A lesser-known fact about the Federal Reserve’s most important assets concerns the gold purchased by the US Treasury a long time ago and kept at Fort Knox. In this article, we will talk about the vault at Fort Knox and the gold reserves of the world’s largest economy.
Confiscation of gold in the United States
During the Great Depression of 1933, President Roosevelt issued an order requiring all citizens who owned gold to turn it over to the Federal Reserve. According to another document issued in 1934, the Federal Reserve was required to turn over all this gold to the US Treasury. Thus, much of the gold owned by American citizens became the property of the American state.
But why was it necessary for the Federal Reserve to turn over the gold surrendered by American citizens to the US Treasury? Theoretically, the Federal Reserve is a private system, the Treasury is assimilated to the American government apparatus.
The Federal Reserve Gold Certificate and Its Role in the Monetary System
However, we must keep in mind one very important detail. The Fifth Amendment to the US Constitution says that the US government cannot seize private property without offering just compensation in return. And to get out of this impasse, the Treasury gave the Federal Reserve a “gold certificate” as compensation for the gold in question. This document still exists in the accounting records of the Federal Reserve.
A 1934 gold certificate with Woodrow Wilson’s face and a face value of $100,000. Such gold certificates are used only for payments between various legal entities of the US government and cannot be held by private individuals. The certificate received by the Federal Reserve probably looked similar.
The Treasury values this gold at $42 per troy ounce , which was the official gold price in 1973, two years after the US left the Bretton Woods system. By comparison, the market price of gold is nearly $1,800 per troy ounce .
If we divide the nominal value of gold stated on the Federal Reserve’s balance sheet by $42 per troy ounce, we can say that the US Treasury holds more than 8,000 tons of gold .
But if we were to sell these 8,000 tons of gold at the current market price, we would get over $500 billion.
Although no one talks explicitly about the existence of this certificate, the entire monetary system is based on gold . The secret of the Federal Reserve’s balance sheet lies in its “hidden gold asset”—this very gold certificate .
The Story of Fort Knox
Fort Knox was built in 1937, in part to store the gold that the Treasury Department had hoarded after the Gold Reserve Act went into effect. Previously, it had been kept in the vaults in the basement of the Ministry of Finance, and when they no longer had enough space, it was decided to build a separate building.
Construction was completed at the end of 1936, and the first batch of gold was delivered early the following year . Today, the vault mainly stores gold bars weighing 12 kilograms, i.e. meeting the London Bullion Market Association’s “good delivery” standard. But there is also a small amount of gold coins.
In almost a century, the vault was visited by only three people. The first was President Franklin Roosevelt. In 1974, a delegation of journalists and congressmen was brought in to dispel rumors that the gold was no longer in the vault. The last time an outsider entered the Fort Knox vault was in 2017, when Treasury Secretary Steve Mnuchin and congressmen visited.
The building’s security system has been improved over time, with Fort Knox being named by Reader Digest as “the best guarded place on the planet.” Hence the expression, very popular:
The Fort Knox complex was built on land donated by the US military, and the area is still frequently used for military training. In addition to the constant presence of thousands of American soldiers, the building where the vault is located is secured with a complex device consisting of laser-guided machine guns, radars, electric fences and mines, according to Business Insider . There are also conventional security measures, such as the fact that the vault’s 20-ton doors open with a combination of codes held by several people. It is guarded by the US Mint , one of the nation’s oldest law enforcement agencies.
Only one person tried to get into Fort Knox, namely the character Orik Goldfinger from the James Bond movie. He tries to detonate an atomic bomb in the vault to contaminate the gold with radiation. As you know, his plan is not successful, unlike the movie, which was a blockbuster.
Investing in gold, in storage?
Once JPMorgan has the gold on lease, it can sell it to, say, a hundred investors who think they’ve bought physical gold, but who, in fact, have invested in unallocated gold. Unallocated gold is a euphemism for no gold at all .
Anyone can contact JPMorgan to buy a million dollars worth of gold and they will agree. But when you get confirmation that you are the owner of this gold and read the fine print, you will know that your gold is unallocated. In other words, JPMorgan does not claim to own gold bullion with a serial number or your name on it. In reality, they took the same gold and sold it to 100 different investors .
Generally, this is not a problem, unless all 100 investors decide to claim their gold at the same time. And then whoever requests it first can get it, but only if they pay the delivery fee and JPMorgan has physical gold available. The remaining 99 investors will receive a terminated contract and their compensation will be in the form of a check with a value equivalent to the sale price of gold at the end of the previous business day, relative to the amount held by each investor. In the end, they will not receive the physical gold they thought they bought, and discover that JPMorgan did not, in fact, have any gold available.