A frequent reader of mine wrote in with a question. He asks:

With the latest drop in the equity market, presumably because of the U.S. debit, why doesn't the Federal Reserve sell off some of its gold reserves? I understand that it has +/- 7,000 tonnes in stock. Could it not also settle its debts with China where the demand for gold is on the rise?

Am I correct in saying that everyone who is reputed to be in gold decided to sell at the same time there is not enough gold in stock to meet all the claims?

Didn't that happen some years ago when a person tried to buy up all the silver in the world?

The International Monetary Fund reports that the United States is the largest holder of gold, with 8,133.5 tonnes. In yesterday's trading, gold prices topped $1,800 an ounce. Even though the price of gold ended a bit lower, let's use this nice round number to calculate the value of all that gold.

In all, the U.S. holds 286.9 million ounces of gold. At $1,800 an ounce, that values our gold holdings at $516.4 billion. That's less than half of what we owed China as of May 2011.

But the U.S. has no interest in truly paying off its debt, and it's certainly not willing to sell its gold to do it.

As of July 2011, the world held 30,683.3 tonnes of gold, excepting some countries that did not report their holdings to the IMF. More than 1.08 billion ounces of gold are held by central banks.

But traders looking to cash in their gold futures for actual bullion might have a problem. One analyst from ZeroHedge.com predicts that in six to 12 months, gold futures holders will not be able to get their gold due to lack of supply.

One of the reasons why gold supplies are pinched is because of central banks. Central banks have been buying gold like mad. In fact, according to the World Gold Council, buying in the first quarter of 2011 totaled 129 tonnes... That's more than the combined net total of gold purchases during the first three quarters of 2010!

China has been a huge buyer. As of July, China held 1,054.1 tonnes of gold. That's only 1.6% of the country's total "cash" reserves. Rumors around the water cooler say that China wants to make gold 10% of its reserve portfolio.

It's a massive, massive increase that the gold markets might not be able to handle.

In other words, if you think $1,800 is high, you ain't seen nothing yet...

The demand coming from central banks is nothing new. But the scary thing would be if the government tried to "FDR" regular gold investors. On April 5, 1933, President Roosevelt signed an executive order that made gold hoarding illegal.

"Hoarding" meant anything over $100 worth of gold coin or bullion. That's $1,677 worth in 2010 dollars, and the order exempted jewelers, dentists and other artists.

People had less than a month to turn in their gold, or they could be fined $10,000 and be imprisoned for up to 10 years!

And this wasn't just for individuals. The order extended to partnerships, associations and corporations.

Could you imagine if an order like this was signed in today's market? It would be total chaos... But it's not that farfetched to have the government intervene in some way.

Back in the 1970s and 1980s, the Hunt brothers, William and Nelson, tried to corner the silver market. At the height of their success, these brothers held the rights to more than half of the world's deliverable silver. That sent prices into the stratosphere: silver climbed from $11 an ounce to $50 an ounce in just four months!

And that $50 level is still the price to beat... we're just getting around to topping it in the past few months, and prices have fallen back below that level.

And what happened to the Hunt brothers? The government jumped in and made some key changes to the exchange rules regarding the purchase of commodities on margin. Sound familiar? The CFTC just did something similar.

Silver prices collapsed back down below $11 an ounce in just two months, and the Hunt brothers lost over a billion dollars!

And remember Jared's article about Goldman Sachs buying up warehouses to hold precious and base metals? He told you Goldman could influence metals supplies, artificially keeping prices high. How long before the government steps in there, I wonder?

The long and short of it all is this: precious metals are in hot demand. Central banks are scared witless about the value of their currencies in the event of another global downturn. These kinds of fears are like a pressure cooker, and prices for gold and silver are at full steam.

You can further protect yourself and your precious metals investments by holding them overseas. It's an interesting idea, and one that helped a lot of gold investors keep their wealth when FDR came calling. Many of them shifted their gold to accounts in Switzerland.

You can do this today, and there are companies that can help you. This opens up worlds of wealth security.

And none too soon...

Starting Jan. 1, 2012, gold dealers are required to fill out tax forms for gold coin and bullion purchases over $600. That means gold dealers are going to have to ask for your personal information.

That would make it pretty easy for the government to come collecting gold if there's ever another executive order like the one Franklin Delano Roosevelt signed 78 years ago.

Holding gold offshore is looking better and better.

Written by Sara Nunnally for Taipan Publishing Group. Additional valuable content can be syndicated via our News RSS feed. Republish without charge. Required: Author attribution, links back to original content or www.taipanpublishinggroup.com.