Gold’s Official Price is $42, and maybe that’s a Good Thing

This is a really interesting take on the price of gold...

People often whisper conspiratorially about the age-old U.S. practice of fixing the gold price at $42.22. "They're just trying to keep gold down," is a complaint I've heard more than a few times. But in this post I'll show that the monetary authorities have sound reasons for keeping the price of gold at $42.22.

US Monetary Gold
To understand what is at stake, let's start with a few stylized facts about U.S. monetary gold:

1. Central banks that keep gold on their balance sheet tend to hold physical gold. But the U.S. Federal Reserve doesn't actually hold physical metal. Instead, it owns gold certificates.

2. The Fed registers the value of these gold certificates on its books at $11 billion (see screenshot below). It has used this same number for decades.

3. These certificates have been issued to the Fed by the U.S. Treasury, a different branch of the Federal government. (To learn about why and when the Treasury issued them, read my old posts on the topic)

4. To "back" these certificates, the Treasury in turn holds physical gold. According to the September 30, 2018 Status Report of U.S. Government Gold Reserve, the U.S. Treasury currently records 261,498,926 fine troy ounces of gold in reserves.

5. The Fed's Treasury gold certificates are quite odd. They do not provide the Fed with a claim on a fixed weight of gold held at the Treasury. Rather, they provide the Fed with a claim on $11 billion dollars worth of gold. It would be as if your coat check tag constituted a claim on $40 worth of coat, rather than the coat itself.

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