fort knox
What lies within the walls of Fort Knox?
Welcome to the world's most secure vault...

Completed in 1936, it's encased in 16,000 cubic feet of granite and 4,200 cubic yards of cement.

The vault door weighs an astounding 22 tons and is made of a 21-inch-thick material that's resistant to drills, torches and explosives.

It comes with a bombproof roof, too.

Additional layers of physical security include: video cameras, minefields, barbed wire, electric fences, armed guards - even unmarked Apache helicopter gunships.

Oh, and it's stationed on a 109,000-acre U.S. army post.

So what's inside?

Well, it depends on who you ask.

The government will tell you that almost 5,000 metric tons of gold, or roughly 3% of all the gold ever refined throughout human history, is safely sealed inside the vault.

Others will tell you that the vault (the United States Bullion Depository - known as Fort Knox) is totally empty.

What if the skeptics are right? And all this protection is just an elaborate cover-up?

What if there's actually no gold at Fort Knox?

Let's dig a little deeper...

Send the Auditors to Fort Knox!

In light of the revelations from NSA whistle-blower, Edward Snowden, it's even harder now to trust Washington politicians.

The government has been doing a lot of things that it said it wasn't for years (i.e. - spying on citizens). And that naturally makes me wonder what else it might be up to.

I'm not alone, either.

Three-time presidential candidate, Ron Paul, has long questioned the amount of gold at Fort Knox. He even went as far as introducing legislation in 2011, which proposed an audit.

One thing we can all agree on is this: Lack of transparency always leads to corruption. So Paul's audit demand seems reasonable. Especially considering that the world's publicly traded companies must undergo annual audits. Why should the Federal government be immune?

Amazingly, though, the last audit of Fort Knox occurred in 1953, right after President Eisenhower's inauguration. Except no outside experts were permitted, and only about 5% of the gold was tested. So there's been no full audit in over 60 years!

Over that time, however, the government has sold its gold - reducing its holdings from about 20,000 metric tons in the 1950s, to the current level of 8,133 metric tons.
US gold
So are we just supposed to trust that the government stopped selling? In this day and age, that's a pretty tall order!

Just ask the Germans.

In late 2012, Germany's federal court ordered its central bank to conduct annual audits and physically inspect gold deposits worldwide - including in the United States. For decades, the Bundesbank had relied on written confirmation.

Why the sudden change of heart? It makes me wonder...

A More Fundamental Question

Let's give the government the benefit of the doubt for a (brief) moment and ask: Why do we even have gold reserves?

The gold bars, packed tightly into a secure vault, were supposed to give us confidence in our country's currency. But we cast off the gold standard in 1971 and stopped redeeming currency for gold. So nowadays, gold reserves are nothing more than an asset on the Fed's balance sheet, not an integral part of our monetary system.

So what gives with clinging tightly to it?

Fed Chairman Ben Bernanke says that it's the result of "long-term tradition."

Mark Zandi, Chief Economist at Moody's Analytics says, "It may lend some confidence to investors that we have large gold reserves. But it's more symbolic than substantive."

Meanwhile, former Fed Chairman Alan Greenspan reportedly said, we hold onto the huge reserves "just in case we need it." (That's comforting.)

In the end, if there's no real purpose for the gold reserves, then why worry about an audit at all?

A Crisis of Confidence

One reason the government might not want an audit is because it would lend importance to an asset that it swears is unimportant.

Or as hedge fund manager James Rickards puts it, "An audit would give gold too much credit and start to erode the official propaganda that gold is not a monetary asset. After all, no one audits the number of acorns in the national parks... They are too unimportant."

Makes sense. Yet, I don't think that's substantive enough to justify the refusal.

What's more likely is that an audit would raise more questions than it answers. Like, if the gold is really there, does it really all belong to the government?

I say that because central banks routinely lease or lend out gold. But current reporting guidelines don't require them to distinguish between gold owned outright and gold swapped with another party.

Instead, the U.S. Treasury simply states its holdings as "gold (including gold deposits and gold swapped)." Or in the British government's case, "gold (including gold swapped or on loan)."

Again, such a lack of transparency opens the door to abuse. Not only could all the gold be on loan (perhaps on unfavorable terms), but banks could also be "re-loaning" that very same gold, thereby creating a "paper pyramid of gold."

The process is known as "rehypothecation," and it's exactly what happened during the mortgage crisis with collateralized debt obligations. And we all know how that ended.

An audit might also reveal that the government dumped some gold on the world markets to manipulate prices. (Yes, governments have done that before.) And if the U.S. government even sold a little without telling us, trust would be irreversibly broken.

More spectacularly, an audit might reveal that Fort Knox is littered with gold-painted tungsten. Here, too, a precedent exists, as counterfeit bars turn up from time to time. Although I doubt a government would confess to being so incredibly duped.

Fort Knox: A New Stimulus Project

It would reportedly take 400 people, working full-time for six months, to test all the gold at Fort Knox for purity. It would cost at least $15 million, too. For me, that's not a deterrent, though.

Sounds more like an economic "stimulus" project. Lord knows we've squandered way more tax dollars on projects with no tangible benefits. Besides, we could use some new jobs.

Bottom line: If you believe the government routinely lies or covers up its actions, we can't simply laugh off the idea that there's no gold in Fort Knox. Until an audit is done, the facts provide more questions than answers.

And while I don't believe Fort Knox is completely devoid of gold, it's certainly possible that our gold reserves are lower than reported and/or not wholly owned by the U.S. government.

So what does that mean for the price of gold? Stay tuned for tomorrow's column. I'll address that question to provide a real-world, logical price target for gold.

Gold's Next Move: $800 or $6,000?
Wed, Jul 17th, 2013

Yesterday, I promised to provide you with a logical, real-world price target for gold.

So is gold undervalued or overvalued? Turns out the question is much easier to ask than answer.

You see, there's no good way - and definitely no universally accepted way - to determine a "fair value" for gold. Unlike a stock, gold doesn't have a price-to-earnings ratio that we can easily compare to the market.

The valuation problem stems from the fact that gold serves different purposes for different investors...

To some, it's a hedge against inflation, or against low real interest rates. To others, it's a hedge against a currency crisis.

Then there's a whole camp of investors who consider it an "oh crap" asset. By that I mean, it's an asset they want to make sure they already own when every other investor is saying "Oh, crap!" in response to a sudden collapse of the entire financial system, or the onset of a nasty bout of hyperinflation.

In the end, the price of gold fluctuates based on the varying expectations from people in each of these camps. And how do we reasonably quantify that?

Turns out, we can't. A recent study published by the National Bureau of Economic Research finds that each of the motivations mentioned above only explains a small portion of the short-term price swings.

Nevertheless, let's try to answer the question at hand because, well... it is an important one. Instead of providing you with a clearly defined and justified price target, though, I think it's more instructive to understand how low (and how high) gold could go. You'll understand why in a moment...

The Floor is Set

On the heels of the yellow metal's precipitous 14% decline in June, I shared three reasons why gold prices could go even lower. How low exactly? Down to $900 per ounce by year's end, based on the most bearish prediction coming out of ABN Amro Group.

Of course, ABN Amro's price target is just an educated guess. One, I might add, that's based on the most recent trading history.

If we take into account a longer history - say, 2,500 years - the bottom for gold could be as low as $800 per ounce, according to Duke University's Campbell Harvey.

"Right now we're way above the mean," says Harvey. "[The fall] might not be tomorrow. [But] the cycles go in 10 to 15 years, and we're well into one of these cycles."

So $800 per ounce is the absolute bottom, according to Harvey, which makes today's going price of $1,289 per ounce seem expensive.

Or is it?

Again, the answer depends on how you view gold as an investment...

Time Horizon Matters

If you're looking to be a short-term trader, then yes - the fundamentals point to gold heading lower in the near future. So I'd avoid trying to play a bounce off the recent lows.

Or as John Goldsmith, Deputy Head of Equities with Montrusco Bolton Investments, cautions, "Gold may have gotten oversold and was due for a bounce, but a bounce doesn't a bull market make."

On the other hand, if you're a long-term investor, gold might be dramatically undervalued. Here's why...

Gold At $6,000?

Remember yesterday's chart that showed the level of U.S. gold reserves for the last century or so?

Well, here it is again. Only this time, it also shows the amount of national debt, which has blasted off in recent years.

US gold reserves
Now, I'm sure we can all agree that the number one concern facing global markets is sovereign debt levels. The examples of Greece, Cyprus, Portugal and Spain (the list goes on) confirm that too much of something can, indeed, end badly.

Accordingly, I'm convinced that the most compelling reason to own gold now is to protect against the U.S. government's troubling debt levels.

I'm not alone, either.

"There's still a very large debt situation with no credible solution. Until the countries put in a credible solution to [reduce] debt burdens, we will look to gold as a currency hedge against that risk," says Will Rhind, Managing Director at ETF Securities LLC.

And that's where the chart above comes in...

As you can see, back in the 1920s, the U.S. government was virtually debt free. (Imagine that!) Accordingly, the ratio of national debt to an ounce of gold stood at about 0-to-1.

At the end of 2012, though, that ratio stood at $61,796 of debt per one ounce of gold owned by the U.S. government.

Does that mean gold is worth upwards of $60,000 per ounce? Not a chance! I say that because a one-to-one debt to gold coverage ratio is completely unreasonable.

So what is reasonable? Well, at the outset of the Bretton Woods Agreement in 1944, debt coverage stood at 10.9%. So if we go with that as a rough benchmark, we're talking about a gold price target north of $6,000 per ounce.

Again, that's based on the alleged amount of gold held by the U.S. Treasury. If it's less, all bets are off. Trust in the central bank would evaporate immediately on any such revelations. And unlike paper money, we can't mint gold reserves out of thin air to calm the market.

Bottom line: It's always prudent to own some gold in your portfolio. "It's a strategic asset class [that] serves a purpose," says Russ Koesterich, Global Chief Investment Strategist at BlackRock Inc. The problem is, that "purpose" varies from one investor to the next.

If you're absolutely convinced that the U.S. government is on a crash course with a default, I'd be loading up at these levels. If, however, you're after a short-term profit, I'd look to be more opportunistic and wait for a pullback below $1,000 before adding to my positions.