Treasury: No fire sale of gold to delay debt ceiling

This just in from the Treasury Department: The United States will not be unloading its nearly $400 billion stash of gold to delay hitting the debt ceiling.

At least not if Treasury Secretary Tim Geithner gets his way.

As the government approaches the legal borrowing limit currently set at $14.294 trillion, some have suggested the government could sell its gold reserves, as well as other assets such as mortgage-backed securities or student loan portfolio.

Reaching the debt ceiling would mean the government couldn't borrow more money, and selling assets would mean an additional revenue stream without running up any more debt.

That would buy politicians a little extra time to negotiate, chest-thump, and whatever else the debt ceiling debate will bring.

But Treasury is already warning lawmakers that holding a giant yard sale of government assets isn't a responsible move.

In a letter sent to Congress last month, Geithner said any "fire sale" of assets would be "damaging to financial markets and the economy" and would "undermine confidence in the United States."

Still, the allure is there. All that gold is just gathering dust, after all, stored in vaults in New York, Colorado and Fort Knox, Kentucky.

The Treasury Department has 261.5 million ounces of gold in its reserves, easily the biggest stockpile on earth. With gold selling at about $1,515 an ounce, that means Uncle Sam is sitting on $396 billion worth of the shiny stuff.

According to the World Gold Council, the United States holds more than twice as much gold as runner-up gold hoarder Germany.

Treasury, however, plans to keep it in the vault.

"A 'fire sale' of the nation's gold to meet payment obligations would undercut confidence in the United States both here and abroad," Mary Miller, assistant secretary of the Treasury, wrote in a blog post last week.

It would also wreak havoc on gold markets, she wrote. That assertion is echoed by Jon Nadler, senior analyst at Kitco Metals.

"Releasing even a quarter of U.S. gold reserves would do definite psychological damage to the market right away," Nadler said. "That's not a quantity that markets could handily absorb ... I don't think they'd find a buyer."

Even if the gold was successfully brought to market, the federal government's massive borrowing appetite would mean only a brief reprieve.

The United States borrows roughly $125 billion a month, a pace that would quickly erase the sale's proceeds. And when the clock expires, the debt ceiling would still have to be raised. Lawmakers would merely be kicking the can down the road.

Another wrinkle: Given the fluctuation in gold prices and other assets, a sale might be ill-timed. Take a lesson from recent British history.

When Prime Minister Gordon Brown was the nation's chief finance minister a decade ago, he decided that gold had become relatively useless to the government.

Brown sold off 400 tons, or 60% of the United Kingdom's gold, between 1999 and 2002. The problem: Gold was selling at a record low inflation-adjusted average of $275 an ounce at the time. It turned out, had he waited 10 years, the U.K. would have made five times what it hauled in from the sale.

Silver: Much Higher Margins Ahead for CME?

Current margins on CME Group's

[CME 295.77 -8.28 (-2.72%) ]

exchange are $14,513 for a "New Initial" position in one silver futures contract, or about 6 percent of the value of the contract. The new rates posted by MF Global reflect margins of 11 percent of the value of the contract.

Earlier Friday, market activity indicated investors were unwinding short gold versus long silver positions. Gold futures for June

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settled up $25.20 to end at $1,556.40, a fresh record high. Silver, on the other hand, finished about where it started the session, near $48 an ounce

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.

The margin increase is being described by some as an atypical move for MF Global

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. Sean McGillivray, vice president at Great Pacific Wealth Management, said that normally, MF Global moves in lockstep with the CME

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.

"I would anticipate that the CME will be raising margins again due to the volatility of the daily trading range as well as to reflect the contract's intrinsic value," he said. McGillivray suggested markets could see some selling in silver when Comex electronic trade starts Sunday night at 6pm ET.

The purpose of increasing margins would be to keep both long and short investors from adding to positions in what has become an increasingly volatile market.

CME has already raised margins on silver futures twice in the past week alone. CME spokesman Chris Grams said any further increase in margins depends on volatilty.

"We are monitoring all our products. These decisions are based on volatility, it will depend on the markets," Grams said.

MF Global has not yet responded to a request for comment. MF Global is both a member of the Nymex and a ring dealing member of the London Metal Exchange. The company operates as a market maker and broker in metals futures, options, and over-the-counter swap products.