By Justice Litle
Last week, I promised to answer this popular question: “Hey JL, what about all that gold in the vaults of the IMF and Fort Knox? Aren’t you worried they might try to dump it on the market?”

But before we get to that, a quick correction. In Friday’s piece, Europocalypse, I made reference to Colonel Kurtz as a “deranged flyboy lost deep in the Congo.”

The film-buff contingent among you corrected me with relish. Kurtz was in Cambodia, not the Congo, at the height of the Vietnam War when the movie took place.

My apologies... in Joseph Conrad’s novella, Heart of Darkness, Kurtz is a rogue ivory trader lost in the Congo. (Conrad himself drew on personal experiences as the captain of a Congo steamer in writing Heart of Darkness.)

Clearly the book and movie are two distinct entities. In referring to “a flyboy lost deep in the Congo,” I accidentally conflated the two. Given the glee that some of your e-mails displayed, I’m tempted to hide future Easter eggs in my pop-culture references.

Anyhow, moving on...

A Golden Sword of Damocles?

It’s true – the United States and the IMF (International Monetary Fund) have a lot of gold in reserve. Some of you fear a good chunk of that gold could be dumped on the market, acting as a sharp break to the yellow metal’s rise.

Let’s start by asking the question, just how much gold do these guys have?

The World Gold Council regularly updates the stats on official holdings of central bank reserves. According to December 2008 data from the WGC, the U.S. holds 8,133.5 tonnes (metric tons) of gold. The IMF holds 3,217.3 tonnes.

When you do the math, that adds up to 11,350.8 metric tons (tonnes), or 12,512 short tons, of gold. Converted to ounces at $1,000 per ounce, that’s a touch over $400 billion bucks worth of bullion.

Does this count as a lot? Yes and no.

On one hand, it represents 8-10% (very roughly) of all the gold in the world. On the other hand, there are a heck of a lot more dollars in the world... and demand is the key driver to consider here.

Big Buyers in the Wings

Take Russia, for example. Russia has recently stated its intent to raise total gold holdings to 10% of total reserves.

Again according to the World Gold Council, Russia held 495.9 tonnes of gold as of December ’08, accounting for just 2.2% of reserves.

We can do the math and see that, for Russia to hit its stated target of raising gold holdings to 10% of reserves (assuming total reserve values don’t change), they would need to purchase 1,758 tonnes of gold in the open market.

By stating a desire to up their gold holdings to 10% of reserves, Russia has all but said “Yeah, we wouldn’t mind owning another 1,750 tonnes of gold or so.” And that’s just Russia.

When you think about it, 10% is a pretty modest allocation. You think China wouldn’t like to have more of its dollar mountain converted to gold?

What central bank wouldn’t want to have 10% of its assets (or more) in bullion at a time like this, with paper currencies getting debased like crazy and creeping geopolitical tensions around the globe?

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