11/5/2000

KUFM/KGPR

T. M. Power

Mining Above Ground Sources of Gold: The US Gold Reserves

Montana has had more than its share of debates over gold mining in recent years. The open pit, cyanide leaching approach to gold mining has led to the pulverization of mountains, the creation of vast pits brimming with toxic brews, and regular leaks of the poisons used in or produced by the gold extraction process. The mines seem to seek out some of our environmentally most sensitive areas, Yellowstone Park and the upper Blackfoot, for instance. Two years ago, Montanans finally said enough was enough, passing a referendum that outlawed the use of cyanide in mining. In other parts of the country, however, the battles over chemical gold mining go on.

The likelihood of new gold mining operations actually starting up, however, are very slim these days because gold prices are in the dumps. Last week they hovered around $260 per ounce while just a few years ago the price was over 50 percent higher, around $400 per ounce. But even the current low price is one that is maintained artificially high by political pressure and government policy. If the US government stopped propping up gold prices, they would slide even further downward, halting even more gold mining operations.

The United State government is the world’s largest holder of gold reserves, about 266 million ounces. Other nation’s central banks and international financial institutions hold another 841 million ounces. Together, these “above ground” government supplies of gold represent the equivalent of about two-thirds of all of the known economic reserves of gold yet to be mined.[1]

These gold reserves are just that, they are held in reserve, off the commercial market. They are not offered for sale or loaned out to private individuals for use. Because of that “hoarding” of a very large fraction of total supply, gold prices are higher than they otherwise would be. This was dramatically demonstrated when several European countries, including the United Kingdom and Switzerland, indicated in mid-1999 that they intended to follow the Netherlands and Australia in dramatically reducing their gold reserves. The Netherlands sold about a third of their holdings in 1996 and Australia sold two-thirds of its holdings in 1998. Switzerland was expected to sell half of its reserves during the year 2000 while the Bank of England also sells off 60 percent of its gold.[2] The sharp drop in gold prices in mid-1999 was tied to expectations about such large releases of government gold reserves to commercial markets. Concern over the impact of various national governments rushing to sell their gold before the price declined even further led to the “Washington Agreement” of September 26, 1999, in which the major central banks of Europe, the United States, and international financial institutions agreed to annual limits on the sale and lending of central bank gold reserves.[3]

US mining interests and the congressional delegations from gold mining states have pressured the US government to make clear that it will not sell gold from its reserves and will block any sales by the International Monetary Fund. Clearly political pressure and public policies are being used to maintain the price of gold above the level that commercial markets and transactions would support.

In a 1997 study, US Federal Reserve System economists concluded that the federal policy of holding substantial reserves of gold off of the commercial market led to significant economic inefficiency because it led to the pursuit of new sources of gold supply at very high extraction costs when there was a bountiful supply being hoarded in government vaults. [4] This kept gold prices artificially high, harming businesses like electronic manufacturers who used gold in their production as well as consumers who had to pay government rigged higher prices. The Federal Reserve System economists estimated the cost to the American economy associated with this government hoarding to be about $368 billion dollars.[5] The government would not have to actually sell off all of its gold to eliminate these losses. It could, instead, just lend its reserves out at market rates just as most private gold stocks owners do.

These staggering economic losses do not include the environmental damage done by gold mining. Those environmental costs are what makes gold mining so controversial and they may well exceed the dollar costs the Federal Reserve System has calculated.

The next time the federal government is approached with a proposal to mine gold on public lands or pollute federally protected rivers and ground water in the pursuit of new gold supplies, we should insist that rather than the federal government approving an incremental source of supply that has high extraction and refining costs as well as even higher environmental costs, the federal government should turn to the far cheaper incremental source of supply, the gold bullion sitting unutilized in the vaults of the US Treasury and the US Federal Reserve System.

[1] “A Note on Government Gold Policies,” Dale Henderson and Stephen Salant, Board of Governors of the Federal Reserve System, Washington, DC, June 4, 1997, non-technical summary of International Finance Discussion Paper Number 582, Chart 1.

[2] Ibid, page 1 and Chart 1; Gold: At What Price: The Need for a Public Debate on the Fate of National Gold Reserves, John E. Young, Mineral Policy Center, Washington, DC, February 2000, p.7.