Barbaric relics become financial chips? Bank of America: Reassessing gold reserves will benefit gold prices.

In recent days, the gold reserves of the United States have attracted people's attention, especially the gold reserves in Fort Knox. Although US Treasury Secretary Janet Yellen has ruled out the possibility of revaluing the gold reserves to market levels, analysts at Bank of America Securities say this would be a positive for the price of gold. Francisco Blanch, Director of Commodity and Derivatives Research at Bank of America Securities, believes that reevaluating the value of the US gold reserves based on current market conditions will provide more momentum for the price of gold, as it would indicate that this precious metal is not an outdated asset. Francisco Blanch stated: "I believe this could be beneficial for the gold market, because it will show that gold is no longer a barbarous relic neglected by central banks, and now even the largest central bank is showing renewed interest in gold." However, Francisco Blanch also added that revaluing the gold reserves would not contribute to the primary goals of the Trump administration, which are weakening the dollar, lowering energy prices to alleviate inflation, and inducing the Federal Reserve to cut interest rates. Revaluation of US gold reserves? It is reported that in recent times, discussions about reassessing the value of US gold reserves have intensified, as people believe this could increase the borrowing capacity of the US Treasury under the debt ceiling. The US Treasury currently uses its physical gold reserves as collateral to obtain cash from the Federal Reserve. The core idea of this proposal is that the US government should adjust the value of the gold reserves from the current $42.22 per ounce (the price left over from the Bretton Woods system) to market price. If calculated at market price, the collateral value of the US Treasury's gold reserves would rise from the current approximately $11 billion to around $750 billion. At present, this proposal has not entered a serious discussion stage, but it is believed that it could help the Treasury to buy more time regarding the debt ceiling issue. According to Barclays Bank's analysis, the increase in the Treasury's account at the Federal Reserve means that the government can continue spending without issuing additional large amounts of short-term bonds. This adjustment could reduce the supply of short-term bonds by about 12% and push back the "X date" when the government runs out of borrowing capacity from the currently predicted August 2025 to after February 2026. However, Secretary Yellen refuted speculation last week that the government might reevaluate the value of its gold holdings. When discussing plans to establish a sovereign wealth fund, Yellen stated that reevaluating the value of the US gold reserves was not something she was considering. Meanwhile, some institutions have pointed out that while discussions about this proposal have heated up recently, it will not be taken seriously by the US government. Lou Crandall, an economist at Wrightson ICAP, pointed out that for the Federal Reserve, reevaluating the value of the gold reserves would change its balance sheet, with the gold certificates on the asset side of the Federal Reserve's balance sheet increasing, and the cash in the Treasury General Account (TGA) on the liability side also increasing. From a balance sheet perspective, this will be similar to a new round of quantitative easing (QE). Long-term use of these funds by the Treasury in the market will lead to cash flowing out of the TGA and into bank reserve accounts, increasing liquidity in the financial system. However, the current policy direction of the Federal Reserve is to shrink its balance sheet, known as quantitative tightening (QT), a process that began in June 2022. So far, the Federal Reserve has reduced its balance sheet by over $2 trillion, bringing the total assets of the System Open Market Account (SOMA) to around $6.8 trillion, although still higher than the pre-pandemic level of $4 trillion. Regarding when QT will end, market opinions are currently divided. Some Wall Street analysts believe the Federal Reserve may end QT by the end of 2025 or 2026, while Federal Reserve Chairman Powell recently stated that the level of bank reserves is still comparable to mid-2022 levels, indicating that QT still has a long way to go. If the Treasury's gold reserves were revalued, the Federal Reserve's assets would further expand, significantly delaying the completion of QT. Considering the impact of fiscal and monetary policy, the likelihood of reassessing the value of the US Treasury's gold reserves is not high. Lou Crandall pointed out that the benefits of such a measure are limited and could trigger strong public backlash. Additionally, the Treasury may seek more creative solutions for the debt ceiling issue rather than prioritizing the revaluation of gold reserves. Gold Price Rally Excites Wall Street Banks Gold prices have hit new highs several times this year. Despite a 0.1% decline in the spot gold price last Friday, closing at $2936.25 per ounce, it has risen for the eighth consecutive week, the longest winning streak since 2020. At the same time, gold-backed exchange-traded fund (ETF) holdings have surged, highlighting an uptrend in the market. In fact, the rally in gold prices this year is a continuation of last year's strong performance. According to Louise Street, Senior Market Analyst at the World Gold Council, the price of gold hit new highs 40 times in 2024. The World Gold Council's "Global Gold Demand Trends Report" showed that due to continued strong central bank purchases of gold and growth in investment demand, global gold demand reached a record high of 4975 tonnes in 2024 (including over-the-counter trading), with record high gold prices and demand driving global gold demand total to $382 billion in 2024. Many institutions predict that factors such as trade tensions, geopolitical concerns, ongoing demand from central banks, and uncertainty in global economic growth will continue to drive gold prices higher this year. Goldman Sachs has raised its year-end gold price forecast from $2890 per ounce to $3100 per ounce, with the main logic being the continued strong growth in global central bank gold purchase demand. Goldman Sachs believes that due to the significant increase in speculative positions, gold prices could potentially soar to $3300 per ounce by the end of the year in an optimistic scenario. UBS, in a previous research report, raised its gold price forecast and expects the peak gold price in 2025 to exceed $3200 per ounce. UBS believes that safe-haven sentiment in the market is continuing, and macroeconomic uncertainty is persisting, driving the rise in gold prices.Uncertainty, worsening US fiscal deficits, and geopolitical risks may all continue to support the upward movement of gold prices.At the same time, the Bank of America commodities strategy team believes that due to concerns about the continued increase in the US fiscal deficit, global trade disputes, wars, sanctions, and asset freezes, global central banks and retail investors have pushed spot gold prices and gold futures prices to record levels. The bank expects that in the most optimistic scenario, the price of gold will reach $3,500.