Revaluing the U.S. gold reserves might appear appealing amid debt-ceiling pressures, but it could have significant repercussions for the financial system, increasing liquidity and delaying the Federal Reserve’s efforts to reduce its balance sheet, according to Wrightson ICAP.
The Treasury has the authority to pledge its physical gold holdings to the Fed in exchange for cash. The proposal, which was also discussed in 2023, suggests revaluing gold reserves from the legacy Bretton Woods price of $42.22 per ounce to current market value. This adjustment would raise the collateral value of the Treasury’s gold reserves from approximately $11 billion to around $750 billion, Wrightson ICAP estimates.
Although the idea is reportedly not under serious consideration by the current administration, the debate has gained momentum in recent weeks. Proponents argue it could extend the Treasury’s borrowing capacity under the debt ceiling until a resolution is reached.
According to Barclays Plc, an increase in the Treasury’s account at the Fed would allow the department to spend without issuing as many bills. Strategist Joseph Abate noted in a Tuesday client memo that this could reduce bill supply by about 12% and push the projected “X-date” — when the government exhausts its borrowing authority — from around August 2025 to beyond February 2026.
For the Fed, however, this revaluation would immediately increase the gold certificate account on the asset side of its balance sheet while simultaneously boosting the cash in the Treasury General Account (TGA) on the liability side, Wrightson ICAP economist Lou Crandall explained in a Monday client note.
“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 U.S. government to monetize its assets remains speculative, revaluing gold reserves would contradict the Fed’s ongoing quantitative tightening (QT) policy, which began in June 2022.
To date, the central bank has reduced its balance sheet by over $2 trillion, leaving about $6.8 trillion in the System Open Market Account — still well above pre-pandemic levels of around $4 trillion.
The timing of QT’s conclusion remains uncertain. While many Wall Street strategists predict the Fed will halt the runoff by the end of March, some have pushed their forecasts to late 2025 or even 2026. Fed Chair Jerome Powell recently stated that the balance-sheet reduction still has a long way to go, noting that reserves are near mid-2022 levels.
Crandall emphasized that any increase in the Fed’s assets would “considerably” extend the QT timeline, as policymakers would be “even farther away” from their normalization goals. Wrightson estimates that QT would need to continue for an additional year and a half at its current $40 billion monthly pace to absorb the extra liquidity, or the Fed could accelerate the monthly pace to catch up.
Given the potential impacts on both fiscal and monetary policy, a revaluation of the Treasury’s gold reserves seems 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.”
Source: Bloomberg
