This is a little off the beaten path, but it’s a silly little diversion with some classic “the press lacks numeracy skills” complaints as a bonus. Thomas Frank writing in the Wall Street Journal has written a rather wild piece – One Cross of Gold, Coming Up: How the government could get even with right-wing cranks.
It’s mainly in a Modest Proposal sort of vein; I don’t expect he’s even a little serious. Still, fun to take a look at. His proposal runs more or less as follows:
1. All those right wing cranks are hoarding stashes of gold.
2. The federal government has lots of gold in Fort Knox.
3. Sell it all on the open market, reducing the deficit, cratering the price of gold, and wiping out the finances of the right.
4. Cackle maniacally in the manner of Sesame Street’s Count von Count!
As it is satirical in nature, I’m not giving the Journal a hard time for publishing something so reminiscent of Dr. Evil. I am going to give them a hard time for not thinking about the math of the situation. If they had, they’d see two gaping holes in the plan, either one of which alone would in reality end the plan with an empty Fort Knox and an entirely undamaged group of right wing gold bugs.
1. The Theoretical Problem: To flood a commodities market, you need a flood of that commodity. According to Mr. Frank, Fort Knox contains 261 million troy ounces of Gold. According to The Economist, world production of gold is around 2.4 billion troy ounces per year. In short, the liquidation of the entirety of Fort Knox would be the equivalent to adding a little over a month’s worth of natural mine production. Since essentially all the gold that has ever been mined is still in circulation, such an action simply wouldn’t necessarily dent the price very much. It would be analogous to the occasional pre-election releases of oil from the Strategic Petroleum Reserves. It produces a limited and temporary price drop, but the extra supply is so small as to not make much difference. On the other hand investors could take it as a sign of governmental instability and drive up the price of gold.
[UPDATE: Hubris, meet Nemesis. I have myself made a serious mistake! World gold production is actually only 75 million troy ounces a year. On the other hand, Fort Knox only holds about 147 million troy ounces, as not all the US gold is stored there. As such it represents a little under two years worth of world production. A sudden release probably would dent prices significantly, though only on a temporary basis since central banks would immediately seize on the opportunity to buy a valuable commodity at a discount during a period of otherwise uncertain economic times. Ditto other large exchange-traded funds and industrial users. Thus Point 1 is likely still valid over the mid to long term, but over the short term the government could flood the market if it wanted. Point 2 still stands unaffected.
UPDATED UPDATE: There's some discussion in the comments indicating that in fact my original point is still likely to be correct even with the updated information on the yearly mine rate. Either way, the overall point about the overall lack of effect stands, but it may in fact still stand even in the short term, which my update cast doubt on.]
2. The Observational Problem: Individual investors in the US – right wing or otherwise – don’t actually buy much gold. Frank seems to believe right-wing paranoia has driven up the price, but that’s just bananas. The entire US only consumes a fraction of the world gold supply. Much the gold that is sold in the US goes straight to jewelery manufacturers and industrial users. The fraction that is purchased as an investment generally circulates among central banks, exchange-traded funds, and other large interests – not your average investor with a gold eagle coin or two. Their impact is certainly much smaller than the massive purchases of the central banks of China and India. Conversely, there’s very little evidence that anyone, right or left, is actually investing any meaningful percentage of their assets in precious metals. No massive 401(k) exchanges for pretty metal, no sudden demand for safes, no sudden surge of reporting in the somewhat arcane IRS tax disclosures that commodities sellers must follow. Further, the dinky gold-selling outfits that advertise on Glenn Beck and the like are explicitly geared toward small transactions. If it were anything other than a niche within a niche within a niche, large-scale exchange-traded gold funds would be looking for customers in those markets as well. They ain’t.
Either one of those two problems renders Frank’s plan unworkable. Still, it’s a cute little thought exercise. I do, on the other hand, wish an explicitly Wall Street publication had put a little more number crunching into it.