yearly gold production adds only 1% per year to the existing supply of gold.  Increasing demand and limited supply result in higher prices.

Only 34 central banks currently hold over 100 tonnes of gold and only 12 central banks or institutions hold more than 500 tonnes of gold.

Ironically, the United States, the most indebted nation in world history has decreased its gold reserves.  In 1962, the United States owned 14,269 tonnes of gold or almost 39% of all gold held by central banks.  By 1972, the United States held only 8,584 metric tonnes of gold.  Currently, U.S. gold reserves allegedly total 8,134 tonnes but the amount remains in question since the government will not allow an independent audit of the actual amount held.

Considering the relatively small amount of gold held by central banks and the exponential increase in the creation of paper money, gold demand by central banks should  increase dramatically in the future.



Ron Paul’s Call For Gold Backed Currency Would Value Gold At $54,300 Per Ounce


Ron Paul said today that the creation of a sound U.S. currency, “backed by gold or some other commodity respected by the market” was the most important first step to create new jobs and encourage capital investment in America.

In an article published on the Ron Paul website entitled “The Keys to Economic Growth“, Ron Paul argued that the U.S. economy was in “terrible shape” and that the trillions of dollars borrowed and printed by the U.S. government have done nothing to turn things around.  Rep. Paul noted that the real unemployment rate was closer to 20% rather than the officially published rate of 9.1% and that real job growth would only come from private capital financing existing business or entrepreneurial growth. New job growth will not occur, said Ron Paul, if we continue to punish those who accumulate capital needed for business expansion.

Ron Paul listed four essential steps that must be taken to turn around the American economy through new job creation.

  1. The U.S. economy cannot be restored, according to Ron Paul, until we “prohibit the Treasury and Federal Reserve from essentially creating money and credit from thin air.”  A currency that is rapidly being debased will not attract private capital.  In order to ensure a sound currency, the dollar should have its value legitimatized via gold or commodity convertibility.
  2. The extreme regulatory burdens on business have greatly inhibited job growth.  The vast bureaucracies and compliance nightmares being created by Obamacare and the Dodd-Frank Act have served to choke off business growth and new jobs since businesses cannot cope with “unknowable regulatory compliance burdens.”   Rep. Paul said it is time to “start shrinking the federal registry.”
  3. The trillion of borrowed dollars spent on foreign wars has reduced our economic growth by sapping the private sector and increasing the Federal debt. Rep. Paul declared that “There is no point in debating a foreign policy we cannot afford.”
  4. According to Ron Paul, the U.S. tax system needs to be revamped to allow U.S. foreign income to be repatriated tax free to the U.S. to allow the funds to be deployed in the domestic economy.   Ron Paul also said it would be better to simply “abolish the income tax altogether.”

Ron Paul noted that free market capitalism and respect for property rights was essential in allowing the creation of U.S. wealth.  The poorest nations on earth routinely demonstrate hostility to free markets, private property and the rule of law, with the predictable result of widespread poverty.

Ron Paul’s attempt to preserve the integrity of the U.S. dollar by backing the currency with gold has little chance of succeeding.  A gold backed currency would prevent Congress and the Fed from running deficits and printing money, something they would fight to avoid at all costs.

It is interesting to speculate, however, on what the value of gold would need to be to in order to back the massive debts and obligations that the U.S. government has piled up.  The United States has issued the most amount of debt of any nation on earth.  Ignoring the trillions in unfunded and off balance sheet obligations, the United States has official debt of $14.2 trillion dollars outstanding, including both marketable Treasuries and intergovernmental debt.

If the U.S. used its official gold reserves of 261.5 million ounces to back the $14.2 trillion of U.S. debt, gold would need to be valued at $54,300 per ounce.




Sale Of U.S. Gold Reserves Would Accomplish Little


The U.S. slammed against the $14.3 trillion debt ceiling last week with a quick resolution to the problem no wheres in sight.

Congressional authorization to extend the debt limit remains mired in ideological disputes.  Secretary of the Treasury Tim Geithner states that the U.S will default in early August if the debt ceiling is not raised.

As the Treasury scrambles to avoid default, a discussion has started on the merits of selling United States gold reserves to avoid default and put the U.S. back on sound financial footing.

While the sale of U.S. gold reserves may appear to be an appealing solution, it would accomplish virtually nothing from a financial standpoint.

According to the U.S. Treasury, total gold holdings of the United States as of April 2011 were 261.5 million troy ounces.

At $1,500 per ounce, the total value of U.S. gold reserves is about $393 billion.  Sound like a lot of money?  Enough to get the U.S. out of the debt/spending crisis that we are in?  Here’s what the U.S. could do with an extra $393 billion.

  • Pay off 2.75% of the national debt
  • Pay less than one year’s interest on the national debt
  • Reduce the estimated 2011 budget deficit of $1.645 trillion by about 23%
  • Reduce this year’s U.S. budgeted spending of $3.8 trillion by about 10%
  • Pay for 40% of the $1 trillion dollar cost of the wars in Iraq and Afghanistan
  • Cover about 33% of the estimated cost of the bailing out Fannie Mae and Freddie Mac
  • Cover half of one percent of the estimated unfunded U.S. government liabilities for social security and medicare
  • Pay off about 4% of total mortgage debt held by American families

Selling the U.S. gold reserves may sound like a good idea until you take a look at the numbers.  The total value of U.S. gold reserves amounts to a mere rounding error in terms of total U.S. debt, spending, deficits and future obligations.   The United States has numerous valuable assets that it could sell, but the sale of U.S. gold reserves would accomplish little.