JP Koning wins “Beowulf” Award

JP Koning writes an awesome post about the valuation of gold on the fed balance sheet, and he points out something very, very interesting:

“If you read the fine print, the Fed doesn’t actually own gold ounces. Rather, it owns gold certificates that have been issued to it by the Treasury. There is a long history behind this. At the end of 1933, the Fed owned some 195 million ounces comprised entirely of physical gold. Valued at the then official price of $20.67, this stash would have been worth around $4 billion. The Gold Reserve Act, passed on January 30, 1934, required the Fed to transfer all of this gold to the Treasury in return for $4 billion worth of gold certificates.

Here’s the kicker. Unlike most gold certificates, the ones issued by the Treasury to the Fed were not payable in a fixed quantity of physical gold. Rather, a $10,000 gold certificates simply promised to pay to the bearer $10,000 worth of gold.”

Whoa!  That is some awesome detective work. I knew the fed had a mountain of gold in the basement, but I didn’t realize the gold wasn’t really owned by the Fed. And who knew the gold certificates wouldn’t be for the ounces, but rather for a proscribed value of gold?

Nice detective work, JP. For this outstanding investigation, you get our first “Beowulf” award, which is awarded for investigation into highly obscure legal areas which could end up having a profound effect on our monetary system and economy.

(h/t to Alea.  ;)   )

Comments

  1. Maybe it’s behavioural economics or something, but I suddenly have this urge to buy precious metals.

    • lol I think gold is about to explode upwards.

      We could see 1900 in just a few months. More on this at some other time, but it is related to real interest rates and the expiration of some weird account they setup at the fed. When it expires, the big banks need to move a trillion or so, and they will buy short term debt with it. This will push real yields into negative territory, which then is very bullish for gold.

      Negative interest rates put a big incentive to buy gold into the market.

  2. Thanks for the award. Does it come as a certificate or a figurine?

    Anybody interested in reading more, here’s an old Federal Reserve paper on the topic.

    http://research.stlouisfed.org/publications/review/74/01/Gold_Jan1974.pdf

  3. This shows its gold certificates and not Gold.

    http://www.federalreserve.gov/monetarypolicy/files/BSTcombinedfinstmt2011.pdf

    Page 4 of the document, page 6 in pdf.

  4. How exactly this relates to the discussion earlier about the TDC, and how the machinations between the Treasury and CB affect peoples perceptions of whether the govt is just funding itself rather then getting their money from the private sector first (via the CB) Im not exactly sure but this seems to me to be germane in some way.

    So the fed bought and owned the gold but had to transfer ownership to the govt in exchange for some credits. If all these credits were redeemed today they would only get about 1/80 th of the original stash of gold (20/1600).

    Of course if gold falls below 20$/oz they could redeem them for all the gold!!

    • “So the fed bought and owned the gold but had to transfer ownership to the govt in exchange for some credits. If all these credits were redeemed today they would only get about 1/80 th of the original stash of gold (20/1600). ”

      Well its since been bumped to $42/oz. So the Fed buys at market ($1700/oz), puts it to Tsy for $42/oz, who then sells it at market. Rinse and repeat.

      Geithner could also use Tsy Stabilization Fund to quietly buy out of the money options about to expire and then go out and make market moving statements. Frontrunning as public finance tool (its not like the SEC is going to sue). :o)

  5. Question:

    I recently had an exchange w/someone who claims to trade in currencies.

    He said that there are money things being issued by (at least) the US that is off budget, not accounted for when doing national accounting.

    Does anyone here agree?

    • Well there’s a lot of GSE (and in some cases private sector) debt issued that’s guaranteed by Tsy– sometimes the guarantee is explicit and sometimes implicit. For example, everyone knew that Tsy would step in to stop Fannie and Freddie from crashing even though there was no explicit guarantee.

      Anyway, guaranteed debt is not counted on-budget or even against the debt ceiling, but its a Tsy obligation and will be always be paid (I forget off-hand if its counted against the debt ceiling if Tsy has to step in as guarantor, so I’ll just go with, “it depends”). :o)

  6. Fascinating! And the “Beowulf” award is a great idea. I was just thinking last night how it is amazing that this Beowulf (is she/he anonymous or known?) could have a huge impact on debates about the monetary system (even if the idea is never implemented, it so clearly highlights what is broken with the system.
    Oh – I believe there is a “Joe Firestone” who has contributed to Beowulf’s comments substantially (on legal issues) – he should get recognized too I think.
    Cheers to Beowulf! Couldn’t have a better handle