Gold Reserves and the Dollar

Dear Ask the Economist:

What if the all the gold in the U.S. reserves were suddenly dumped onto the market? What would happen to the economy?  The price of gold?  The strength of the U.S. dollar?

Though gold has been completely demonetized (major world currencies are not denominated in, defined as weights of, or convertible by central banks into gold), it is still regarded widely as a store of wealth and a bulwark of stability. A nation that strips itself of gold reserves invites a loss of confidence in its stability and financial integrity--and that is especially true, I believe, for the world's premier reserve currency, the dollar. While the immediate effect on the U.S. economy of massive gold sales would probably be minimal, the long-term may be more problematic. I would expect that a U.S. without substantial gold reserves would be a U.S. in which the world would have considerably less confidence. That would show up, to answer your third question, as a drift away from the dollar and hence, a decline in its value.

As far as the price of gold itself is concerned, massive sales would affect it the same way massive sales of anything from large stockpiles would affect price: it would severely depress the price, but no one can predict in advance to what extent. If the sale of gold by the U.S. government is accompanied by an expansionary monetary policy, the long-run effect would actually be to push people in the direction of buying gold as a hedge against paper inflation, driving its value back up.

For more information on gold and gold sales, I recommend viewing the web site of the Ludwig von Mises Institute.