A proposal to revalue U.S. gold reserves could have significant consequences for the Federal Reserve and the broader financial system, according to Wrightson ICAP. While the idea of revaluing the U.S. gold stockpile may appear appealing, especially under the pressure of debt-ceiling constraints, it could lead to increased liquidity and complicate the Fed‘s ongoing efforts to reduce its balance sheet.
The proposal, which surfaced again in 2023, suggests that the U.S. government should adjust the value of its gold reserves from the legacy Bretton Woods price of $42.22 per ounce to the current market value. If implemented, this move would boost the Treasury’s gold reserves’ collateral value from approximately $11 billion to around $750 billion, according to Wrightson ICAP.
Although the current administration has not seriously considered this proposal, the debate has gained momentum in recent weeks, as some see it as a potential workaround to extend the Treasury’s borrowing ability under the debt ceiling, delaying the need for a resolution. The shift in gold’s valuation would increase the Treasury’s account at the Federal Reserve, allowing the department to spend more without issuing as many short-term bills. Barclays strategist Joseph Abate estimates that this would reduce bill supply by about 12%, pushing back the U.S. government’s borrowing authority “X-date” from the expected August 2025 to February 2026.
However, the revaluation would have far-reaching implications for the Federal Reserve. Wrightson ICAP economist Lou Crandall explained that, on the Fed’s balance sheet, this adjustment would increase the gold certificate account on the asset side, while simultaneously raising the Treasury General Account (TGA) on the liability side. In essence, Crandall argued, this would act like a new round of quantitative easing (QE), with the cash flowing out of the TGA and into bank reserves as the Treasury spends the proceeds.
This potential revaluation could clash with the Fed’s ongoing efforts to reduce its balance sheet, a process known as quantitative tightening (QT). Since June 2022, the central bank has unwound over $2 trillion from its balance sheet, leaving approximately $6.8 trillion in the System Open Market Account. Although many analysts anticipate that QT will end by March 2025, some are now forecasting it could continue into 2026. Fed Chair Jerome Powell recently indicated that the balance-sheet unwind still has a long way to go, as reserves remain at levels similar to those in mid-2022.
Crandall warned that any increase in the Fed’s assets through a gold revaluation would likely extend the QT process significantly. Wrightson ICAP estimates that the central bank would need to run QT for another 18 months at its current pace of $40 billion per month to absorb the additional liquidity, or even accelerate the pace to keep up.
Given these potential fiscal and monetary challenges, Crandall expressed doubt that the Treasury would opt for a gold revaluation. “The benefits would be minimal, and the public relations fallout could be messy,” he said. While a creative solution to the debt ceiling may emerge in the coming months, Crandall doesn’t foresee a gold stock revaluation being the first choice.
In conclusion, while revaluing U.S. gold reserves may seem like a viable option to ease fiscal constraints, its potential consequences for the Federal Reserve’s monetary policy make it a less attractive option in the current economic climate.
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