Revaluing US Gold Stockpiles: Implications for Financial System and Federal Reserve

Key Implications

Revaluing US gold stockpiles could have significant implications for the financial system, including:

* Boosting liquidity
* Prolonging Federal Reserve's balance-sheet unwind

Proposal Details

The proposal involves revaluing gold reserves from the Bretton Woods price of $42.22 per ounce to market value. This would significantly increase the collateral value of Treasury gold reserves, approximately from $11 billion to $750 billion.

Impact on Federal Reserve

For the Federal Reserve, this revaluation would:

* Increase its gold certificate account assets
* Simultaneously increase cash in the Treasury General Account (TGA) liabilities

Quantitative Easing Impact

According to Wrightson ICAP economist Lou Crandall, this would be functionally equivalent to a new round of quantitative easing (QE). However, over time, cash would flow out of the TGA and into bank reserve accounts as the Treasury spends the proceeds.

Impact on Quantitative Tightening

A gold revaluation would also run counter to the Fed's ongoing quantitative tightening (QT) strategy, which aims to reduce its balance sheet. The central bank has unwound over $2 trillion from its balance sheet since June 2022, leaving $6.8 trillion in the System Open Market Account.

Extension of QT Timeline

Any increase in the Fed's assets would extend the horizon for QT "considerably." Wrightson estimates that QT would need to run for an extra year-and-a-half at the current $40 billion per month redemption pace, or the monthly pace would need to increase.

Outlook

Given the potential implications for fiscal and monetary policy, a revaluation of Treasury's gold holdings is unlikely. The benefits would be minimal, and the public relations blowback could be negative. While the Treasury may find creative solutions to debt ceiling constraints, a gold stock revaluation is unlikely to be the first recourse.