Will Trump monetize part of US Gold reserve to cut bond yield?

·       Trump 2.0 is no longer pressuring Fed/Powell to cut rates but may be planning to issue less US bonds by selling Gold to support deficit spending

·       Trump is still indicating lower borrowing costs by targeting a direct supply of fresh US bonds/debts; for this Trump may use a part of the US Gold reserve

Gold is now wobbling around $2900, around the middle of the recent range of $2950-2850; Gold surged following President Trump's announcement of new tariffs on steel and aluminum imports, reaching record highs. This is due to the increased uncertainty in global financial markets and rising demand for safe-haven assets.

Key factors contributing to the rise in gold prices:

·       Safe-haven demand amid lingering Gaza war uncertainty: Gold surged after Gaza war broke out in Oct’23

·       Fed easing cycle: Gold was also boosted by the Fed easing cycle and QT tapering from early 2024

·       Trump's tariff threats have amplified the appeal of gold as a safe store of value during uncertain times. Investors tend to move towards safer assets like gold when trade tensions and economic uncertainties increase.

·       Global economic uncertainty: The announcement of tariffs has led to concerns about a potential escalation of trade wars, which could negatively impact global economic growth

·       Inflation Worries: Trump Tariffs may exacerbate inflation within the US by around +0.7% if implanted at face value; Concerns about higher inflation and slower economic growth are spurring demand for safe-haven assets

·       Growing devaluation of local/paper currency: Gold is a major beneficiary of increasing public deficit, debt, and currency devaluation; Trump’s tariff policies hurt almost all major global currencies against USD, which is benefitting as a trade war currency. But even with higher USD/US bond yields, Gold (XAU/USD) is getting some boost against USD as Trump’s expansive fiscal policies may be negative for UST as more UST may come into circulation as a result of Trump’s tax cuts, various fiscal stimulus even after considering higher Trump tariffs (import duties)

·       Central bank buying: EM/BRICS Central banks, particularly China's PBOC, India’s RBI, and the Central Bank of Poland and Turkey have been increasing their gold reserves, signaling a commitment to diversifying their FX holdings and also to combat local currency devaluation against USD amid Trump trade war tantrum and uncertain bellicose policies. Central banks added 1,045 tonnes to global gold reserves. Central banks have been net buyers of gold for the past 15 years. The National Bank of Poland was the top buyer with 90T, followed by the Reserve Bank of India (RBI) with 72.6T and the Central Bank of Turkey.

Precious metals Gold has been seen as an inflation hedge, a haven physical asset for centuries:

In the last few weeks, gold waved on Trump's trade war tantrum mostly on the downside as higher Trump tariffs including reciprocal tariffs are positive for USD/UST. But Gold and Silver also surged in the last few days since Monday (10th Feb’25) after Trump talked about metal tariffs imposition. The market may be now apprehending Gold itself might be taxed by Trump.

Will Gold Itself Be Taxed?

·       Unlikely Directly: It's less likely that there would be a direct tax specifically on gold itself (like a tariff on gold imports).

·       Indirect Effects: The more likely scenario is that gold's price is indirectly affected by broader economic policies; if Trump tariffs cause economic disruption, there may be more demand for Gold and the price may further surge

·       Capital Gains Tax: There may be a capital gain tax on Gold in the future on ETF/derivative etc, but may not be in physical form

The US has a healthy demand for physical gold across investment, jewelry, and industrial sectors, met by a combination of domestic mining, imports, and recycling. Currently, there are no tariffs on gold imports into the US. If tariffs were imposed, they would likely increase costs, potentially reduce demand, and shift supply patterns. But tax or no tax, the physical demand has increased suddenly for the last month after Trump's inauguration on 20th Jan’25. BOE is now scrambling to supply physical Gold, while Gold premium is now around $3020 against the spot price of around $2905 and future price of $2935. The market is now expecting spot Gold (XAU/USD) to reach around $3000 by the next few weeks.

In any way, recent discussions within the Trump administration have explored the possibility of monetizing the U.S. Treasury's gold reserves to address national debt and influence bond yields. Treasury Secretary Bessent has proposed revaluing the government's gold holdings, currently accounted at $42.22 per ounce book value to reflect the market price of approximately $2,900 per ounce. This revaluation could theoretically add around $750 billion to the Treasury's balance sheet, potentially reducing the need for new debt issuance and thereby lowering bond yields.

However, such a move would not decrease the consolidated government debt, as the interplay between the Treasury and Fed accounts would offset the apparent gains. Additionally, this strategy might conflict with the Fed’s current monetary policies, including quantitative tightening (QT). While the proposal could offer some fiscal advantages, it wouldn't change the overall amount of Treasury debt held by Treasury investors (US debt holders).

In this way, it’s also important to note that while these discussions are taking place, no official policy has been implemented to monetize or sell the U.S. gold reserves for debt reduction or bond yield management. But Trump and his administration are exploring strategies to manage the U.S. national debt and potentially lower bond yields. These strategies include monetizing assets, such as gold reserves, and creating a sovereign wealth fund.

Monetizing Gold Reserves:

·       Accounting Adjustment: Treasury Secretary Bessent mentioned "monetizing" U.S. government assets, which has led to discussions about adjusting the book value of U.S. gold reserves. The U.S. holds approximately 261.6 million troy ounces of gold, recorded at a fixed price of $42.22 per ounce, resulting in a book value of $11 billion.

·       Market Valuation: With the current spot price of gold around $2,920 per ounce, the market valuation of these gold assets is approaching $765 billion. Adjusting the bookkeeping to reflect this market value could add $750 billion to the nation's financial statements (TSY B/S).

·       Impact of Liquidation: For this adjustment to have a real impact, the U.S. would need to liquidate some of its gold reserves. However, this could destabilize the gold market.

Sovereign Wealth Fund:

·       Executive Order: President Trump signed an Executive Order to establish a sovereign wealth fund, directing the Secretary of the Treasury and the Secretary of Commerce to develop a plan within 90 days.

·       Goals: The goals for the fund include maximizing the stewardship of national wealth, easing tax burdens, enhancing long-term economic security, and promoting U.S. economic leadership.

·       Potential Capital: The U.S. government directly holds $5.7 trillion in assets and indirectly holds a far larger sum, including natural resource reserves. These assets could potentially provide the starting capital for the fund.

Managing Bond Yields:

·       Desire for Lower Yields: The Trump administration wants to lower yields on 10-year bonds. Treasury Secretary Bessent believes that the administration's policies of energy dominance, deregulation, and non-inflationary growth will naturally bring the 10-year yield down.

·       Deficit: Reducing the deficit could also lead to lower bond yields because the government would not need to borrow as much money. However, tax cuts planned by the administration could increase the deficit, making this a challenge.

·       Trump's Comments on Debt: President Trump questioned the U.S. government debt figures, hinting at a potential scam in the issuance of US Treasuries and overhaul of the federal government that could lead to a reduction in the national debt.

Conclusions:

Theoretical price/fair valuation of Gold:

Inflation-Adjusted Gold Price:

Gold Price= (CPI Index-2024/ Base Year CPI Index-2020)* Base Year-2020 Avg Gold Price= (314/259)*1850

=$2242

M2-Money Supply adjusted Gold Price:

Gold Price= (M2-Dec’24/M2-Jan’20)* Base Year-2020 Avg Gold Price= (21.5/15.4)*1850

=$2583

Gold-to-S&P 500 Ratio

Gold is sometimes valued relative to stocks.

Historical Gold/S&P ratio: ~0.5

S&P 500 (2024): ~5975 (average)

Price of Gold: 5975*0.5=$2987

Average Fair Value of Gold: (2987+2583+2242)/3=$2604

Overall, the average fair value of Gold may be now around $2600 against present levels of $2900. Looking ahead Gold may correct due to various reasons:

·       Gaza and Ukraine war permanent ceasefire and lower geo-political tensions under Trump 2.0

·       Less hawkish approach by Trump 2.0 on tari9ffs and immigration, resulting in relatively muted inflation

·       Less dovish Fed monetary policy and higher USD/US bond yields

Gold may have surged too much above its fair value for various reasons in the last year, especially after the Gaza war started in Oct’23 amid a central bank buying spree led by EM central Banks like India’s RBI, Poland National Bank, and Turkey Central Bank. But in 2025, we may not see so much Gold buying by EM central banks due to USD scarcity and less hawkish Trump trade war tantrum 2.0. Another factor behind Gold’s record surge may be the market perception that record issuance of Gold ETFs may have inadequate backing of real physical Gold at COMEX and LME/BOE; there is heavy demand for Physical Gold in the US and BOE/LME scrambling to supply the same.

Bottom line:

Now if Trump is considering monetizing/selling/pledging part of Gold held by US TSY to pay off US debts partially and reduce bond yields, it may lead to huge panic selling of Gold. Trump 1.0 repeatedly pointed out lower borrowing costs and warned Fed Chair Powell either to cut rates or resign. Now Trump 2.0 is not targeting Powell/Fed directly, but still urging for lower borrowing costs by keeping bond yields lower. Trump may be now planning to reduce US debts by selling part of Gold to support deficit spending and not issuing US Treasuries for the same.

Weekly-Technical trading levels: Gold

Looking ahead, whatever the fundamental narrative, technically Gold (CMP: 2895) has to sustain over 2960-2975 for a further rally to 3000/3025; otherwise sustaining below 2950 may again fall to 2850/2790 and 2770/2755-2725/2690 and further 2675/2655-2610/2560 in the coming days.