from Birch Gold Group:
This week, Your News to Know rounds up the latest top stories involving gold and the overall economy. Stories include: Central banks could be planning modernize their gold reserves, Wheaton CEO’s gold and silver predictions, and BlackRock’s analysts on gold’s near-term prospects.
Accounting tricks and central bank gold “revaluation”
Rick Mills’ attempt to explain how a gold revaluation account (GRA) works is a lengthy and convoluted affair, mostly because the subject matter is as well. I‘ll take a minute to summarize the concept because it’s relevant not only to central bank gold reserves, but also to the ongoing banking crisis.
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Accountants assign value to an asset in different ways:
- Based on the asset’s current market price (this is called “mark-to-market” pricing, and by far the most common way of assessing value)
- Based on the price paid for an asset (that’s considered “cost basis,“ explained briefly here)
- Based on the expected future value (called “held to maturity”)
- …something else
Here in the U.S. for example:
The Department of the Treasury records U.S. Government owned gold reserve at the values stated in 31 USC § 5116-5117 (statutory rate) which is $42.2222 per Fine Troy Ounce of gold.
So the U.S. gold reserve’s 261.5 million ounces of gold has A stated value of $11 billion. But its actual market value is $512 billion. That’s a big difference! (Don’t get too excited, though – that’s less than May 2023’s federal spending.)
What’s the point? Simply this: by realizing the actual market value of gold reserves, central banks could realize the gains on the value of their gold reserves. Mills speculates this “capital” thus created would be used to offset sovereign debt and maybe even for writing off liabilities.
Keep in mind that most Western central banks obtained the majority of their gold bullion reserves during the Bretton-Woods era, when gold was $20-$40 per ounce. So the U.S. example of a 45x increase in the actual value of a nation’s gold reserve is not that unusual.
So why aren’t central banks profit-taking now that they’re massively indebted, insolvent for all intents and purposes?
The official explanation is that central banks do not consider gold to be money. Mills says:
The U.S. has long opposed a gold revaluation dating back to the 1970s, as this would damage the dollar’s status as the world’s reserve currency.
Unofficially, well, central banks fear changes in gold price. A bad month for gold could turn this massive upside into a massive downside. (Think of it as a savings account turning into a mortgage.)
However, this line of reasoning doesn’t really hold up. Selling just a part of their holdings would protect them from any loss they might incur. And it seems that central banks might be looking to do just that. The Dutch central bank said it isn’t worried about its close-to-negative balance sheet seemingly only because of the gold in its portfolio, which amounts to some $20 billion. The Bundesbank, Germany’s central bank, said they’re viewing gold revaluation as a way of dealing with their central bank’s fiscal situation.
European banks have legislation that’s meant to prevent this action from happening yet, as Mills notes, seems there only to be changed as-needed. The U.S. has no such legislation, but faces its own issues in the form of having to maintain the reserve currency’s credibility and name value. The central bank of Curacao and Saint Martin, burdened by neither, recently used its GRA for precisely this purpose.
