For all the gold in Fort Knox

There have been many disparagers of the Federal Reserve and its control over the currency recently and there are also many Gold-Bugs in commodity land touting buying gold. I was wondering actually how any return to a non-fiat currency would take place.

The US economy’s GDP released on Friday is approximately $14.872 billion according to the Bureau of Economic Analysis site. This was a sharp upward revision to a growth rate of 3.1 and knocked down commodity prices, including gold.

Many of the Gold-Bug people decry the “fiat money” and the Federal Reserve, and would like to get rid of the Fed and return to a Gold Standard or a hard money standard. Though many forget that the Federal Reserve AND the Gold Standard of currency conversion were created at the same time. The thought is that “dollars” as created by the government through the Federal Reserve are not a “store of value” but that “gold” is. Why this should be so is not clear, and is tied up with the psychology and philosophy of money and a “reserve currency.” But let’s return to a thought of what it might mean to return to a gold standard.

The US has significant Gold reserves, mainly stored at Fort Knox and the New York Federal Reserve Bank. According to Wikipedia, there are approximately 4,578 metric tons of gold in Fort Knox and about 5,000 metric tons of gold in the NY Fed. Not all the gold in the NY Fed is property of the USA, some of it is held in the accounts of foreign governments and international organizations. These gold reserves are currently valued on the Fed’s books at $42.22 dollars an ounce, while gold is trading at around $1,500 dollars an ounce in the markets. This makes the gold reserves of Fort Knox worth about $222 billion at the current market price for gold.

This leads to the following conclusion:

All the gold in Fort Knox, if allowed to underpin the dollar at current market values, would cover about 1.5% of the needs of the US economy.

Even if we double this amount for the gold in Manhattan, the inability of a commodity based hard money to support the US economy in its current size is clear. The gold bug people will say this argues for an increase in the dollar price of gold. But if we were to say the reserves should be sufficient to cover the economy then the price would have to go up 30 times and the economy would have to stay stable. An impossible thing to envision at this point without calamity.

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