Gold Surge Gives U.S. Treasury an ‘Antiques Roadshow’ Surprise

Gold prices have risen more than 46% so far this year, their best annual gain since 1979. (DAVID GRAY/AFP via Getty Images)

Key Points

• The U.S. government’s 8100 tons of gold reserves are now valued at over $1 trillion, a significant increase from the 1973 appraisal of $11 billion.
• Gold prices have risen more than 46% this year, reaching a record high of over $3800 an ounce, driven by investment and central bank accumulation.
• Revaluing U.S. gold holdings to current market prices would unlock $990 billion but could disrupt the Federal Reserve’s balance sheet and stoke inflation.

Antiques Roadshow, the long-running PBS show devoted to appraising forgotten treasures in the basements and attics of American homes, builds its drama by unveiling a detailed history of the item before ultimately delivering its resale value money shot.

Discovering that a forgotten Civil War teapot could fetch $5000 on the open market is the kind of windfall most participants are hoping for. It isn’t exactly life-changing, but it’s a good financial boost nonetheless.

Now imagine digging into your basement and finding $1 trillion.

While not exactly forgotten, the U.S. government’s 8100 tons of gold reserves have gone largely unmentioned over much of the past few decades, with bullion stored in Fort Knox, Ky., U.S. Mints in West Point, N.Y., and Denver, and several other locations around the country.

However, much like that Civil War teapot, it’s been a long time since its value was appraised.

Congressional lawmakers last did so, in fact, back in 1973, when they fixed a price of $42.22 an ounce. That pegged the nation’s holding at just over $11 billion.

We’re some ways from that level today.

Gold prices have risen more than 46% so far this year, according to Dow Jones Market Data, and are on pace for their best annual advance since 1979. Spot prices were last pegged at just over $3800 an ounce, a record high.

That level, in fact, means U.S. gold holdings are now worth more than $1 trillion, a huge and tempting figure for the Treasury as it faces a budget deficit that is approaching $2 trillion.

But that would only become a functional benefit if, like that Civil War teapot, it was given an official mark-to-market value of $1 trillion. And there are good reasons not to do so.

The first, and most compelling, is how U.S. gold holdings are managed. The bullion is stored and owned by the Treasury, but pledged with the Federal Reserve in the form of gold certificates, which are exchanged for cash.

Converting that value to today’s levels would unlock around $990 billion in new money, but it would wreak havoc with the Fed’s balance sheet and stoke inflation pressures as the money worked its way into the real economy.

That would, of course, likely boost the bullion’s appeal in the open market, as gold investors tend to use it as a hedge against inflation, but it would also lead to further price level increases that would complicate the Fed’s dual mandate. It would also make future interest rate cuts more difficult to justify.

That said, gold prices are doing just fine without the Treasury’s revaluation. Bank of America data suggest gold has attracted around $17.6 billion in new investment over the past four weeks, the largest tally on record.

Central banks are also on an accumulation run, adding around 166 tons over the three months ending in June, as they seek to wean themselves from a reliance on U.S. dollar holdings in their foreign exchange reserves, according to recent World Gold Council estimates.

Over the past three years, central banks have boosted their collective gold coffers by around 1000 tons, the WGC estimates, a pace that’s nearly double the 10 year average.

The Fed’s anticipated rate cutting cycle, which the CME Group’s FedWatch tool forecasts to be six more quarter point reductions over the next 12 months, will also boost the precious metal’s appeal.

Last week, Capital Economics’ analysts, led by David Oxley, forecast gold prices would top $4000 an ounce by the end of next year, powered in part by lower Fed rates.

Earlier this month, Goldman Sachs analyst Samantha Dart said a sustained attack on Fed independence from President Donald Trump could take it to $5000 an ounce.

That’s likely to inspire a great deal of digging—in both gold mines around the world and in the basements, attics, and cupboards of homes across the country.

Write to Martin Baccardax at martin.baccardax@barrons.com