As the United States and foreign countries continue to print money and potentially cripple their economies with astronomic deficits, gold has become more prominent because of its status as a safe haven asset and the belief that gold represents the last honest international currency. Central banks in China and India have begun an aggressive campaign to acquire more gold. Indeed, it has been reported that central banks are expanding their gold holdings at the fastest rate since 1964.
The largest holders of the world’s gold are central banks, governments and the
International Monetary Fund (“IMF”). These entities reportedly control more than 970 million troy ounces of the precious yellow metal and store it around the world. The countries with the largest gold holdings are the United States, Germany, Italy, France, China, Switzerland, and Japan (with the IMF being the third largest holder of gold).
The United States holds the largest amount of gold reserves in the world with over 8,100 metric tons. While this number sounds impressive, it actually translates into less than one ounce per U.S. resident. Interestingly, while the United States does not encourage its citizens to hold gold, China, one of the largest holders of U.S. debt, has been actively advising its citizens to acquire gold.
The United States stores the majority of its gold reserves at its bullion depositories in Fort Knox and West Point. However, in addition to storing its own gold reserves, the United States is also the depository for more than $250 billion worth of gold owned by foreign governments, central banks and international funds.
The Federal Reserve estimates this stockpile of gold represents 25% to 30% of the world’s official monetary gold reserves. When you consider the United States holds an additional 26% of the world’s reserves, more than half of the world’s gold reserves are held in the United States. The United States reportedly charges no fees for holding the world’s gold.
It is curious that a government which, for decades has shown hostility towards the value of gold as a safeguard against unbridled government spending and inflation, holds so much gold. At one time, vaults packed with gold meant security for our nation’s currency.
However, once the United States abandoned the gold standard in 1971, gold became an asset on the Federal Reserve’s balance sheet rather than an integral part of the monetary system.
Under the gold standard, the basic economic unit of account was a fixed weight in gold; the government could only print paper dollars equal to the value of the nation’s gold reserves. But the United States incrementally abandoned gold as the foundation of the monetary system. First, in 1933, President Franklin Delano Roosevelt confiscated gold bullion from Americans and prohibited private citizens from buying, selling or owning gold (with certain limited exceptions including gold coins which had special collectible value). Then, President Nixon “closed the gold window” by denying foreign governments the right to exchange U.S. dollars for gold.
Today, as it has throughout history, gold continues to fascinate collectors and enthusiasts for its beauty, cultural significance and rarity. Only 161,000 tons of gold have been mined in all of history – less than the capacity of two Olympic-sized swimming pools. Investors often turn to gold as a “safe haven asset” which offers portfolio diversity and a hedge against inflation and a declining dollar.
The value of world currencies and economies fluctuate as governments print money and create and sell debt backed only by the stability of those governments and their economies. As inflation, deficit spending and debt rise, creating instability and uncertainty, gold remains a storehouse of wealth. Indeed, over the past ten years, the price of gold has risen more than 300%. Historically, gold has been known to have an inverse relationship with the dollar. As the government tackles economic woes by printing money and devaluing the dollar, a number of financial analysts see the spectre of inflation and higher gold prices.
Demand for physical gold remains high as investors and institutions remain concerned about the United States’ exploding deficit and unchecked government spending. The Congressional Budget Office issued a report that President Obama’s budget may send the United States to the tipping point where the debt reaches 90 percent of our gross domestic product. This budget will add $10 trillion to our national debt.
The United States is likely to continue to be the world’s largest holder of gold reserves for years to come. But clearly other countries and individuals recognize the importance of diversifying their dollar based assets into gold. Americans should similarly consider the benefits of owning gold in these unsettled times.