The Chancery allows one to efficiently claim large swathes of sov for political reasons, such as marking territory.  So far there is not a compelling in-game reason to do this, as territorial issues tend to be worked out through diplomacy (talking).

It is possible that in the future there will be compelling reasons to lay claim to large amounts of territory through sovereignty.  The devs have hinted at such possibilities.

Consider yourself running at 25% tax, you would have 1000 RP from library and 100 RP from the mysterious statues quest. If you claim sovereignty for all your RP's worth, you would be spending 11,000 gold per hour. You could run on 0% tax and have 1350 RP and spend 13,500 gold on sovereignty - that is the peak value. Unless you run at negative RP, you are NEVER going  to spend more gold than 13,500 per hour on sovereignty.

The chancery lets you only to claim more sovereignty squares using that same amount of gold and RP. Since you cant build on all those tiles, it is never going to be really profitable in terms of gold.

it is worth noting that this benefit can be gained by building the chancery to level 20; then researching the relevant technology (serjeanty). then the building can be destroyed and the benefits retained as tech research is never (well almost never, see capturing cities) destroyed.(and since you should be researching the lower tech in chain as the building goes up; which amounts to about 7 days of a lvl 20 chancery. though this is a bit exploity. 

The ultimate limit on this scheme is when you run out of research points.  The Chancery reduces the resource point cost of each sov square allowing you to sov more and get higher pop and therefore more buildings and gold.  The cost of this scheme is the resources to maintain the Chancery but you get a bigger city and more gold as a result.

The strategy you describe certainly works, but you don't claim level 1 food sovs, but higher... Since chancery only reduces level 1 sov costs it is useless in that regard. Regarding sov, the real limit is rather only 20 sov buildings... 

The only thing why someone would want to build chancery is to claim large amounts of lvl 1 sov, which currently wouldn't do him any good except boost alliance place in the ladder... 

My level V food sovs at distance of 1.41 take 66 research points with a level 15 chancery.  Without the chancery they would take 70.  The sovs at distance 1.0 take 47 research points.  The strategy is working.  The Chancery seems to reduce the cost of the level one sov and the sov levels seem to stack on top of each other so there is a level one sov on a square at sov level 5 (if that makes sense).  The point is, it reduces the cost even if you increase sov beyond level one.

With one lvl 20 chancery, for a city with the closest 20 (5 food) sov squares you gain about 600 extra pop, which at 50% tax and with parade grounds works out to about 500 extra T2 cav (plus the benefit of the extra pop to run more buildings).  You trade clay, wood and stone for troops and buildings.

Another neat bonus is that it is very quick and cheap to change the buildings on all those level one sov squares.  You wind up with 10 level 1 sov squares and in literally 1-2 minutes you can go from a 10% food bonus to a 50% production bonus in any area and then back again in 1-2 more minutes all for about 500 of each resource.