We analyse the portfolio-reallocation incentives faced by NIIP-surplus economies under cross-border seizure risk. Assets, such as gold, can be physically imported and held domestically in contrast to financial claims on other jurisdictions. Gold purchases not only reduce the NIIP but can also drive steep increases in gold prices. We review the history of gold as an international settlement asset, the evolution of financial sanctions, and the global distribution of NIIP and gold holdings. We calibrate a simple model to recent gold mining cost curves and show that (assuming a current account balance of zero) closing one trillion dollars of NIIP per year through newly mined gold could push prices above USD 8,500 per ounce, while a ten-trillion-dollar target could be consistent with USD 67,000 per ounce. In an extended model, NIIP surplus countries face a trade-off between rapid NIIP reduction, with subsequent valuation losses, versus gradual adjustment, which tempers price impacts but lengthens the period of exposure to cross-border seizure risks. We also model the case of an elastic supply from mobilization of existing private holdings in the rest of the world via a simple portfolio re-allocation channel.
SAFE Working Paper No. 486
