Thoughts From DJ “Gold” 9-23-2024
DJ: DID YOU KNOW?
The statutory value of gold refers to the price or value of gold as established or fixed by law or government regulation, rather than being determined by market forces like supply and demand.
Historically, statutory values of gold were set by governments to define the exchange rate of gold with their national currency, often in the context of the gold standard, where currencies were pegged to a specific amount of gold.
This fixed legal value contrasts with the market value of gold, which fluctuates based on trading in the global gold markets. Today, most countries no longer have a statutory value for gold since currencies are not tied to gold, but the concept remains relevant in legal contexts, such as central banks’ gold reserves and specific fiscal policies.
In the context of the U.S. gold reserves, the statutory value of gold is a fixed price set by law, which is significantly lower than the current market value of gold. The U.S. Treasury still maintains this statutory value for accounting purposes, despite the fact that the U.S. dollar is no longer backed by gold (since the U.S. abandoned the gold standard in 1971).
Application to U.S. Gold Reserves:
Statutory Value: The official statutory price of gold in the U.S. is set at $42.22 per troy ounce under the Gold Reserve Act of 1934. This price is used by the U.S. Treasury for accounting and reporting purposes when valuing the gold held in the U.S. Treasury’s reserves. This figure has remained unchanged since 1973, even though the market price of gold has risen significantly.
U.S. Gold Reserves: The U.S. holds a substantial amount of gold (over 8,100 metric tons) in its reserves, primarily stored in locations like Fort Knox and the Federal Reserve Bank of New York. The value of this gold is reported using the statutory price of $42.22 per ounce, which leads to an official accounting value of U.S. gold reserves that is far below its actual market worth.
Difference from Market Value: The market price of gold is determined by global trading on commodities exchanges and typically fluctuates based on supply and demand. As of 2024, the market price of gold is around $2,500 to $2,600 per ounce, much higher than the statutory price. This means that while the gold reserves are valued at billions of dollars under the statutory rate, their true market value is in the hundreds of billions of dollars.
Purpose: The statutory value is a historical relic from when the U.S. dollar was backed by gold, and it now serves primarily for internal accounting within the U.S. Treasury. It simplifies the bookkeeping of the government’s gold holdings but does not reflect the actual economic value of those reserves. While the statutory value of U.S. gold reserves is used for government reporting, it vastly underestimates their real market value.
Title of U.S. Gold Reserves:
The title to the gold in U.S. reserves is held by the U.S. Department of the Treasury, specifically under the legal jurisdiction of the U.S. government. This gold is primarily stored in places like Fort Knox, the U.S. Mint at West Point, and the Federal Reserve Bank of New York. The gold reserves are part of the national assets, managed and accounted for by the Treasury, but owned by the U.S. federal government on behalf of the public.
What Would Happen if the Statutory Value Was Changed to $500 per Ounce:
If the statutory value of gold were changed from the current $42.22 per ounce to $500 per ounce, several significant financial and accounting impacts would occur:
Increase in the Official Valuation of U.S. Gold Reserves:
The U.S. Treasury currently holds over 261 million troy ounces of gold.
At the statutory value of $42.22 per ounce, these gold reserves are valued at approximately $11 billion.
If the statutory value was raised to $500 per ounce, the official accounting value of these reserves would increase to about $130.5 billion (261 million oz × $500).
Impact on the U.S. Federal Balance Sheet:
This change would boost the official assets of the U.S. government by reflecting a closer (though still undervalued) estimate of the gold’s worth. It would improve the appearance of the U.S. Treasury’s balance sheet, reducing the ratio of debt to assets, which might affect perceptions of U.S. fiscal health.
However, since this is an accounting change rather than an actual sale or use of the gold, it wouldn’t directly affect the national debt or reduce federal deficits.
No Immediate Effect on the U.S. Dollar or Monetary Policy:
Since the U.S. no longer operates under the gold standard, the statutory value of gold is primarily an accounting mechanism. A change in this value wouldn’t directly affect the dollar’s value or the Federal Reserve’s monetary policy.
The market price of gold would still be far higher than the new statutory value ($500 per ounce is still below the current market price of ~$2,600 per ounce). The dollar remains a fiat currency, meaning its value is not tied to gold reserves.
Potential Legal or Political Implications:
Increasing the statutory value of gold could spark political debate, especially regarding government transparency and the actual economic utility of the gold reserves.
There may also be calls to further increase the statutory value to align it more closely with the actual market value, though doing so could have broader economic and financial consequences.
Impact on Gold-Backed Securities or International Confidence:
An increase in the statutory value might suggest to some observers that the U.S. is acknowledging the potential for gold to play a larger role in its balance sheet. However, unless there’s a broader shift toward gold-backed currency (which is unlikely under orycurrent economic systems), the change would remain symbolic and largely administrative.
Changing the statutory value of gold to $500 per ounce would increase the U.S. Treasury’s reported assets significantly, but it wouldn’t directly affect the economy, the dollar’s value, or debt levels. The gold reserves would remain an underutilized asset held by the U.S. government unless furthermost.
DJ