(Kitco News) – The track record of revaluing gold reserves to address monetary or fiscal challenges is mixed, with the countries that needed it the most seeing the least sustained impact while the countries that used it most judiciously didn’t need it at all, according to new research by Colin Weiss, principal economist for global financial flows at the Federal Reserve.
“With public debt at high levels, some governments have begun to explore financing additional expenditures without raising taxes while also not increasing public debt outstanding,” he wrote in ‘Official Reserve Revaluations: The International Experience’ on August 1. “One possibility is using proceeds from valuation gains on gold reserves, as has been floated in the U.S. and Belgium recently. For the U.S., this would involve revaluing the government's 261.5 million troy ounces in gold reserves—the largest gold reserves globally— from a statutory price of $42.22 per troy ounce to current market prices, which stand around $3300 per troy ounce.”
In the research note, Weiss reviews the handful of cases where countries revalued their gold and foreign exchange reserves to realize gains. “Over the past 30 years, only five countries have done so—Germany, Italy, Lebanon, Curacao and Saint Martin, and South Africa,” he noted. “What motivated the governments in these countries to use the proceeds from valuation changes in their official reserves? How were the revaluations implemented, and what were the outcomes?”
Weiss said the proceeds from these revaluations were “either used by the central bank, as in the cases of Italy and Curacao and Saint Martin, or by the central government, as in South Africa, Lebanon, and Germany.”
“Central banks have used revaluation proceeds to offset operating losses and maintain net profits or minimize reported net losses,” he wrote. “In Italy, revaluation proceeds covered a one-off loss for the conversion of a specific bond the Banca d'Italia owned. In Curacao and Saint Martin, the proceeds covered losses generated by a fall in interest income from holding relatively lower-yielding securities than previous years and realized valuation losses as the central bank rebalanced its portfolio. The use of revaluation proceeds temporarily boosted profits for both central banks, but, in Curacao and Saint Martin, the use was paired with other measures to generate additional income on a sustained basis.”
Central governments, for their part, used the proceeds gained from revaluation “to retire existing debts, often in exceptional fiscal circumstances. While reducing the debt stock using revaluation proceeds improves the fiscal situation at the margin, drawing on revaluation proceeds may not address larger structural challenges. For example, Lebanon's debt-to-GDP ratio continued to increase even after revaluation proceeds were used to retire some existing debts.”
Weiss pointed out that central banks have different ways of valuing their existing bullion holdings. “Some value their gold reserves at their historic cost; others report it at current market prices,” he said. “When central banks report their holdings at current market prices (fair value), the unrealized profits or losses from valuation changes are recorded in ‘revaluation accounts’ on the liability side of the balance sheet.”
“When gold is valued at historic cost (or modified historic cost), gold reserves can be revalued at market prices (or values closer to market prices) to generate revenues,” he noted. “When all official reserves are valued at market prices the unrealized valuation changes recorded in the revaluation account can be shifted to other parts of the balance sheet to generate funds.”
Weiss said that using revaluation of gold reserves as a funding source “is particularly salient because most gold reserves globally were acquired prior to 1990, and as shown in Figure 1, gold prices have climbed substantially since then.”
The first category includes cases with gold reserves valued at their historic cost with the central government as the end user. “Table 1a shows the initial change to the central bank's balance sheet due to a revaluation that increases the reported value of the gold reserves by X: assets increase by X due to the change in the valuation, while liabilities also increase by X as the valuation gains are distributed to the central government's account with the central bank,” he said. “As the central government uses these new funds, the composition of the liability increase will shift from the government's account to commercial bank reserves held at the central bank (not shown in the figure).”
The second broad category includes those cases where gold reserves are reported at fair value and the funds listed in revaluation accounts are then transferred to the central government. “Table 1b shows this example for a transfer of size Y,” Weiss wrote. “In this case, only the composition of the central bank's liabilities changes: revaluation accounts decrease by Y while the central government's account with the central bank increases by Y. Again, as with the previous case, commercial bank reserves at the central bank will increase as the central government uses its new funds.”
The final revaluation category involves the case where gold reserves are reported at fair value and the central bank uses its revaluation accounts to offset operating losses in other areas. “Table 1c displays this for a transfer of size Z,” he said. “Here, as with the previous example where revaluation accounts were used, only the composition of the central bank's liabilities changes. In this case revaluation accounts decrease by Z while net profits increase by Z.”
In Figure 2, Weiss plots the revaluation proceeds as a share of GDP in the year the appreciation was realized for each of the five examples. “The bars shaded green denote cases where the end-user was the central bank, while bars shaded blue mark examples where the central government sought to use revaluation proceeds,” he wrote. “Except for the German case, the transfers when the end-user is the central government are larger than the proceeds used by the central bank. For comparison, the inset note reports the potential revaluation amount as a share of GDP for the U.S.”
Weiss then provides a historical overview of the context of each revaluation case, and their political and economic outcomes for the countries in question.
The first example of gold revaluation with the central bank as the beneficiary was that of Curacao and Saint Martin, which “involved about 8 percent of the CBCS's gold reserves and was equivalent to about 0.6 percent of the 2021 and 2022 GDP of Curacao and Saint Martin, relatively modest amounts compared to other cases and leaving plenty of scope for additional use of the revaluation accounts.” He noted that the central bank “appears to have used its gold revaluation accounts to help offset losses in a couple years, but it relied on other means to generate a more permanent increase in income.”
The other case of revaluation where the proceeds were used by the central bank was in Italy at the beginning of the century. “In 2002, the Banca d'Italia transferred €13 billion from its gold revaluation accounts, or about half of the 2001 value of the account, to help cover losses,” Weiss wrote. “The transfer was equal in size to about 1 percent of Italy's 2002 GDP, as seen in Figure 2, placing it on the smaller side of the examples discussed in this note. Against the objective of helping the central bank avoiding reporting overall net losses, this use of revaluation account proceeds, was quite successful, as the Banca d'Italia reported a small net profit in 2002.”
The most recent case, and the first example in the report of revaluation for use by a central government, occurred in South Africa in 2024. “Specifically, the National Treasury and the South African Reserve Bank agreed to use R150 billion of the valuation gains recorded in the ‘Gold and Foreign Exchange Contingency Reserve Account’ (about 30 percent of the total valuation gains in the account) between 2024 and 2027 to ‘reduce borrowing, and consequently the growth in debt-service costs,’” he wrote. “This transfer is equivalent to about 2 percent of South Africa's 2023 GDP, which, as shown in Figure 2, places it in the middle of the size distribution of the actual and proposed revaluations studied in this note.”
Weiss noted that because “South Africa's use of revaluation account proceeds is ongoing, it is too soon to assess whether their use helped place fiscal policy on a more sustainable path.”
Another example of a central bank transferring unrealized profits on its gold and foreign exchange reserves to the central government occurred in Lebanon in December 2002, where the proceeds were used to retire $1.8 billion of treasury bills. “This was equivalent to around 11 percent of Lebanon's 2002 GDP, making it the largest use of revaluation proceeds (in domestic GDP terms),” he said.
Weiss noted that the relatively large size of this operation “likely reflected Lebanon's extremely difficult fiscal situation at the time,” as the country’s interest payments on its post-Civil War reconstruction debt “consumed 91 percent of government revenues by 1997.”
He noted that “Lebanon's debt to GDP ratio continued to increase after 2002,” and said that “the Lebanese experience again highlights that while gold revaluations can provide funds for the government, their ability to offset larger structural challenges can be limited.”
The final example is that of Germany – holder of the second-largest sovereign gold reserves after the United States.
“In 1997, German chancellor Helmut Kohl and finance minister Theo Waigel proposed a revaluation of Germany's gold and foreign exchange reserves with DM20 billion of the revaluation gains to be used to offset deficits elsewhere in the German budget,” Weiss wrote. “The Bundesbank valued its gold reserves at historic purchase prices that were significantly below the prevailing market prices in 1997. With the creation of the euro and the European Central Bank (ECB) in 1999, the Bundesbank was going to have [to] transfer at least a portion of its international reserves to the ECB. The ECB planned to value reserves at current market prices and record valuation changes in its own revaluation account, meaning that the Bundesbank would be transferring unrealized valuation gains on its gold reserves to the ECB.”
“Kohl and Waigel planned to revalue the reserves prior to their transfer to the ECB and use a portion of the revaluation gains equivalent to 0.5 percent of 1997 German GDP to help shore up the government's budget,” he wrote, a move that was necessary “because the level of the deficit was projected to violate the threshold set in the Maastricht treaty.”
After a period of parliamentary wrangling, “a compromise was reached where German official reserves were revalued in 1997, but the funds that were originally to be used to cover the fiscal deficit in 1997 were not distributed until 1998,” Weiss noted. “In the end, the German fiscal deficit in 1997 satisfied the Maastricht criteria even without the proceeds from the revaluation.”
While he doesn’t offer a conclusion or attempt to draw any broad lessons from the five very different cases, the data appear to show that the revaluation of even a significant portion of a country’s gold reserves delivers only a one-time boost to the balance sheet of either the central bank or the central government, and the move cannot address a significant portion of even one years’ worth of fiscal issues.
As Weiss points out in the notes for Figure 2, “Potential proceeds from a revaluation of U.S. gold reserves at current market prices would equal about 3 percent of U.S. GDP.” This means that the strongest economy in the world, liquidating 100% of the largest gold stockpile in the world, at the highest nominal price in history, would gain the equivalent of 3% of this year’s GDP.
