International Forecaster Weekly

Is a New Gold Standard on the Horizon? - Revaluing Gold Could Write Off Government Debt

Is a new Gold Standard coming to town? If one is, it’s likely to be in Europe. So says independent financial writer Jan Nieuwenhuijs. 

The gold analyst writes in The Gold Observer that Europe is the most likely to take the initiative—as opposed to the U.S.—because revaluing gold “would damage the dollar’s status as world reserve currency.” 

The euro, on the other hand, as the second most liquid currency in the world, “would enable the eurozone to revalue gold without devaluing much against other currencies and commodities.”

The more debt is being accumulated on the balance sheets of European central banks, the more likely they will revalue gold to write off this debt. 

Here’s the gist of Nieuwenhuijs’ thinking: The ratio of government debt to GDP in many countries is at record highs. And no country, leader or economist has proposed a strategy to lower those debt burdens. 

He points to the primary tools that governments can lower their debt to GDP levels:

Guest Writer | February 19, 2022

By Dave Allen for Discount Gold & Silver

Is a new Gold Standard coming to town? If one is, it’s likely to be in Europe. So says independent financial writer Jan Nieuwenhuijs. 

The gold analyst writes in The Gold Observer that Europe is the most likely to take the initiative—as opposed to the U.S.—because revaluing gold “would damage the dollar’s status as world reserve currency.” 

The euro, on the other hand, as the second most liquid currency in the world, “would enable the eurozone to revalue gold without devaluing much against other currencies and commodities.”

The more debt is being accumulated on the balance sheets of European central banks, the more likely they will revalue gold to write off this debt. 

Here’s the gist of Nieuwenhuijs’ thinking: The ratio of government debt to GDP in many countries is at record highs. And no country, leader or economist has proposed a strategy to lower those debt burdens. 

He points to the primary tools that governments can lower their debt to GDP levels:

  1. Economic growth
  2. Default
  3. Higher taxes
  4. Austerity
  5. Debt relief
  6. Inflation 

He counts out options 1-4 as not being viable, which leaves #5 debt relief and #6 inflation. 

Right now, inflation is on the rise around the world and shifting wealth from savers to debtors. 

But Nieuwenhuijs asks, “Can inflation stay elevated and solve the debt problem without destabilizing societies?”

When people on lower incomes can’t make ends meet, they tend to get nervous, sometimes even revolting. 

Such social instability leads to political instability, which leads to monetary instability, which leads to more social instability, more political instability, and on and on. He calls this the “Doom Loop.”

Why Not Revalue Gold to Write off Bad Debt?

One potential solution that Nieuwenhuijs proposes is for central banks to use unrealized gains of the gold on their balance sheets to write off their sovereign bond principal, thus providing debt relief to their governments. 

And when the unrealized gains aren’t enough—as they are in many countries--central banks can revalue gold. 

Here’s how Nieuwenhuijs sees this at work:

The most important assets of a central bank’s balance sheet are international reserves (e.g., gold, foreign exchange and special drawing rights), domestic government bonds, and loans to banks. 

The major liabilities are the monetary base, domestic liabilities (such as an account for the government) and a central bank’s equity.

Using generally accepted accounting principles, if government bonds were to be written off on the asset side, something would have to be written off on the liability side. 

What though? Nieuwenhuijs suggests that a central bank could use its capital (equity), but that’s usually “far too little to cater any relief of substance.” 

For one thing, operating with negative net equity could jeopardize a central bank’s credibility. 

What about gold then? Nieuwenhuijs reminds us that gold is the only type of money that isn’t issued by a central bank and thus can’t be printed.

So, “there’s really no limit to its price denominated in fiat currencies, which can and are printed.” 

Try this scenario: Central banks in the eurozone amassed most of their gold during Bretton Woods when gold was valued at $35.00 per troy ounce. 

At the current price of about US$1,900, these central banks have unrealized gains worth hundreds of billions of dollars (they’re actually denominated in euros on their balance sheet). 

How could these unrealized gains be used? Nieuwenhuijs observes that when the gold price rises, the value of the gold on the asset side of a central bank’s balance sheet increases. 

At the same time, an equal increase is recorded as a liability in what is known as a “revaluation account.” 

A gold revaluation account, which effectively has no limit, registers the unrealized gains on gold.

For example, say Germany’s central bank owns 3,300 tons of gold, which was purchased for 8 billion euros. And say the gold is now worth 173 billion euros—creating a gold revaluation 165 billion euros (173 – 8).

Nieuwenhuijs notes that using gold’s revaluation account, for literally anything, has been done before, “and there’s no reason why it can’t be done again.” 

In the 1930s, for example, gold was revalued by central banks around the world—when countries went off the gold standard and devalued their currencies against gold. 

A New Gold Standard? 

According to Nieuwenhuijs, central banks would have to set a floor price for gold to revalue it to write off debt. 

He adds that if a central bank uses its revaluation account to its fullest extent, the gold price ideally doesn’t fall back; otherwise, the central bank would incur unrealized losses. 

“As such, the central bank would need to stabilize the gold price, which is a form of a gold standard.”

Nieuwenhuijs admits that eurozone central banks would face risks in revaluing gold, because they wouldn’t know how much gold they’d have to buy—and print euros for—at a particular new price. 

He believes, though, as soon as they’d start buying, other countries outside of Europe would join the new Gold Rush to deal with their dangerous and unsustainable debt levels too.    

Revaluing gold could be a step towards a new international monetary system based on gold. 

It wouldn’t be the classic gold standard that our ancestors knew but, as Nieuwenhuijs surmises, “perhaps [it would be] a system of gold price targeting, allowing countries more easily to devalue their currency [when necessary].” 

After all, devaluing one’s fiat currency is a fact of life—all.over.the.world.