Przemyslaw Radomski, CFA: In the classic 1964 movie
Goldfinger, James Bond tries to prevent the main villain, Auric Goldfinger, from detonating a dirty nuclear bomb inside
Fort Knox. While in Fort Knox, Bond says:
Well, if you explode it [the bomb]
in Fort Knox, the… the entire gold supply of the United States would be radioactive for… fifty-seven years.
Goldfinger is only a work of fiction. Fort Knox wasn’t under
the threat of a nuclear explosion (then again, who knows?).
Nonetheless, it has been argued that it wouldn’t really make difference
if the gold in the fort were radioactive – nobody has seen much of it
since the 1950s. On December 4 and December 12, 2012 in our two-part
story on gold and the U.S. dollar, we highlighted two possibilities:
the
dollar collapses, gold goes up like crazy or the
dollar doesn’t collapse, gold still appreciates.
In those commentaries, we analyzed the possibilities of gold
appreciating and tied possible price levels with a number of factors,
for instance with
U.S. gold reserves as presented on the chart below.
On December 4, 2012, we wrote the following:
This chart presents the (…)
relation of U.S. debt to
Treasury gold reserves – the amount of debt per one ounce of gold – up
to 2012. The red line represents U.S. Treasury gold reserves in metric
tonnes, while the yellow line denotes the amount of U.S. debt in dollars
per ounce of gold. The debt per ounce has visibly increased since 1971,
accelerating around 2000 and even more around 2008. In 2012, there were
$61,796.11 of debt per one ounce of gold owned by the U.S. government.
Now, if a new gold standard is introduced and the agreement works
like the Bretton Woods system, the dollar (or whatever other currency)
would be tied to gold. As noted earlier in this essay, at the
introduction of the Bretton Woods agreement in 1944 the debt coverage
for the U.S. stood at 10.9% (or $319.90 of debt per one troy ounce of
gold). If the new system were based on similar assumptions with debt
coverage at 10%, this would imply a fixed price of $6,179.61 per ounce
of gold ($6,179.61 per ounce of gold divided by $61,796.11 of debt per
one ounce of gold gives us coverage of 10%).
Since the publication of this essay, we have received a particularly
interesting question about the assumptions we used:
Dear Mr. Radomski
Your December 4, 2012 article (…) is exceeding well-written and
researched, and I gained a lot of knowledge from reading it. However
there is one potential problem I see in all the logic you are applying
to the current situation. It seems to me you are assuming the USA
actually has gold at Fort Knox and West Point. But there is mounting,
but unproven evidence, both places have no gold in them at all, and are
rather storage places for nerve gas. (…)
An audit of the US
gold holdings has been demanded by some for years, but the government
will not allow it. The gold belongs to the American people, so why won’t
they let us see it? Many think it is because it is no longer there. If
that is indeed the case, do we not face a “financial Armageddon?” Thanks
for reading this and any response you might have. (I am not a
conspiracy freak!) (…)
We always appreciate our readers’ feedback and would like to thank
for it here. We also appreciate spot-on questions and see this
particular one as intriguing, to say the least. Which brings us back to
Fort Knox.
At first it may sound shocking, but the
last audit of gold stored in Fort Knox took
place in 1953. No typo here, 1953, just after U.S. President Dwight
Eisenhower took office. Even though it is the last audit up to date, it
can’t be described as satisfying. No outside experts were allowed and
the audit team tested only about 5% of gold hoarded in the fort. So,
there
hasn’t been a comprehensive audit of Fort Knox in at least 60 (!!!) years.
This is at least surprising, given the fact that large entities listed
on stock exchanges are usually required to undergo an outside audit at
least once a year. Of course, the U.S.
Bullion Depository
is no conventional company. Nonetheless, not auditing it independently
for more than half of the century raises questions such as the one
posted above.
This is no new topic. One of the first written accounts questioning
the amount of gold really stored in Fort Knox appeared in 1974 in a
tabloid, the
National Tattler. An unnamed informant claimed
that there was no gold left in Fort Knox. The sensational nature of the
story, and of the newspaper, wouldn’t perhaps contribute to the
credibility of the account but it was later revealed that the informant,
Louise Auchincloss Boyer, secretary to Nelson Rockefeller, had fallen
out of the window of her New York apartment and died three days after
the publication in the
Tattler. The tragic incident resulted in
controversies over the possibility that the U.S. Bullion Depository may
have misstated the actual amount of gold held in Fort Knox. Congressman
John R. Rarick demanded a
Congressional investigation and,
on September 23, 1974 six Congressmen, one Senator and the press were
allowed to enter Fort Knox to see for themselves if the gold was there
or not.
The tour showed that there was gold in Fort Knox but, all the same,
it sparked even more controversies. Only a fraction of the gold reserves
were available to see. A photo of one Congressman published by
Associated Press suggested that gold bars held in the fort may have been
less heavy than would be usually expected.
Quite obviously, this has resulted in even more
doubt about the fineness of gold in Fort Knox.
None of these doubts have been put aside by any of the audits carried
out since 1974. When the reserves were audited, the amount of the gold
examined was fractional and there has been no comprehensive bar count
and weighting. The same goes for assaying – if a fraction of gold bars
were examined at all, then a fraction of this fraction were assayed. The
methods used in the assaying process were not conventional. Usually,
during an assay, gold bars are examined by means of drilling, which is
called the core boring method. But the bars in Fort Knox were examined
merely by cutting of small chips of the metal from their surface. This
method only proved that the outer layer of the bars examined was made of
gold.
This difference in assaying methods is important if you consider that
counterfeit “gold bars” have been showing up in New York recently and
that
fake gold bars turned up in LBMA Approved Vaults
in Hong Kong. All these bars had one common characteristic: they were
made of tungsten, which has similar density as gold, and covered with a
gold veneer. The problem here is that such bars can go undetected if
they are examined with X-ray fluorescence scans or by means of simply
scraping of a bit of the metal from the surface. So, to properly assess
the fineness of gold bars in Fort Knox, a full core boring method should
be employed.
In 2012, the German federal court ordered that the German central bank, Bundesbank, conduct an
audit of German gold reserves stored abroad,
particularly in the U.S., U.K. and in France. The German authorities
have never before conducted a comprehensive audit of their foreign gold
reserves and the last time they were able to see their gold stored in
the New York
Federal Reserve vaults
was supposedly in 1979/80. The Bundesbank has expressed that
it doesn’t doubt the trustworthiness of the U.S. authorities but demands
stricter control over its gold reserves. Because of that 150 tons of
gold will be shipped from the U.S. to Germany to assess the fineness of
the bars.
All of this shows that the measures applied by the U.S. government to gold storage in Fort Knox and
the Federal Reserve
Bank of New York’s vaults are questionable and that this fact may have
been recognized by German authorities. It’s hardly conceivable that
there is no gold left in Fort Knox or the New York vaults. On the other
hand, the lack of a comprehensive audit of either facility is unnerving.
So are
other irregularities associated with Fort Knox:
missing shipments, audits acknowledging the existence of gold based on
seals that were not broken, not on the actual count and examination of
bars and so on.
Of course, a full audit of Fort Knox wouldn’t be an easy task because
of the sheer amount of gold to be examined. But it’s feasible. The U.S.
Mint estimated the
cost of such an audit to stand at $60 million.
The Treasury came up with a lower estimate – $15 million. Even if we
take the higher value, and compare it to the value of gold stored in
Fort Knox (as of December 31, 2012, $240.8 billion) it adds up to about
0.02% of these reserves. In this light the Treasury cannot really claim
that this is too expensive.
So, what does all of this mean for the analysis we presented in our essay on
gold and the dollar collapse?
In short words, not much. Our price target for gold is to be treated as
a general indication of where gold might go if the dollar collapses. If
the value of the greenback is reduced to paper, we would expect gold to
appreciate, but not exactly to $6,179.61. It could appreciate to $5,000
or to $10,000 (in today’s dollars). Nobody really knows that. The point
is that if doubts about the amount of gold stored in Fort Knox are just
that – unproven doubts – gold could be a lot more expensive (in dollar
terms) than it is today. If, however, there’s any substance in these
doubts and gold reserves in Fort Knox are lower than officially
reported, gold could go even higher, and the price of $6,000 per ounce
of gold could be viewed as the lower bound of where it might go.
The bottom line is that if the dollar collapses and
the gold reported to be in Fort Knox is really there, gold could
appreciate very strongly. If the dollar crashes and Fort Knox is
(partially) empty, gold could go sky-high (in dollar terms).
For more information on how to structure your gold and silver
portfolio to deal with both the possibility of the dollar collapsing and
the possibility that it will endure in spite of the current U.S.
debt levels, please consult our essay on
gold and silver portfolio. For information on why we use past gold tops as reference points, check our essay on the
1980 top in gold.
Thank you for reading. Have a great weekend and profitable week!
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(NYSEARCA:SLV), iShares Gold Trust (NYSEARCA:IAU), ETF Securities Swiss
Gold Trust (NYSEARCA:SGOL), Ultra Gold Trust (NYSEARCA:UGL).
