(Kitco News) – The various schemes being floated in recent months about the United States government manipulating the gold price through massive buying or selling are illogical, unworkable, and self-defeating, and would bankrupt the Treasury without even solving the debt, according to Jeffrey Christian, Managing Partner of CPM Group.
“People keep talking about the Treasury and the Trump [administration] having this secret plan to reset the gold price,” Christian said in a video report published Tuesday, referencing a piece he published earlier critiquing the premise.
“This guy a couple of weeks ago said, ‘You’ve got it backwards, Mr. Christian. The U.S. Treasury won't be able to set the price of gold [if] they sell gold, because they don't want to sell it, but if they offer to buy gold for $10,000, then $10,000 is the new price for gold, because nobody would sell gold to anyone else for anything less than $10,000 an ounce! And they wouldn't have to buy a lot because once they reset the gold price at $10,000, that's the gold price.’”
Christian said this view is based on a misunderstanding, and that markets don't work that way.
“Let's think this through,” he said. “Let's say that the Treasury says we're going to buy gold at $10,000 an ounce. The market price when I wrote this was $3,450, [now] it's $3,430. Let's say that the Treasury says, ‘We're going to buy $100 million worth of gold.’ The first thing is, the Treasury doesn't have $100 million to buy gold; they'd have to borrow the money to buy the gold, which would put pressure on the U.S. dollar and U.S. interest rates, given that they are a debtor government that doesn't have the money to buy the gold. But let's say they borrow the money, they print the money, they say, ‘We're going to buy gold at $10,000, and maybe we're going to buy $100 million worth, and that'll reset the gold price.’ No one has 261 million ounces. Someone would go into the market at $3,450.”
Christian pointed out that this steady buying of large volumes would cause the price to begin rising immediately. “People start buying gold at $3,450, $3,480, $4,000, until they have enough gold to sell to the Treasury at $10,000,” he said. “At some point, the Treasury says, ‘This is killing us. We're borrowing all this money to buy gold, and we already have 261 million ounces, so we're going to stop.’ As soon as they stop, the price falls back to a real, reasonable market price. And it ain't $10,000.”
“It just doesn't make sense,” he added. “Markets don't work that way. You would basically be in a process of bankrupting your government by borrowing more money, printing more money, going further into debt, to try to artificially stimulate the price to a higher level. Doesn't make sense.”
Christian said someone else suggested his analysis was wrong and the scheme could still be workable because the Treasury would instead sell the existing U.S. government gold reserve at a higher price than the accounting price on their books, which would address the debt and currency issues.
“You would then be saying, ‘Okay, the Treasury has 261 million ounces,” he said. “The annual volume of newly refined gold entering the market and being used by fabricators and jewelers and bought by investors is about 130 million ounces a year. So, you've got two years’ worth of gold that the U.S. Treasury is going to sell, and they're going to offer to sell it at $18,000 an ounce to pay off the debt.”
Christian pointed out that there are multiple flaws with this scheme as well. “First off, no one would buy it at that price,” he said. “The price is $3,430. Why would you pay $18,000 for a product that is $3,430 an ounce? I know that people pay inflated prices for things like cars, watches, and cell phones, but gold investors, generally speaking, are reasonable and intelligent individuals. They want to buy at [the current market] price. If the Treasury said it was going to sell 261 million ounces of gold – two years’ worth of new supply – the market price would actually plummet. It wouldn't rise to $18,000.”
The other problem with this plan is that even if the U.S. government could sell every ounce of gold on its books for over five times the current price – which it couldn’t – this still wouldn’t address its vast debt.
“Even at $18,000, 261 million ounces would fetch around $4 trillion,” he noted. “We have $38 trillion worth of debt. It doesn't do anything to reduce the debt significantly, but it would bankrupt the Treasury by selling off its only liquid asset. There's no logic behind that.”
“It's just demagoguery, or wishful thinking, or wishful beliefs, because there's not a lot of thought process put into it."
