The status of the U.S. gold reserves has long been a point of discussion, as all information on the subject is closely guarded by the Treasury. Although information on annual audits is available, the average person is unaware of it; and even those who know it exists generally don’t know where to find it. Couple these facts with the public’s widespread distrust of Congress and government agencies, and it’s no wonder that rumors about the nation’s gold supply have run rampant for decades. Nearly every coin and/or investment forum on the Internet, if you dig deeply enough, has hosted discussions on the existence of the gold, with participants often calling for independent audits to prove the gold is still there.
On April 4, 2011, Representative Ron Paul (R-TX) introduced H.R. 1495, the Gold Reserve Transparency Act of 2011, “to provide for an audit of all gold owned by the United States.” The bill was referred to the House Subcommittee on Domestic Monetary Policy and Technology, which held a hearing on June 23 of that year. Witnesses were Gary T. Engel, director of Financial Management and Assurance, U.S. Government Accountability Office (GAO); and Eric M. Thorson, inspector general of the U.S. Treasury. The report on the hearing (serial no. 112-41) can be viewed here. The 273-page document consists of a transcript of the hearing and related appendices, which include gold assay reports, audit reports on U.S. gold holdings, the Mint’s Schedule of Inventory of Deep Storage Gold Reserves, and the Fed’s Schedule of Inventory of Gold Held.
It was not widely known then (and still is not exactly household knowledge) that every ounce of the U.S. “deep-storage” gold reserves has been audited, in increments, from 1974 to date. The hearing covered the nature of these audits, among many other topics, including public ease of access to the audit reports, the amount of time that has passed since the first gold bars were audited in 1974, the accounting methods for U.S. versus IMF gold at the FRB in New York, and so on. This blog post will focus on the discussion of the Mint’s methods of auditing and assaying the nation’s gold reserves, and on what it would take to re-audit and re-assay the entire reserves from scratch.
These gold reserves are held by two agencies: 5% of the gold is held by the Federal Reserve Bank of New York, and 95% is held by the U.S. Mint (1% as working stock, from which coins are made, and 94% as “deep-storage gold reserves”). The Mint’s deep-storage gold is secured in 42 compartments distributed across three facilities: the bullion depository at Fort Knox, Kentucky (60%); the West Point Mint (22%); and the Denver Mint (18%). At the time of the hearing, the compartments held 699,515 gold bars, each weighing about 27 pounds and ranging from 0.4701 to 0.9999 fine, with an average fineness of 0.9006. Total fine troy ounces: more than 245 million. The security of the three facilities is closely evaluated by the Treasury’s Office of the Inspector General (OIG).
In 1974, Congress responded to ongoing rumors that there was really no gold in Fort Knox by paying a visit to the vaults, where the bars are stored in 13 compartments. The House issued a report stating that the gold had indeed been observed in the vaults, and that Americans could put their minds at ease (a statement that seems to have had little effect).
Furthermore, the Government Accountability Office (GAO), in conjunction with the Mint, chose three of those 13 compartments for an inventory, the results of which matched the depository’s records. An associated assay indicated that the bars were within the Mint’s required tolerance range. Still, that accounted for only three compartments. The GAO recommended that the Mint embark on a “cyclical inventory of its gold holdings,” which would take place over a specific number of years and would conclude when all the compartments had been inventoried. The Treasury agreed that this was a wise course of action, and in 1975 established the Committee for Continuing Audits of United States Government-owned Gold to guide and oversee the process. As of September 30, 1986, between the GAO’s audit and the audits under the Committee for Continuing Audits, about 97% of the Mint’s gold had been audited and placed under official joint seal.
An “official joint seal” is an extremely secure, high-end version of sticking a tiny slip of paper into a doorjamb so you can later find out whether anyone has opened the door. Specifically, it is “a pre-numbered document that includes wax seals. It is attached to an inventoried compartment door with tamperproof cloth tape. The pre-numbered document includes all relevant information of the compartment inventoried and audited, e.g., the number of gold bars, gross weight, and fine troy ounces. The document is signed by those present at the inventory of the compartment (a representative from the storage facility, a representative from the Mint headquarters, and an OIG/independent observer).” (Quoted from p. 44, footnote 6, of the hearing record.) If a seal has been tampered with, the wax on the seal would be broken and the cloth would become detached.
After the Committee for Continuing Audits’ cyclical inventories concluded in 1986, the Mint continued to inventory and confirm the remaining gold reserves that had not been placed under seal. This ongoing inventory continued through 1992. In 1993, the Treasury OIG was made responsible for audits of the Mint’s and the Treasury’s financial statements, which include the balances of deep-storage gold reserves. These audits are performed by independent public accounting firm KPMG, which must “satisfy themselves as to the independence, reputation, and qualifications of [OIG’s] audit staff” and on “the adequacy of the audit procedures performed.”
Thus, not only the responsible parties at each storage facility but those at the U.S. Mint, the Treasury, the Treasury OIG, and KPMG must all be satisfied that the inventories and assays are correct. If they are incorrect, all of these parties would have to be in lockstep to conceal that fact. (And as Ben Franklin wrote, “Three people can keep a secret if two of them are dead.”)
At the end of fiscal 2008, all 42 compartments had been audited by either the GAO, the Committee for Continuing Audit, or the Treasury OIG, and placed under official joint seals. So, just how were these audits performed?
How to Audit a Mint Vault
First, the audit team evaluates the facility’s controls over the gold. Then they inspect the gold bars personally and compare each compartment’s records to the identifying information stamped on the individual bars. After confirming that all the bars are present, they statistically select a sample of gold bars; these are weighed and assayed. The latter process involves drilling into the gold bar and removing fragments from the hole for analysis by an independent laboratory. (The negligible amount of gold lost to the assaying process is replaced from the Mint’s working stock.) The compartment is then locked and placed under an official joint seal. Once that happens, as Mr. Thorson points out in the report, “There is no [further] movement [in and out of the vault]. Those doors are not opened.” The seals, with their multiple signatures and the accountability of multiple officials on the line, confirm in future inspections that no one has opened a compartment door.
During such an inspection, the official joint seal is examined to determine whether it has been tampered with in any way. An “Official Joint Seal Inspection Report” identifies the condition of the seal, reports whether the signatures on the seal agree with the signatures on the copy of the original, and reports whether the seal or lock show evidence of tampering. To date, all seals have been repeatedly confirmed intact and un-tampered-with. (In 2010, the Mint replaced all the original seals with newer ones. This was performed on each of the 42 compartments in the presence of an OIG auditor, a representative of the Mint director, and a representative of the facility’s plant manager. All three parties signed an inspection report for each removed seal, and then signed each new seal.)
Should the Gold be Audited and Assayed Again?
Part of Rep. Paul’s reason for initiating H.R. 1495 was the fact that more than 25 years had passed since those first three compartments at Fort Knox were inventoried and assayed; from that time forward, the compartments remained tightly closed and the integrity of their seals confirmed on a regular basis—but the gold had not been re-checked, up close and in person. Rep. Paul stated that an all-new inventory and assay every 25 years seemed prudent, and most reasonable people would probably agree. Unfortunately, the numbers involved in this process became painfully clear during the hearing.
According to the hearing report, the Mint estimates that it takes a team of 19 people, working in tight quarters, an average of six minutes to move, weigh, assay, and return a single gold bar. With nearly 700,000 gold bars in storage, a total re-inventory and re-assay of all the nation’s deep-storage gold would require nearly 1.3 million labor hours. To perform this task within a six-month period, as the bill specified, would require about 1,280 people. As Mr. Thorson pointed out, the storage compartments are rather small and could never accommodate the number of people needed to complete the process within six months, so the process would take quite a long time indeed.
As for the expense, the personnel cost alone was estimated at $53 million. Assaying services cost about $230 per bar, totaling around $161 million. Each assay destroys about 1/10 ounce of gold, which would total about 14,000 ounces—around $21 million, assuming a market value of $1,500 per ounce. The total bill, then, would be about $235 million (plus travel and per diem costs for the individuals involved).
The upshot of the hearing was this: the Treasury, the Mint, and the GAO, with the watchdog of the independent KPMG, are already doing an extremely thorough job of monitoring and accounting for the U.S. gold reserves. An additional audit would be both redundant and extremely expensive.
That said, an important point was raised by Mr. Jones (see p. 9 of the report): namely, the American public doesn’t trust the government. No small wonder, given the ease with which massive amounts of money can vanish overnight, as shown during the Financial Crisis. It was suggested by Richard Peterson, then–acting director of the Mint, that a full inventory and audit with only a 10% assay would cost a little over $71 million. Perhaps a price tag of more than $235 million is a bit extreme. If that’s the case, spending $71 million—and providing user-friendly audit reports that are easily accessible to the average computer user—might go a long way toward rebuilding public trust. These days, we could really use it. ❑