Could the US Use Its Gold Reserves to Avoid a Debt Ceiling Showdown?

Should US gold be revalued the Treasury could then issue new “gold certificates” to the U.S. Fed and in exchange demand newly printed money (QE continued) in the Treasury’s account under the Gold Reserve Act of 1934

Fri, Sep 1, 2017
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The last day of August in Moscow, a bright cool sunny morning. I walked to the nearby farmers market hoping to buy a melon for later. While selecting a ripe “Torpedo” melon I was startled by a finger poke from behind. A familiar face, it was my “Znakhar” woman (seeress) whom I have written about before. We exchanged pleasantries, commenting about the price of melons, which a month ago were 59 rubles a kilo, now were 25 rubles a kilo ($0.45). The Znakhar loaded up with three big ones, asking me with a grin to help her lug her bag of goods to the tram…. I should have seen that coming. While waiting for the tram she asked whether I thought any more about her vision of global changes and realignments.

Did I get rid of my pesky dollars as she recommended and exchanged them for rubles or gold St. George’s instead? Muttering that yes I have given her vision some thought. As she got on the tram she said, “The Lord created gold to tempt us and protect us at the same time, remember that and you will not have to worry about having bread to eat”.

That and the dramatic drop in the price of melons started me thinking along the lines of economics 101, where price is a function of supply and demand. The equity markets are booming in the US, EU and Japan yet the fundamentals, which should ideally support such explosively high prices, are largely muted, absent or disregarded. One item that has not received much attention and tends to skew the bourses is the continually shrinking quantity of equities themselves, a trend some have labeled as de-equitization.

Since 1996, the number of listed U.S. public companies has fallen by 54% (yes, more than half) although at that same time the economy and population have grown. In the United Kingdom and Germany, the trend has been similar. Since 2008, publicly traded companies have spent almost three trillion dollars buying back their stock, and buybacks do tend to increase earnings per share especially when the quantity of shares shrinks. Add to that the fact that over the past decade companies that have gone public find it is much cheaper to issue debt instead of equity. According to the Federal Reserve Board, net equity issuance by non-financial companies has been negative by almost $6 trillion, 20% of today’s US market value. Could it be that the shrinking supply of equities from a fundamentalist’s perspective could be part of what is driving the stock markets higher?

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Add to this the relatively recent phenomenon of Central Banks (CB) buying equities in the market, which still surprises me but has become another accepted ‘new normal’. It seems apparent that while economic news and statistics remain uninspired the central banks have continued making historically unprecedented asset purchases throughout 2017. The PC phrase, Quantitative Easing (QE) for printing money which many assume based on statements made by CB’s and the Fed has seen its peak, and that QE is being reversed.

No so at all. In fact, asset purchases by the Bank of Japan (BOJ) and European Central Bank (ECB) during the past two years are far greater than before. The BOJ, ECB, Swiss National Bank and Bank of England purchased $1.5 trillion of assets during the first five months of 2017, far exceeding any historic rate of global QE. Given current economic realities we may indeed see a continuation of QE ad infinitum, or until actual values are reassessed and the market realigns accordingly…. a volatile unpleasant thought.

Let us take a step back; equities continue to set new highs while investors await expectantly a schedule of Fed tightening to be implemented. All this within a deteriorating U.S. economic picture, a shell game if you will, replete with plenty of geopolitical and social diversions. It is my opinion that the recent bally-hoo over assuredly upcoming (one-day) FOMC rate hikes have already begun to negatively affect our debt strapped and growth-starved economy. So where do we go come end September when the debt ceiling and budgetary needs of the country need goosing up a bit? One theory gets its start when US Treasury secretary Steven Mnuchin paid a visit to Fort Knox. He is only the third Treasury Secretary in our history to ever visit Fort Knox, and the first since James Bond foiled Auric Goldfinger. Perhaps it is because the US Treasury is running out of cash and should Congress not increase the debt ceiling by September 29 there will be anxiety in the markets.

Perhaps however the Treasury could magically conjure at least $355 billion in cash from thin air without increasing the debt by marking the value of U.S. gold to the market. Sound outlandish, or even simple-minded? Consider that the bullion held by the United States is today officially valued at approximately $42 per ounce on the Treasury’s ledgers. It doesn’t take a rocket scientist to appreciate that if it is marked to market at say $1200, $1300, or more per ounce, the volume value gets a little larger, no? Should US gold be revalued the Treasury could then issue new “gold certificates” to the U.S. Fed and in exchange demand newly printed money (QE continued) in the Treasury’s account under the Gold Reserve Act of 1934. This trick would not increase the national debt and therefore no nasty debt ceiling negotiations or legislation would be required.

It would also serve to remind the world yet again that gold is in fact at the foundation of how money is variously expressed… gold benefits.

Despite popular consensus (and maybe in keeping with the “Znakhar” visions) I suspect that we will not be seeing any further tightening anywhere in the upcoming several months. In fact, many financial assets will probably see a point in time in the next few months where they will be revalued and significantly repriced as compared with today’s bubbly valuations, all to gold’s very real benefit yet again.


Paul Goncharoff is Chairman, Disciplinary Committee, National Association of Corporate Directors, Russia

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