(Kitco News) - The massive inflows of gold and silver into the United States, coupled with talk of monetizing the nation's gold reserves, could have much broader ramifications for consumers and the U.S. and global economies, according to one economist.
In an interview with Kitco News, Thorsten Polleit, Honorary Professor of Economics at the University of Bayreuth and publisher of the BOOM & BUST REPORT, said that it is not surprising that the U.S. has seen a significant influx of physical gold and silver as banks are building a stockpile to hedge against the risk of tariffs. He added that although the risk of a tariff on gold and silver is low, it is still enough that banks and investors have to be proactive.
However, looking at the long-term implications, Polleit said that a growing stockpile of gold and silver in the U.S., along with the government's renewed focus on its own reserves, could raise expectations for both precious metals to be recognized as currencies alongside the greenback.
He added that using gold and silver as hard currency in conjunction with the U.S. dollar could fix inflation, which has become a major threat to the economy. However, he added that in this scenario, gold and silver prices would have to be much higher to accommodate the size of the U.S. economy.
Polleit explained that the unsustainable rise in U.S. debt has pushed the Federal Reserve and fiat money as far as they can go.
"Going forward, the Fed can no longer act as flexible as it did in the past," he said. "For instance, if there was a crisis, the Fed could just open the floodgates and pump in new money to support the economy. It can't do that anymore because it would drive inflation higher. We are starting to realize that the Federal Reserve can't just come to the rescue anymore."
Polleit said that the Federal Reserve's measures to rescue the U.S. economy have significantly mispriced risk in the marketplace. He pointed out that yields on higher-risk corporate bonds are well below their long-term average. The yield credit spread between "B" grade corporate bonds and U.S. Treasuries is currently at 1.45%, its lowest point since mid-'79.
Polleit said that these market risks have to be repriced properly - which won't be an easy task - and this is one reason why many investors are turning to gold.
"I think things could get pretty messy as the administration continues to cut spending and improves the U.S. government credit outlook," he said. "There will be a repricing of corporate debt, and the idea of having a safe haven asset somewhere puts gold quickly on the agenda."
A new type of gold standard could be the solution.
Polleit noted that a traditional gold standard would create deflationary problems for the global economy as credit spending would be limited to global gold production; however, he added that there is another solution.
"The U.S. administration could allow or encourage a free market in money. This could change the U.S.'s fiat currency system into a more sound regime," he said. "We live in a world where, in terms of the technology, this could be done quite easily."
Polleit noted that in thousands of years of history, gold has proven its value over and over again. So far this year, gold has been a dominant force in global currency markets, hitting new record highs against all major currencies.
Polleit explained that a free money market would allow the U.S. government to support its domestic economy and allow consumers to protect themselves from rising inflation. He added that over time he would expect to see an equilibrium in the marketplace.
"If the government slowly, gradually developed this new regime, and then the Fed would have to be less inflationary because if it keeps inflating like hell, people will go into the better money, and the Fed will lose market share," he said.
Polleit said that he also doesn't see any sovereign risk in embracing a hard currency. He added that a currency isn't the defining factor of a country.
"Whether a consumer uses Canadian Maples or U.S. Eagles, gold is still just gold. Would that person be less American for the gold they used?" he said. "A nation isn't any less because of its currency."
Polleit's comments come as the U.S. government reflects on its own gold reserves. Earlier this month, Treasury Secretary Scott Bessent said he is looking to "monetize the asset side of the U.S. balance sheet" as the government explores the creation of a sovereign wealth fund.
Many analysts have speculated that this could mean that the U.S. government will mark to market its gold reserves, which have been valued at $42 an ounce since 1972. The revaluation of the Treasury's gold hoard could increase the government's assets by nearly $800 billion.
This week, officials voiced support for an audit of both the Fed and Fort Knox to ensure all of the government's gold is there.
In another government gold scheme, Stephen Miran, the nominee to lead the White House Council of Economic Advisers, has suggested that the U.S. government could sell its gold and use the proceeds to buy other currencies. This would weaken the U.S. dollar, giving the nation a trade advantage.
Selling the U.S. gold reserves would also impact the reserves of emerging market central banks that have been accumulating the precious metal at record rates for the last three years.
Meanwhile, last year, Judy Shelton, who has been floated as a potential pick to serve on the Federal Reserve, advocated for the government to issue bonds payable in gold.
Polleit said long-term gold prices will have to go higher as the government looks to potentially monetize its reserves. However, in the short term, he said that prices could remain volatile.
"I don't think you want to chase prices, but with everything going on, gold and silver are clearly in bull markets," he said. "So, don't get distracted by short-term volatility."
