Forget Cyprus. Imagine the Fed Selling Gold.


One reason cited for the historic collapse of gold this week was investor fear that Cyprus’s central bank would sell its gold holdings, and other  countries could follow. Last week the bank denied the rumor up and down. This morning, Cyprus’s finance minister, Haris Georgiades, said that yes, Cyprus does plan to sell gold after all. So much for the denial cycle.

Bigger question here: why don’t governments sell some of their gold? Even after the recent plunge, the price, and with it the value of international gold reserves, has more than tripled in a decade.

Gwynn Guilford at Quartz  probes into international central bank holdings and unearths a couple of answers. The first is that they do. Guilford points out that Spain has sold off 46 percent of its gold since 2000. She also explains that since 2009 other countries have actually been buying gold, trying to take advantage of the price run-up and realize a return on their investment.

Despite the rise in the price of gold, the share of international reserves that gold makes up has been roughly stable since 2000 at about 13 percent, according to the World Gold Council, a gold industry trade group. That number, though, is a little deceptive because it reflects a big rise in the total of all central bank reserves. from 2000 to 2011, That has been led by China, which holds relatively little gold. China’s central bank reserves  reserves went from $172 billion to more than $3.2 trillion, in part from efforts to keep the yuan from rising.

The biggest gold reserves are those of the United States, which has about 8,100 tons of gold* (worth $327 billion at current prices) and Germany, which are held mainly in gold, and have appreciated. Why do we hold so much gold? Check out the video above, in which Congressman Ron Paul, the Texas Republican and longtime goldbug, asks Ben Bernanke precisely that question. The Federal Reserve chairman’s answer is simply, “Tradition.” Take a look at that video and decide for yourself if his expression says, “There’s no very good reason at all.”

There is one very good reason why the U.S. and Germany wouldn’t want to trade in some of their gold reserves for dollars or euros. It’s that they would instantly drive down the price dramatically. If the prospect of Cyprus selling gold could panic the markets, imagine the result if the U.S. or Germany started dumping even a small part of their gold. One common conviction among gold’s defenders is that it gives them protection against wily central bankers who’ll debase other currencies. Ironic, isn’t it,  that nothing is easier for those wily bankers than obliterating the gold market?

PS:  One interesting thing about watching Congressional hearings is that the structure makes sure that the questioners always manage to get the last word–as the Congressman does here. The last word, it turns out,often doesn’t sound especially clever.

*Correction: An earlier version of this post listed incorrect values for U.S. and German gold holdings. U.S. reserves are 8,133.5 tons, according to the World Gold Council.

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