April 1997 (Revised June 1997)

Can Government Gold Be Put to Better Use? Qualitative and Quantitative Effects of Alternative Policies

Dale W. Henderson, John S. Irons, Stephen W. Salant, and Sebastian Thomas


Gold has both private uses (depletion uses and service uses) and government uses. It can be obtained from mines with high extraction costs (about $300 per ounce) or from above ground stocks with no extraction costs. Governments still store massive stocks of gold. Making government gold available for private uses through some combination of sales and loans raises welfare from private uses by removing two types of inefficiencies. For given private uses, there is a production inefficiency if costless government gold is withheld while costly gold is taken from mines. There are use inefficiencies if costless government gold is withheld from private users. We assess both qualitatively and quantitatively the gain in welfare and its distribution.

Any policy in a class maximizes welfare from private uses. One policy involves selling all government gold immediately. Another involves lending all remaining government gold in every period and selling government gold gradually after some future time. Government uses might require gold ownership but not gold storage. If so, any loss in welfare from government uses would be much smaller under the policy involving lending and selling gradually.

We construct and calibrate a model of the gold market. We prove that governments always obtain more revenue by making their gold available sooner. For a representative set of parameters, there is a gain in total welfare (discounted economic surplus) of $130 billion (1997 dollars) if governments act now instead of twenty years from now. Before any redistribution, governments gain $128 billion, and the private sector gains $2 billion. According to our measure, a large share of the gain (37%) comes from removing the production inefficiency.

Keywords: Gold, exhaustible resource, extraction of a durable

PDF: Full Paper

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Last Update: February 12, 2021