Backing the U.S. Dollar with Gold

There has been a lot of speculation regarding the resurrection of the gold standard to address a possible crisis of confidence in the U.S. dollar should markets begin to focus on increasing U.S. indebtedness and growing fiscal imbalances. Potentially, this elephant in the room is a lot bigger than the European debt situation. This speculation is partly driven by the very large purported U.S. gold reserves of 8133 metric tonnes or approximately 262 million troy ounces which comprises by far the largest gold holdings of any nation. Could this gold hoard rescue the U.S. from a potential financial catastrophe down the road? Maybe, but only if gold were revalued much, much higher. Some observers suggest that monetary aggregates such as M1, M2 or M3 should be used to determine the price to which gold would need to rise for markets to accept a gold-backed dollar if a crisis of confidence were to occur.  I decided to use figures for the U.S. National Debt instead. More importantly, I wanted to see how the debt of the U.S. compared to its gold reserves historically.

Between 1900 and 1940, U.S. indebtedness was typically two to ten times the gold price. Between 1940 and 1970 U.S. debt rose sharply and this ratio ballooned to almost 30. That's when the big catch-up in gold prices occurred and by 1980 the ratio was brought back down to 5 or so. After this the ratio zoomed again up to 65 or so by 2001-2002 at which point Gold entered another catch-up phase which continues to this day with the ratio at about 37 in early 2012. If we assume that the ratio will reach 5 again, gold would need to be $12,000 today.

But . . . U.S. debt continues to rise and some have speculated that not all the gold in Fort Knox and elsewhere is there anymore! H'm m m.

Fort Knox Gold?

Doubts about the contents of Fort Knox and other gold repositories surface quite regularly. While certain views might fall into the conspiracy camp, there is a fair amount of circumstantial data to justify some healthy skepticism. GATA and Congressman Ron Paul are among the most vocal in demanding independent audits.

I would categorize doubts surrounding gold in repositories in three ways:

Missing Gold
Since U.S. gold repositories have had no independent audits for decades and since such an audit appears to be hotly resisted, there have been growing doubts as to how much physical gold is actually there.

Fake Gold
Reports circulated in October of 2009 that the Chinese had received a shipment of gold bars which, when tested using invasive techniques (drilling), were found to consist of gold-plated tungsten. I have not been able to find any mainstream news source to confirm this story. Another story detailing fake bars from the Ethiopian central bank is well-documented here.

Borrowed (lent out) Gold
This may be the more probable situation and would similarly explain the resistance to an independent audit. There has been plenty of speculation that while there is still gold in U.S. repositories, much of it has been lent out in the form of swaps or leases to the likes of JPMorgan Chase. Any such gold would thus be encumbered and not owned by the Treasury or Federal Reserve.