The US should stay away from gimmicks and tackle its real fiscal problem

Treasury Secretary Scott Bessent hinted at “monetizing the asset side of the US balance sheet for the American people.” Stephen Miran, Trump’s nominee to chair the White House Council of Economic Advisors, also floated the idea of “selling the stash” and then exchanging those dollars for foreign currencies, which would also strengthen “undervalued” currencies, an outcome that Trump has signalled he wants. 

Also Read: Mint Quick Edit | Trump’s $5 million price tag on a US visa is no big shock

These statements set off speculation that the revaluation of US gold reserves to market levels was a possibility, though what Miran said was later dismissed.

For ages, gold has been seen as a reliable hedge against inflation and economic uncertainties. It has been on a tear in recent years due to triggers such as covid, the Russia-Ukraine war and the resultant sanctions that froze Russia’s dollar- and euro-denominated assets. But it isn’t just retail investors and traders who have taken a shine to the yellow metal. For the third straight year in 2024, central banks bought more than 1,000 tonnes of gold.

Now, this idea of gold monetization isn’t exactly new, and has been doing the rounds after the global financial crisis of 2008. But what is the immediate trigger? The recent surge in US government debt, caused by tidal waves of fiscal deficits, and the search for a quick fix have revived such suggestions.

Also Read: Madan Sabnavis: There is no alternative to the US dollar as the world’s anchor currency

The proposal centres around the idea that the US government should revalue its chest of gold, raising it from its legacy price to market value via an accounting entry change, to pay down debt.

Revaluing gold reserves only requires the assent of the US Congress, so it’s in the realm of possibility. The US owns 261.6 million troy ounces of gold, valued officially at $42.22 an ounce, leading to a book value of $11 billion. At gold’s current spot price, though, its market value would be about $750-800 billion.

But, unlike the rest of the world, the US central bank doesn’t own this gold, as the Federal Reserve transferred it to the Treasury under the Gold Reserve Act of 1934. In exchange, the Fed received gold certificates. The Treasury is allowed to pledge its holdings of physical gold to the Fed in exchange for cash.

From an accounting perspective, a revaluation would cause the gold certificate account on the asset side of the Fed’s balance sheet to rise and increase the cash level in the Treasury general account on the liability side. This will be akin to a fresh round of quantitative easing. But this would go against the Fed’s ongoing policy of quantitative tightening, which started in June 2022 and has seen more than $2 trillion unwound since then.

Also Read: Ajit Ranade: Much of today’s gold buying frenzy reflects a move away from the dollar

America’s urge to get quick billions will have to contend with a few hurdles and adverse fiscal and monetary implications, apart from other attendant  second-order policy effects.

Since Trump wants to weaken the dollar, the US government could also sell its gold and use the proceeds to buy other currencies or assets (to that end). But the resultant higher inflation from a weaker dollar will impact various asset classes.

The bond market will face a heavy negative impact. As the revaluation of gold reserves is likely to herald a dollar with lower purchasing power in nominal terms, it would add to inflationary pressures in the US.

Thus, bond yields would need to rise much more to compensate for the increased inflation risk. Given that the US is running a fiscal deficit near 7% of GDP and burdened by about $37 billion in federal debt, it is the government that will feel the hardest pinch of higher bond yields.

A fall in the dollar’s nominal value, in turn, will lead to a re-pricing of hard assets and commodities, including oil, energy and food, etc, that are usually denominated in dollar terms. Producers of commodities and investors in hard assets would like to preserve the real value of their assets and commodities.

Realty could also see prices rise, as investors will re-allocate their capital to tangible assets that are more likely to hold value in an inflationary environment. As for equities, the real value of stocks will become more attractive as investors typically seek stocks as a safe haven from inflation.

Also Read: Mint Quick Edit | Gold’s gains: More glittery by the day?

Globally, unilateral gold revaluation by the US could spur efforts to de-dollarize. With a weaker dollar, countries exporting goods and services to the US would have an incentive to look for alternatives that lower their dependence on the dollar. This may lead to a rise in the appeal of other currencies or commodities as stores of value.

However, the biggest factor would be the US intent and signalling. If such a move is attempted at all, it mustn’t be gimmicky. If it is seen as a short-termist sugar rush of quick money without the willingness to address the real structural problems of fixing America’s debt and fiscal deficit—i.e., by taking steps to augment revenues or cutting wasteful expenditure sustainably—it could boomerang spectacularly and erode  the world’s confidence in the American economy and dollar.

These are the author’s personal views.

The author is group chief economist at Larsen & Toubro.