Question of the Day: Why Does the Fed Value Its Gold at $35 Per Ounce?

Thieves is right. “Since legality has not stopped the Fed before” – classic. They are not stupid, they know and continue to do it.

Most commercial banks that have operated in the US over the past century are gone. Compared to an all time high of 30,456 banks in 1921, total US banks fell to 4,135 in 2022, down 86%. Getting rid of the competition.

When the US rescinded its promise to allow the exchange of US dollars into gold at a set exchange rate, the dollar fell and to maintain military hegemony, US leaders felt this fall had to be stopped. The solution was found in the importing needs of countries like Germany and Japan: most of their energy was imported. The US dollar was thus transformed from the gold-backed dollar into the oil-backed dollar, known as the “petro-dollar”.

US troops were deployed in the largest oil producing country, Saudi Arabia, and a deal was made that its government and royal family would be supported by the US, in exchange for the promise to sell oil only against the US dollar, and invest 80% of the resulting abundance in US dollar reserves in Saudi Arabia back into US Treasuries, thus funding the government budget deficit, and with it, the US foreign wars.

Germany and Japan now needed US dollars, in order to be able to buy the energy needed to operate their economies. Of course, some alternatives were explored, namely Germany gradually began to import gas from the Soviet Union, which always delivered reliably.

The other step to underpin the US dollar was to engineer a massive hike in the oil price, which would essentially transfer vast resources from manufacturing powerhouses Germany and Japan to Saudi Arabia and the United States. For this, Henry Kissinger had to arm-twist the Saudis to quadruple the oil price, which happened in January 1974. To divert the attention from the true sequence and cause of these events, as outlined here, and instead spread the narrative that the driving force of events was the OPEC oil embargo, central banks in the sphere of influence of the Federal Reserve, which included the Bank of England, the Bank of Japan and the Bundesbank, had simultaneously set out in 1971 and 1972 to massively expand the money supply by encouraging a grotesque expansion in bank credit, for property speculation and consumption.

This caused the inflation of the 1970s, despite the dominant official narrative that the inflation was the result of a war and its subsequent energy embargo. (Like Henry Kissinger’s visit to China, also this scenario has recurred half a century later: it was not the Russian military operation to defend the newly formed Republics on Ukraine’s borders that caused the inflation of 2021 and 2022, but the massive expansion in bank credit, coordinated by the Federal Reserve, Bank of England and ECB and implemented in March 2020).

Small banks lend to small business

What is needed next is (for China to champion) the establishment of many small local banks in developing countries, just as Deng Xiaoping did at home to launch the rapid rise of the Chinese economy. This would be the ultimate alternative to the Washington-based wrong-headed “Development Economics”, which considers banks unimportant and presses countries to instead focus on stock market development, despite the fact that stock markets do not result in economic growth, but instead fuel US and UK-style casino capitalism.

China’s vast economy has benefitted greatly by abandoning the old Soviet-era mono-bank system of central planning and introducing decentralisation of economic decision-making, delegated to hundreds of thousands of loan officers working for thousands of small local banks evaluating the loan applications of millions of small firms and micro-businesses. This creates a strong and large middle-class, which means inequality declines and the country can prosper, thanks to the strong purchasing power of the average citizen – while the Washington “Development Economics” has presided over an ever-growing disparity between many very poor people and a small elite of extremely rich beneficiaries.

Washington’s “development economics” is actually designed to prevent development 12 September 2023 Richard Werner

The Federal Reserve (the Fed) values its gold at $35 per ounce based on a historical standard that has not been updated to reflect current market prices. This valuation is tied to the historical price of gold under the Bretton Woods system, which was established in 1944.

Under the Bretton Woods system, currencies were pegged to the U.S. dollar, and the U.S. dollar was pegged to gold at a fixed rate of $35 per ounce. This system effectively created a gold standard, where the value of the dollar was directly linked to a specific amount of gold. However, in 1971, President Richard Nixon ended the direct convertibility of the U.S. dollar to gold, marking the collapse of the Bretton Woods system and the transition to a fiat currency system, where currencies are not backed by a physical commodity like gold.

Despite the end of the gold standard, the Federal Reserve continues to value its gold holdings at the historical price of $35 per ounce for accounting purposes. This valuation is largely symbolic and does not reflect the current market value of gold. The market value of gold has significantly increased since the 1970s and fluctuates based on supply and demand, geopolitical factors, inflation rates, and other economic variables.

In summary, the $35 per ounce valuation is a historical artifact from the Bretton Woods era and does not represent the actual market value of the Fed’s gold reserves. The continued use of this valuation is more about maintaining consistency in historical financial reporting than reflecting current economic realities.

Mish, I am a bit confused we just proved the Fed does not care or worry about gold. And they actually own gold? What others asset do they own?

I certainly will take 0.5 tons off there hands for $35 an ounce.

The real reason is if they priced it at the market then they would be admitting that they have devalued the dollar by $35 ÷ $1974 = ± 0.018

So under their leadership your dollar is now worth less than 2 cents. MONEY?

IMHO gold ought to be revalued at $1,000,000 per oz
and entire fed govt debt declared null and void with CONGRESS/POTUS/SPOTUS and all heirs responsible
since it has been issued with no intent on paying it back
then we can have NEW CONVENTION OF STATES to determine NEW AMERICA
not cesspool of neocons/rino’s/wokies running this fascist state

Javier Milei was elected! Now let’s see what happens when a Libertarian takes over a basket case country.

I am a CPA and our motto is “In God we trust, everyone else we audit.”

Surely you’ve heard of the “lower of cost or market” method of valuing inventories on balance sheets. Investors (especially in takeovers) will adjust. I realize how much you despise the Fed, but I’m not seeing an LBO in the offing.