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Gold | Bonds
The Wall Street Skinny
February 20, 2025
This Week on The Floor
U.S. Gold Reserves: Why hasn’t the price moved since 1973?
EU Bonds: What’s in store for Europe if the U.S. cuts NATO spending?
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As Elon Musk’s Department of Government Efficiency (“DOGE”) turns its eye on Fort Knox, conspiracy theories abound. Some question whether or not the gold within its vaults — which constitutes roughly 50% of the U.S. Treasury’s gold reserves — is actually there.
The more interesting question?
Why are the 248mm ounces of gold (source: USMint.gov) that belong to the U.S. government marked at a book value of $42.22 an ounce based on pricing from 1973, equaling approximately $10.5bn?
Do you know what the market price of gold is today?
$2,944.80 as of the time of publication.
Source: CNBC.com / COMEX
I’m no mathematician, but marking an asset at $10.5bn that has a mark-to-market value of $730.5bn sounds like some creative accounting to say the least.
So what’s really going on here?
First, some facts.
This gold belongs to the U.S. Treasury, NOT the Federal Reserve.
Then, “the Fed holds gold certificates corresponding to the value of the Treasury’s holdings, and credits the government with dollars in return” (source: Bloomberg).
So if the government were to revalue all its gold holdings at the current market rate, that would create a windfall of cash to the U.S. Treasury to the tune of $720bn.
Some pundits have floated the idea that this could be the seed for a U.S. Sovereign Wealth Fund.
What it really amounts to is another round of quantitative easing.
But remember, ADDING to the government’s balance sheet is the exact opposite of what the Federal Reserve is currently trying to do.
The Fed is currently undergoing a policy of quantitative tightening, letting assets it purchased during the phase of massive government stimulus post-GFC and post-COVID roll off as they mature.
Is there REALLY a reversal of balance sheet policy on the horizon?
And while $720bn sounds like a lot of money that could help forestall the next inevitable debt ceiling crisis, it’s less than the net interest payments on the U.S. national debt from 2024 alone.
So the fundamental question then becomes: which is the higher priority? Normalizing the Fed’s balance sheet? Or kicking the can further down the road on the debt ceiling?
Given Fed chairman Powell’s latest testimony earlier this month and the Fed minutes released on Wednesday, it doesn’t seem likely to me that he would embrace a reversal in course on the Fed’s balance sheet anytime soon.
EU Bonds — a Possibility?
With the US pulling back on international spending - such as NATO defense spending - talk of a jointly issued EU member bond is on the rise again.
Per Bloomberg, “France’s minister for European affairs said joint European bonds should be discussed in the coming days to ramp up defense spending for the bloc as it tackles an ‘existential moment’ over Ukraine and the continent’s wider security.”
So, if you’re new to European bond markets, you might wonder: “wait, I’ve heard of ‘Eurobonds!’ This is nothing new!”
A “eurobond” is just a generic term for a debt instrument denominated in a currency other than that of the issuing country. It is NOT a bond issued by the EU.
For those of you less familiar with European markets than American ones, a quick refresher: the European Union (E.U.) is a monetary union, not a fiscal union.
Meaning, while 20 of the 27 Eurozone countries share a common currency (and monetary policy), each member country has independent taxation and government spending.
This means that German schatz, bobls, and bunds — while denominated in Euros — are different debt instruments than say, French OATs or Italian BTPs.
They have different underlying economies — therefore, different interest rates and perceived riskiness.
During various periods of crisis over the past few decades, the idea of jointly issued EU bonds has been floated.
It was discussed during the sovereign debt crisis of 2011-2012, and again during COVID in 2020.
During the former, the European Stabilization Mechanism (“ESM”) was established as a joint rescue fund to provide emergency loans to financially struggling member countries.
During the latter, the Recovery and Resilience Facility (“RRF”) was established for the purpose of helping struggling member countries bounce back from the pandemic.
Now, with the current US administration calling into question its willingness to continue leading NATO defense spending, the idea of fundamentally changing how EU member countries operate from a fiscal standpoint is part of the conversation again.
Source: World Population Review
Countries like Poland, Lithuania, Latvia, and Estonia with borders close to Russia and Ukraine are already at the higher end of spending relative to the size of their economies compared to other member nations.
Could the EU tap existing financial rescue mechanisms in place for defense spending? Or is a fundamental change to the bloc on the horizon?
All I know is, the US is changing policy very rapidly, something the EU is not exactly known for, so I am not holding my breath.
Regardless, fears that spending will need to increase are already putting pressure on European fixed income markets, and are something to watch in the coming weeks.