[This blog post is an excerpt from a recent commentary at www.speculative-investor.com]

The official US gold reserve is 260M ounces and is an asset on the balance sheet of the Fed. Currently the asset is valued at $11B, which equates to only US$42.22/ounce, whereas the actual market value of the asset is around US$770B. There recently has been speculation that the asset would be re-priced to reflect its current market value. What is the chance of this happening and what would be the likely effects? We will deal with the second part of this question first.

If the value of the asset on the Fed’s balance sheet were increased by US$750B, the re-valuation would, we assume, result in the Fed adding $750B to the Treasury General Account (TGA — the federal government’s demand account at the Fed). In effect, the Fed would be creating 750 billion new dollars that the government could spend. Therefore, the revaluation immediately would increase the US money supply by $750B. In addition, as the money was spent by the government, that is, as the money made its way from the Fed to the commercial banks, it would boost bank reserves.

The monetary injection into the economy that would occur as the government spent its newly acquired 750 billion dollars would give the economy a short-term boost. This means that if the revaluation were to happen within the next couple of months it could postpone a recession and provide some support to the stock market. It would not, however, be bullish for gold, unless gold is now a pro-cyclical asset.

Although the initial effect on the economy would be positive, the economic boost would be of a short-term nature only. One reason is that it would result in higher inflation and therefore higher long-term interest rates. A related reason is that it would prompt the Fed to extend its QT in order to absorb the additional money and reserves created by the revaluation.

Due to the short-term nature of any positive effect on the economy, from a purely political perspective it would make more sense to implement the revaluation during the final year of the Presidential term (2028, that is) rather than during the first year. This suggests to us that the probability of the revaluation happening this year is low. Furthermore, in an interview last Thursday (20th February) Scott Bessent, the US Treasury Secretary, stated that revaluing the official gold reserve was not what he had in mind when he recently mentioned the possibility of monetising the balance sheet, although he wouldn’t be drawn on whether revaluing the gold was under consideration.

We suspect that if the official US gold reserve is revalued it will happen as part of a stimulus package during the next recession or it will be done to give the economy a short-term boost during the lead-up to the next Presidential election. It’s not likely to happen within the next few months.