The US Government Believes In Gold!

“Brass Monkey”

I was standing on the tarmac at the airport in Frankfurt, Germany. I was a newly minted co-pilot of a Lockheed C-141 Starlifter aircraft waiting for the loadmaster to finish loading and balancing out our cargo before we could take off. We were on our way to Istanbul, carrying military vehicles and supplies in support of some NATO exercise. The year was 1970.

I was chatting with one of the ground crew. About that time two F-4 Phantom fighter jets in formation screamed overhead. We stopped talking because we could not hear each other. It’s expected. And another two F-4s were taking off, afterburners roaring.

When the two of us could hear each other again I asked the guy. “They’re headed east in an awful hurry. Won’t they be at the border in about one minute?”

He said, “Yeah, but it’s probably just a simulated “Brass Monkey”. They do this all the time.”

I responded, “What’s a Brass Monkey?”

“Oh, that’s a normal mission around here. The fighters fly at top speed toward the East German border to see if the Russkies are awake”.

Apparently, this mission is to test the East German early warning radar and its response time. I learned a lot more about this mission later on during this exercise, but I found out about the Escape and Evasion packets when I was on a special assignment to deliver US government property, gold coins, to the Federal Reserve Bank in New York City.

“Brass Monkey” is the emergency signal to fighter pilots to attack. A radio signal is broadcast from the base controller into the jet’s cockpit at any time during its flight. And so there would be no mistakes, the broadcast procedure was for the controller to repeat it three times.

These weren’t just any flights. These were special missions flown from military bases in West Germany during the time of the “Cold War”. The fighter pilots flew these missions on a full alert status. The aircraft was armed with bombs and radar jamming pods and other counter attack measures. After all, they were designed to attack targets located behind the most heavily fortified border in the world… the border between East and West Germany.

The pilots were prepared for war. In addition to the normal and customary issue of survival equipment, each pilot was issued a loaded forty-five handgun and an escape and evasion (E&E) packet. This E&E packet contained tablets to purify water so you could drink it, maps of East Germany, breath mints (just kidding), and a row of five mint condition British Sovereign solid gold coins held together with scotch tape. The coins were not stacked. They were laid out in a row so you could see them all at once, and fastened together with many layers of scotch tape.

The gold coins were included in the E&E packet because the US government knows gold is a universal currency and would be accepted even by our enemies. If you are serious about getting your downed pilot back, you don’t give him US Dollars, Russian Rouples or the East German whatevers, you give him gold so he has a real chance of buying his way to freedom.

The US government believes in gold when it is serious about retrieving a valuable resource, a highly trained fighter pilot.

Nixon’s One Finger Salute!

For hundreds of years, countries settled their accounts with each other in gold. For example, if France exported more to England than England exported to France, England would send gold to France equal to the difference. All accounts would then be settled.

Since it is expensive and risky to move physical gold around, countries began giving each other credit for amounts due.

I was in the impregnable vault of the New York Federal Reserve Bank in the fall of 1971. I was on a special duty assignment for the Air Force to deliver the accumulated shipments of gold coins from our military bases in Europe. These gold coins were from the E&E packets I mentioned earlier. I accompanied the gold into the Federal Reserve vault six stories under ground, dug out of solid rock. There, the gold coins would be inventoried and eventually melted down into gold ingots.

The vault was huge and contained many small barred enclosures. These walk-in rooms looked exactly like jail cells. On the door of each hung a nameplate and on each nameplate was a name of a country...one for the United States, one for England, one for France, one for Japan, one for Saudi Arabia, and so on. The only thing in these rooms was gold ingots. The US had a big pile. England had a big pile. So did Saudi Arabia and this was before the five-fold increase in oil prices in 1973. I’m sure their pile is bigger now.

The Federal Reserve staff would move gold from one country to another by simply moving ingots from one room to another. These movements were all done based upon settlement instructions from the respective countries. For example, England would instruct the Federal Reserve to settle its accounts with France by moving ingots in England’s room to France’s room.

Inflation had been heating up in the US in the late sixties given our policy of funding both the “Great Society” and the Vietnam War. The Dollar was weak and getting weaker. France was becoming increasingly concerned about our ability to meet our obligations.

They routinely requested physical delivery of a portion of the gold held in their vault in the NY Federal Reserve Bank. The Federal Reserve delivered the gold to the US Air Force for transport to France. The Air Force then flew the gold to to Orly Airport, near Paris, France for delivery to the French government.

On August 15, 1971, President Nixon, among other things, decided the United States would no longer relinquish possession of other countries’ gold held in the New York Federal Reserve vault. Of course, there was a dustup with the French government over possession of France’s gold, but Nixon would not relent. Essentially, Nixon gave France the one finger salute.

The US government believes in gold when it refuses to give up possession of another country’s gold.

Who’s Got the Gold Now?

“That’s all very interesting”, you might say. “But that was almost forty years ago. What’s going on now? Who’s got the gold now?”

Actually, very little has changed. In 1972 our reserves of gold were 8,584 tons. In 2008 our reserves of gold were 8,134 tons. Our gold reserves have declined a modest 5% in the last 35 years. And this entire decline of 450 tons took place in the late seventies. Our gold reserves have not changed at all since 1981.

We need to look at more history to see some important changes. The following schedule illustrates the major changes in gold reserves since World War II.

World Gold Reserves
(thousands of tons)

Source: World Gold Council

After World War II, America was the undisputed power in the world. We were a creditor nation undamaged by the war with 21,682 tons of gold in our reserves. This represented 72% of the 30,182 tons of gold held by the world in 1948. Our policy of funding the “Great Society” and the Vietnam War at the same time accelerated our loss of gold reserves in the mid to late sixties. As you can see our gold reserves were more than cut in half by 1968. This is much of the reason Nixon ended any connection between the US Dollar and gold in August 1971.

It is interesting to note the Middle Eastern oil-rich countries that have benefited enormously from the massive prices increases in oil since the early seventies have collectively less than 300 tons of gold today. In contrast, both China and Russia have doubled their gold reserves over the past 30 years.

In the late nineties, some countries and institutions, such as The United Kingdom, Canada, Switzerland and the Bank for International Settlements reduced their holdings of gold. But not the United States…we have not changed our holdings for over 35 years.

US government policies and promises ensure an inflationary bias to our economy. We regularly and routinely embrace actions that result in inflation. But we steadfastly and tenaciously hold onto our gold.

The US government believes in gold when it refuses to reduce our holdings.

The US Government believes in gold. So does the rest of the world. Given the large dichotomy between government monetary policy and its unyielding position on gold, maybe you should believe in gold too. At least for some part of your portfolio.

May you live long and prosper,

Mike Williams, CFA

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