The United States has the largest gold reserve. But setting it at $1 trillion “would have the opposite effect”

The urgency has increased in recent months as Treasury yields have risen to their highest levels in more than 20 years, putting increased pressure on interest costs.

The Treasury Department has recently tried unconventional measures to calm yields, including buying longer-term debt and intervening to prop up the yen, which allowed Japan to avoid selling its Treasuries.

Faced with such surprises, speculation has multiplied around even more outlandish tactics. One idea that comes up from time to time is that the Treasury Department values ​​its immense gold reserves at market rates.

The United States has the world’s largest gold reserves, totaling approximately 261.5 million ounces, more than double those of Germany, the second largest holder. But the official price of the U.S. Treasury was set by Congress in 1973 at $42.22 per ounce, and it has not changed since.

That means all that gold is only on the books for just over $11 billion. But if it were valued at today’s gold price, around $4,000 an ounce, it would be worth $1 trillion.

Treasury Secretary Scott Bessent’s comments last year that the government would “monetize America’s balance sheet assets” and create a sovereign wealth fund fueled talk that this could include a revaluation of the price of gold, although the administration later said that was not being seriously considered.

But America’s gold reserves are under scrutiny. For example, a recent Congressional bill to establish a strategic bitcoin reserve proposed revaluing the United States’ gold holdings.

And last year, President Donald Trump questioned whether the gold held at the US military base at Fort Knox was actually there. (Treasury gold is also held in Denver, the New York Fed, and West Point, New York.)

In July of this year, Bessent reignited the gold theories. He said the Fort Knox cache was “fully present and accounted for” – then casually added: “The United States has the largest pile of gold in the world, over a trillion dollars at current market value.” »

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Jurrien Timmer, director of global macro at Fidelity Investments, began thinking about “what other tricks the Treasury Department might have up its sleeve to try to reduce the cost of financing.”

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“Far-fetched? Sure, but these days I’ve learned never to be shocked by anything again. Although an action like this would require Congressional approval, I suspect if Treasury tried to do it it would backfire in a big way,” Timmer warned.

On the one hand, the U.S. dollar would suffer, he predicted, probably because a sudden influx of $1 trillion would further fuel inflation, which is already escalating.

Timmer also warned that the “term premium” of Treasury yields would rise even further. Rates have soared in recent months for a variety of reasons, including expectations of Fed rate hikes, robust economic growth and persistent inflation.

But the term premium, or the extra return investors demand to cover the risk of holding long-term debt, has also increased. These risks could range from further geopolitical unrest to a fiscal crisis or economic slowdown.

Although this seems unlikely in the United States, other countries have reassessed their gold reserves over the past 30 years. A note from a Federal Reserve economist last August noted that Germany, Italy, Lebanon, Curaçao and Saint Martin, as well as South Africa had done so.

In Italy, Curaçao and Saint Martin, their central banks used the funds. In South Africa, Lebanon and Germany, central governments have reaped the benefits of this windfall.

But when it comes to reducing a country’s debt burden, revaluing gold is not enough, the Fed note adds. This comes as the United States’ gross debt has ballooned to $40 trillion, with no end in sight to annual budget deficits of $2 trillion.

“Central governments have drawn on the proceeds of revaluations to repay existing debts, often in exceptional fiscal circumstances,” the Fed note adds. “Even if reducing the debt stock through revaluation proceeds slightly improves the fiscal situation, relying on revaluation proceeds may not resolve larger structural problems. »