Gold Revaluation Risks ‘Messy’ Outcome for Fed, Wrightson Says

(Bloomberg) — Revaluing the US gold stockpiles might look tempting under debt-ceiling constraints, but it would have far-reaching implications for the financial system, boosting liquidity and prolonging the Federal Reserve’s balance-sheet unwind, according to Wrightson ICAP. 

Treasury is allowed to pledge its holdings of physical gold to the Fed in exchange for cash. The proposal, which was also floated in 2023, centers around the idea that the government should revalue gold reserves from the $42.22 per ounce — the legacy Bretton Woods price — to market value. That would put the collateral value of the Treasury’s gold reserves at roughly $750 billion, up from about $11 billion. 

While the idea reportedly isn’t under serious consideration by the current administration, the debate over such a move has gathered steam in recent weeks as it’s seen extending Treasury’s ability to borrow under the debt ceiling before an agreement is reached. 

Related story: US Gold Revaluation Idea Attracts Market Attention, Skepticism

For the Fed, though, this price adjustment would cause the gold certificate account on the asset side of its balance sheet to rise, and simultaneously increase the amount of cash in the Treasury General Account, or TGA, on the liability side of the ledger on day one, Wrightson ICAP economist Lou Crandall wrote in a note to clients on Monday. 

“From a narrow balance sheet perspective, this would be the functional equivalent of a new round of quantitative easing,” Crandall said. “Over time, cash would flow out of the TGA and into bank reserve accounts as Treasury spent the proceeds.” 

While any plan for the US government to monetize its assets is speculative at this point, a revaluation of gold holdings would also run counter to the Fed’s ongoing policy of reducing its balance sheet, a process known as quantitative tightening, which started in June 2022.

So far, the central bank has unwound more than $2 trillion from its balance sheet, leaving about $6.8 trillion in the System Open Market Account, which is well above the pre-Covid levels around $4 trillion. 

Exactly when QT will end is up for discussion. While a plurality of Wall Street strategists anticipate the Fed will stop the runoff by the end of March, many have shifted their end-QT forecasts to later in 2025 and are even eyeing the conclusion in 2026. Fed Chair Jerome Powell said in recent weeks the balance-sheet unwind still has a ways to go, noting that reserves are at roughly the same level back in mid-2022. 

Meanwhile, any increase in the Fed’s assets would extend the horizon for QT “considerably” as policymakers would be “even farther away” from their normalization goals, according to Crandall. Wrightson estimates that QT would have to run for an extra year-and-a-half at its current $40 billion per month redemption pace to work off the additional surplus liquidity, or even increase the monthly pace to catch up. 

Given these implications for fiscal and monetary policy, it’s plausible why a revaluation of Treasury’s gold holdings is unlikely. 

“The benefits would be minimal and the public relations blowback could be messy,” Crandall said. “We won’t be surprised if the Treasury finds a creative response to legal technicalities this spring and summer if debt ceiling constraints become pressing. However, we would not expect a gold stock revaluation to be its first recourse.” 

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