A proposal to revalue the U.S. government’s gold reserves has sparked growing debate, with analysts warning it could have significant consequences for both fiscal and monetary policy. Under the plan, the U.S. Treasury would be allowed to pledge its gold holdings to the Federal Reserve in exchange for cash. This move would involve revaluing gold from the $42.22 per ounce price set during the Bretton Woods system to current market value—potentially boosting the value of the Treasury’s gold reserves from about $11 billion to roughly $750 billion.
While the proposal is reportedly not being actively considered by the current administration, it has gained traction in recent weeks, particularly as a potential way to extend the Treasury’s borrowing ability under the debt ceiling before a long-term agreement is reached.
A Potential Lifeline for the Treasury?
The idea of revaluing gold reserves may appear appealing, especially amid ongoing debt-ceiling constraints. Barclays Plc. strategist Joseph Abate suggested that such a move could significantly reduce the need for the Treasury to issue as many bills. In a note to clients on Tuesday, Abate estimated that it would reduce the supply of Treasury bills by around 12%. Additionally, it could push back the X-date—the date when the government exhausts its borrowing authority—extending it from August 2025 to beyond February 2026.
However, experts caution that the proposal could lead to far-reaching implications for the broader financial system, particularly with regard to liquidity and the Federal Reserve’s ongoing balance sheet unwind. According to Wrightson ICAP, revaluing the U.S. gold stockpile would have ripple effects across the Fed’s operations, potentially complicating its current efforts to reduce its balance sheet.
The Federal Reserve’s Dilemma
For the Federal Reserve, revaluing the Treasury’s gold reserves would have significant balance sheet consequences. Wrightson ICAP economist Lou Crandall explained that this would increase the gold certificate account on the asset side of the Fed’s balance sheet and simultaneously boost the amount of cash in the Treasury General Account (TGA) on the liability side. The result would essentially function as a new round of quantitative easing (QE), increasing liquidity and extending the Federal Reserve’s balance-sheet unwinding process.
In the short term, cash would flow from the TGA into bank reserves as the Treasury spends the proceeds, but over time, this would complicate the Fed’s quantitative tightening (QT) efforts, which have been underway since June 2022. The Fed has already unwound more than $2 trillion, leaving about $6.8 trillion in its System Open Market Account, a figure still well above pre-COVID levels.
With the Fed’s current QT pace at $40 billion per month, the revaluation of gold holdings could extend the QT process by at least another year and a half, Crandall estimated. Alternatively, the Fed might need to accelerate the pace of QT to offset the added liquidity, further complicating the Fed’s policy goals.
A Highly Unlikely Scenario
Given the potential disruption to both fiscal and monetary policy, many analysts view the revaluation of gold reserves as unlikely. Crandall emphasized that the benefits of such a move would be minimal and warned that the public backlash could be significant. “The public relations blowback could be messy,” he said, suggesting that while the Treasury might explore alternative measures to deal with debt ceiling constraints, revaluing gold would likely not be its first choice.
The U.S. Treasury is expected to consider other creative responses to the looming debt ceiling issues in the coming months, but for now, revaluing the gold stockpile remains a speculative idea, with far-reaching implications for the broader financial landscape.
Conclusion
While the idea of revaluing the U.S. Treasury’s gold holdings might offer a temporary solution to the debt ceiling challenges, the potential consequences for both fiscal and monetary policy make it a highly contentious option. The revaluation could create significant complications for the Federal Reserve’s efforts to reduce its balance sheet and could lead to increased liquidity, essentially acting as a new round of quantitative easing. With minimal benefits and considerable risks, particularly in terms of public perception and long-term financial stability, it seems unlikely that the Treasury would pursue this route as its primary response to debt ceiling constraints. Instead, officials may look for other, more practical solutions in the months ahead, as the government navigates the complexities of fiscal policy and national debt management.