Last month, President Trump was talking about revaluing the gold reserves of the United States. This is a topic he’s broached at other times as well. The expected discussed benefits include strengthening the balance sheet of the Untiled States. Some also think this would cause an increase in the price of gold. I think the possible move is irrelevant.
The thinking goes something along the lines of the US balance sheet is creaking with debt. So, by showing a larger asset base, the current situation would seem less unbalanced and could result in better borrowing rates. This makes sense if you’re a real estate developer. The bank is likely to lend you more at a better rate if you show that your balance sheet has more assets.
In this case, it doesn’t matter. First, the size of the change is irrelevant. The US officially owns 261.5MM ounces of gold valued at just over $42 per ounce. That’s about $4,100 an ounce below the current market price of gold. Revaluing that much gold at current prices would improve the official balance sheet of the Federal Government by just under $1.1T. The on-balance sheet debt of the government is about $40T and increasing by several trillion a year. The off-balance sheet liabilities (Social Security, Medicare, Medicaid, pensions, etc…) are another $200T. The total liabilities of the Federal Government are almost a quarter of a quadrillion dollars. Revaluing the asset side of the ledger by $1.1T doesn’t really make an impact.
Further, gold doesn’t earn a dividend. The issue the US is facing is interest expense has exploded in recent years due to continued debt-driven devaluation of the currency combined with higher long-term interest rates. Changing the book value of the gold in Fort Knox on the US balance sheet doesn’t change the amount of interest we’ll owe. Due to continued multi-trillion-dollar annual deficits regardless of the party in power in Washington DC, the only way we can pay the interest expense on existing debt is to print more dollars. That won’t change based on the book value of gold.
Imagine that as you analyze the net worth of your household, that you decide to revalue your house and car. You add another million dollars to the value of your house and another $50k to the value of your car. That might feel good to look at a higher net worth on your spreadsheet, but unless you’re testing that value by selling the house and car, the new valuation won’t help you pay your credit card bill this month. If you were irresponsible with your spending like the government and your credit card debt kept rising each month, your interest expenses will rise rapidly and again, telling the credit card company that your house is worth another $1MM won’t make a difference. The US isn’t proposing to sell the gold; just to change the value of it on the books.
Your tl;dr version: changing the value of the assets on the balance sheet doesn’t solve the problem and even if it did, a $1.1T change isn’t enough to matter.
Regarding the idea that the US revaluing its gold assets would cause the price of gold to rise, I’m skeptical on that one as well. The market for gold is large and liquid. Central banks all over the world are adding record levels to storage. The world knows the US has 261.5MM ounces of gold valued at $42 and change. They also know the real value of that gold is more than $4,100 at current prices…the prices they’re paying now. Changing the book value of this gold is a recognition of the loss of purchasing power of the dollar since the US severed the link between the dollar and gold in 1971.
The world is aware that the dollar price of gold has skyrocketed as the dollar has lost value. Every central bank buying gold knows the metal is mis-marked on the US balance sheet. Changing that carries no new information to the market and that’s what would affect the price.
I like that the President has a habit of thinking creatively and differently from others regarding the economy. This idea briefly changes optics but not reality. It won’t matter and from what I can see, has no real upside
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