Voima Weekly #52 – Gold as Collateral for Government Debt?

Fort Knox was built to store the United States government’s gold reserves. Construction was completed in 1936, and the first shipment of gold arrived in 1937. Today, Fort Knox holds approximately 147 million troy ounces of gold, roughly half of the gold held by the Treasury. Could this historic reserve take on a new role if gold were used as collateral for government debt?

The U.S. national debt has surpassed $40 trillion. In a recent interview with TIME, President Donald Trump said inflation could pay down the debt quickly. He also spoke about the importance of economic growth, but inflation can reduce the debt’s real value in a way that shifts the cost onto creditors and savers. It is noteworthy that the president is saying this openly.¹

The discussion has now turned to another subject: America’s gold.

Rick Rieder of BlackRock is one of the world’s most influential fixed-income investors. He is the firm’s Chief Investment Officer of Global Fixed Income. In an interview with Morningstar, Rieder discussed America’s $40 trillion debt, the compounding cost of interest, and how the country’s debt is managed. He also pointed out that the United States has gold on its balance sheet.²

At the same time, Treasury Secretary Scott Bessent appointed David Zervos as an adviser to the department on September 28. Zervos is an experienced macroeconomist and market strategist. He spent many years as Jefferies’ Chief Market Strategist and has also worked at the Federal Reserve. He now advises Bessent at the Treasury Department.³

Zervos has spoken about the Treasury taking a more active role in managing the maturity structure of government debt. He has urged markets to watch closely how that is done. The structure of the debt, and the kinds of bonds the Treasury issues, affect interest rates and investors’ willingness to finance the U.S. government.⁴

And then there is Judy Shelton.

Shelton is an economist and a long-time advocate of sound money.⁵ She served as an economic adviser to Trump and has proposed gold-linked U.S. government bonds for years. Her verified X profile now lists her as Counselor to the Secretary of the U.S. Department of the Treasury.⁶

Shelton’s proposal is known as the Treasury Trust Bond. It would be a long-term government bond, potentially with a 50-year maturity. A specified amount of U.S. gold would be set aside as collateral. At maturity, the investor could choose whether to receive repayment in dollars or in a predetermined amount of gold.⁷

This would not mean selling the gold, nor would it restore the United States to a full gold standard. But it would change gold’s role: it would no longer be simply a reserve asset sitting on the government’s balance sheet; it would serve as collateral for a new government bond.

Investors would have a choice: a conventional dollar-denominated Treasury bond, an inflation-protected TIPS bond, or a gold-linked Treasury Trust Bond. Shelton’s idea is that gold could serve as a long-term measure of the dollar’s purchasing power and offer investors another way to assess confidence in money.

Could this affect Europe too? There is one thought I can’t set aside.

Yesterday, at an event, I happened to speak with a former governor of the Banque de France about European bond markets. I asked whether gold could be considered as collateral for government bonds in France too, where government bond yields have risen sharply to around 5%. His answer was emphatic: gold is not intended to be used as collateral in this way.

Perhaps that is precisely why it is interesting to consider what might happen if the United States did issue a gold-linked government bond. France and Italy have substantial gold reserves of their own, but they also face serious debt problems. A U.S. precedent would not solve those problems, but it could change what investors consider possible. If one major government used gold as collateral for its bonds, investors in other countries might also begin asking why the same option should not be considered elsewhere.

This would not create new cash flow for governments. Ultimately, debt is a cash-flow problem: spending, tax revenue and interest costs have to be on a sustainable path. But governments also have balance sheets. Gold reserves cannot pay day-to-day expenses, but they might be used as part of a new financing arrangement.

Perhaps some of the keys to resolving the debt crisis are already on governments’ balance sheets.

This does not mean the United States has announced a gold-bond program, or that a gold-linked bond would solve the debt crisis. But when debt, inflation, government bond markets, gold and a new group of advisers all enter the same conversation, it is worth paying close attention.

Gold may no longer be just a reserve asset on an old balance sheet. It could be part of the next government bond.

Hold on to your hats.

–Marko Viinikka
Founder, CEO
Voima Gold Oy