Gold’s Historic Rally

Even casual observers know that gold has been trading near all-time highs lately. The dollar price of gold has been trading around $2,955 per ounce, quite close to the all-time closing high and near the recent intraday high just below $3,000 per ounce. Since November 1, 2022, gold has rallied from $1,650 per ounce to $2,955 per ounce, an 80% gain in 28 months.

Since the U.S. dollar is also near interim highs based on leading indices, gold’s performance when measured in euros, sterling or Swiss francs is even stronger. We expect this trend to continue and to push gold solidly above the $3,000 per ounce level on its way to even higher levels in the months ahead.

Trump: Show Me The Gold!

That’s news in its own right but there’s a lot more going on in the gold space than just the price action. President Trump and Elon Musk (head of the Department of Government Efficiency, DOGE, and the world’s richest man) are planning to visit Fort Knox in the near future to “audit” the gold stocks and make sure all of the gold is where it’s supposed to be. I’m certain that visit will be the mother of all photo-ops.

Of course, Trump and Musk will not be conducting a real audit in the financial sense. They’ll just look around and show that the gold is actually there. This should lay to rest the rumors and ill-founded theories that the gold is somehow missing or has been shipped to JPMorgan. It hasn’t been.

Make U.S. Assets Great Again

Even this publicity visit has not captured all of the gold news lately. On a more serious note, Scott Bessent the U.S. Treasury Secretary said recently that “within the next twelve months, we’re going to monetize the asset side of the balance sheet for the American people. We’re going to put the assets to work.” There has been so much focus on the liability side of the balance sheet (basically the $38 trillion in national debt) that it’s refreshing to hear a senior official talk about the asset side.

The liberal critics will wail that Bessent plans to sell Yosemite National Park to real estate developers. Nothing like that will happen but the U.S. does have ample assets it can sell, lease or otherwise monetize without invading national parks or wilderness areas. These include mineral and mining rights, intellectual property, airwaves, rights of way, flight paths, and, yes, property development rights and land sales in non-sensitive areas. No one has any idea what all of this is worth, but it’s certainly worth in the trillions of dollars and can be monetized for the benefit of the American people including paying down the national debt.

Gold dealers and gold bugs immediately focused on one particular U.S. asset that could be monetized – gold. The U.S. has 8,133 metric tonnes of gold bullion in three locations – Fort Knox, West Point and the Denver mint – that could be sold. That gold has a current market value of $771 billion. Of course, any effort to sell more than a small fraction of that would drive the price of gold straight down. It would be an immense blunder to sell any of it anyway. The Treasury should be buying gold to maintain confidence in the dollar, not selling it.

Another take on monetizing gold revolves around the fact that the Federal Reserve currently holds a gold certificate issued by the U.S. Treasury in 1934 in compensation for the transfer of gold bullion from the Fed to the Treasury on orders of Franklin Roosevelt (backed up by legislation). That certificate is valued on the Fed’s books at $42.22 per ounce. If the Treasury ordered the Fed to write-up the value to market, that would add $760 billion to the Treasury’s general account, which could be used to finance the U.S. government without adding new debt.

Marked Up Gold: Not A Revenue Stream

Trump definitely wants new revenue streams for the government. I wouldn’t count marking-up the price of gold as a revenue stream. It does produce cash with no addition to the national debt but it’s not really a revenue stream; it’s just an accounting entry. It does produce cash but only on a one-time basis. In principle, you could repeat the process if gold went higher in the future but that’s uncertain and not completely reliable like taxes, leases and tariffs.

Despite the gold bug claims, there is no particular connection between marking up the price of gold (accounting) and selling gold reserves for cash (monetizing). One has nothing to do with the other. The government could sell the gold today at the market price without having to wash the accounting through the Treasury general account at the Fed. There’s nothing about marking up the price of gold on the Fed’s books that affects the government’s ability to sell the gold one way or the other.

Can The U.S. Even Sell Gold?

Still, the issue of monetizing gold has to be put in the context of whether the government can legally sell any gold at all. If you convert the Fed’s gold certificate into Troy ounces of gold (not dollars but ounces), it’s approximately equal to the entire U.S. gold reserve today (8,133 metric tonnes). If the Fed’s gold certificate is intended to be backed by physical gold, it’s possible the government cannot sell any gold without diluting the Fed’s gold certificate.

This is not discussed in economic literature to my knowledge, but it could be a simple derivative of the Fifth Amendment constraint that required the Treasury to give the Fed something of fair value when the gold was confiscated in 1934. This happened when the U.S. was on a gold standard and the weight and value of gold were interchangeable.

That’s not true today. Weight is constant but value fluctuates. It may be the case that the Treasury has to maintain a certain amount of gold by weight regardless of value in order to honor the original deal. If this analysis is correct, that’s extremely bullish for gold. It means the world’s largest single holder of gold (the U.S.) cannot be a seller!

Another idea which has surfaced in the hype surrounding Bessent’s comments about monetizing assets is that the U.S. could sell gold and use the proceeds to buy foreign government bonds that ostensibly produce higher yields than U.S. Treasuries. An alternative is to issue Treasury bonds backed by gold that would (in theory) carry a zero interest rate because they are “inflation proof.” This creates an arbitrage between higher yielding foreign government debt and supposedly zero interest U.S. Treasury debt that produces income for the Treasury.

This idea is nonsense for a long list of reasons.

In the first place, the U.S. already has inflation adjusted Treasury bonds. They’re called TIPS and offer investors a market interest rate plus an adjustment for inflation. An inflation-proof gold-backed bond is therefore redundant. If you like gold, just go buy some. We don’t need to make the Treasury jump through bond market hoops.

The second reason is that gold is not particularly correlated to inflation. In the past two-and-a-half years, gold has gone up 80% and cumulative inflation has been around 10%. Where’s the correlation? The price of gold is driven more by uncertainty, liquidity and geopolitics. Indexing Treasury bonds to gold prices would have resulted in windfalls for investors and a huge loss for the Treasury.

In addition, it’s not clear why selling or monetizing gold reserves has anything to do with buying foreign government bonds. The Fed could just buy them with printed money and the Treasury could just buy them with borrowed money. The gold reserve issue has nothing to do with it.

Finally, the calculation of whether buying foreign sovereign bonds makes sense for the Treasury involves a comparison of U.S. interest rates to German or Italian interest rates. Right now, German interest rates are about two points lower than U.S. rates, so those bonds would have negative carry from the U.S. perspective. That’s a bad deal. You also have to factor in exchange-rate risk. If the euro went down against the U.S. dollar, the Treasury would lose on the exchange rate and the interest rate. That’s a very bad deal.

As mentioned, I recommend gold as an investment asset and own it myself. It’s just not the case that the Treasury has to mess around in gold, bond and currency markets to achieve some opaque goal that can be achieved directly just by leaving the gold in Fort Knox and issuing TIPS.

A U.S. Sovereign Wealth Fund

In the midst of the noise set off by Bessent’s monetization comments was a striking remark by Trump that he would like to establish a U.S. sovereign wealth fund. That’s highly significant.

Right now, official U.S. reserves are about 70% in gold with the rest in a few foreign currencies. The idea of a sovereign wealth fund (SWF) is to allow a country with reserves to diversify into stocks, bonds, natural resources, property and a lot else instead of just holding gold and U.S. Treasuries.

Most countries with SWFs finance it with their trade surplus. Norway, Russia and Saudi Arabia are among the biggest SWF holders in part because of their oil revenue trade surpluses. The U.S. doesn’t have a trade surplus, but we might soon have substantial revenues from tariffs. The U.S. could always borrow money to finance a sovereign wealth fund. Then it would be more like a hedge fund, but that might be Trump’s style. (Scott Bessent was a hedge fund manager for Soros).

I did extensive collections and research on sovereign wealth funds for the Director of National Intelligence when it was a hot topic around 2007-2008. The SWF issue faded after 2009 as it was overshadowed by the global financial crisis. SWFs lost a lot of money in that panic. But they never went away and have recovered their losses since then. Trump may bring SWFs back into style.

Bessent’s asset monetization comment and Trump’s reference to a sovereign wealth fund for the U.S. are critical initiatives that we’ll be watching closely. In the short run, the gold bug and other hype has run far ahead of the reality. In the long run, both initiatives may come to fruition and mark a material reset in the international monetary system.