How Gold Can Prevent the Shutdown

The Chief Economist at Standard & Poors, Beth Ann Bovino, just stated that “failure to raise the debt limit would likely be more catastrophic to
the economy than the 2008 failure of Lehman Brothers and would erase
many of the gains of the subsequent recovery.”   Whilst most believe this could not rationally eventuate, she tellingly also said "betting on a rational US government can be risky."  To be clear, these are the words of the world’s largest rating agency.

Such is the gravity of the situation the recent actions of Secretary of the Treasury Steve Mnuchin and Senate Majority Leader Mitch McConnell have got some in the market talking.  Only last week they went and visited the infamous Fort Knox to verify the gold holdings of the US Government.  That visit is only the third visit by a Treasury Secretary in history and the first government official inspection in nearly 45 years!  The US reportedly holds 4,582 tonne of gold in Fort Knox, the biggest holding in the world, valued at around US$193billion.  In the context of a Government about to default, that gold sits on the Treasury’s balance sheet valued at just $42/oz, not the $1308/oz at the time of writing this.

Why could this extraordinary visit be telling?  Put simply, under the US Gold Reserve Act of 1934, the Treasury could revalue the gold at today’s price and monetise this uplifted value through the issuance of ‘gold certificates’ to the Fed and have them issue newly ‘printed’ money accordingly.  No new National Debt and no need for a new debt ceiling (for a little longer).  Problem solved….for now….

BUT… this would go against decades of strategy of deliberately undervaluing gold so as not to highlight the lack of ‘value’ in the constantly eroding fiat currency adopted since they left the gold standard.  The last time this accounting trick was deployed was by President Eisenhower in 1953.

An extraordinary action indeed but let’s revisit S&P’s quote "betting on a rational US government can be risky."

Trump is infamously anti-establishment, commercial and politically reckless.  In that context such a move doesn’t seem out of the ordinary.   Such a move would clearly be momentous for gold.  Watch this space, 29 days to go….