Gold Backed Bonds - An Alternative To European Austerity?

Tyler Durden's picture

From GoldCore

Gold Backed Bonds - An Alternative To European Austerity?

Today’s AM fix was USD 1,670.25, EUR 1,243.39, and GBP 1,058.93 per ounce.
Yesterday’s AM fix was USD 1,677.00, EUR 1,258.06, and GBP 1,059.18 per ounce.

Silver is trading at $31.55/oz, €23.54/oz and £20.04/oz. Platinum is trading at $1,689.00/oz, palladium at $723.00/oz and rhodium at $1,200/oz.

Cross Currency Table – Bloomberg

Gold dropped $17.90 or 1% in New York yesterday and closed at $1,667.70/oz. Silver slipped to a low of $31.60 and finished with a loss of 1.8%. Most traders were at a loss to explain the counter intuitive losses given the bullish backdrop.

Gold in Euros – 5 Years (Daily) - Bloomberg

Overnight gold bounced back from an almost 2 week low and was again especially strong in yen terms - strengthened by the Bank of Japan’s stance on aggressive monetary easing.

Russia’s Central Bank said it will continue to buy gold bullion as it seeks to diversify its foreign reserves away from paper assets, such as the euro, it views as more risky.

At Davos, George Soros, one of the largest buyers of gold in the world today, warned of currency wars and that “interest rates are going to take a big leap” - probably this year.

Bank of America warned of a “bond crash” comparable to 1994 that would trigger a string of upsets across the world. In 1994, the bond crash bankrupted Orange Country, California, and set off the Tequila Crisis in Mexico. 

Today, the world is much more fragile and the increasingly likely bond crash could lead to a Lehman style systemic crisis – but on an even greater scale.

These risks and the recent price drop has fuelled buying interest in physical metal and a minority of smart money gold buyers continue to diversify into allocated gold on the dip .

At 1500 GMT new U.S. new home sales data is released.

Across Europe, economic growth is faltering and in many Eurozone countries, sovereign debt yields are dangerously high and austerity measures are creating much hardship.

The World Gold Council has been exploring ways that Eurozone member states could use their gold reserves to help bring down the cost of borrowing.

The Eurozone is the largest sovereign holder of gold in the world and has over 10,000 tonnes of gold reserves. The Eurozone, including the ECB, has 10,787.4 tonnes of gold worth over a significant €450 billion.  Some of the countries worst affected by the crisis, including Portugal and Italy, own a significant proportion of these assets. Italy alone holds nearly 2,000 tonnes of gold. 

The Eurozone as a whole has 32.6% more gold reserves than the U.S. which has 8,133.5 tonnes of gold.

Due to the ongoing global debt crisis and significant systemic and monetary risk, it would be financial and monetary folly of the highest order to sell gold. Indeed, prudent creditor nation central banks are continuing to add to their gold reserves.

Most agree that outright sales of gold are not the answer. Aside from the obvious problem that the outstanding debt level of the struggling European countries far surpasses the value of their gold reserves, existing EU laws prohibit such a move to finance governments, as do the provisions of the Central Bank Gold Agreement, which limits gold sales.

To illustrate this point, the gold holdings of the crisis hit Eurozone countries (Portugal, Spain, Greece, Ireland and Italy) represent only 3.3% of the combined outstanding debt of their central governments.

A one-time sale of all of their gold reserves would probably not cover even one year’s worth of their debt service costs. This would be akin to an individual selling everything they owned in order to make one month’s mortgage payment.

However, there may be an alternative to selling gold for desperate cash strapped nations facing vicious austerity. The alternative is to use European gold reserves in a way that will buy time for growth to take hold. 

The World Gold Council and leading academics and international think tanks believe that using a portion of a nation's gold reserves to back sovereign debt would lower sovereign debt yields and give some of the Eurozone's most distressed countries time to work on economic reform and recovery.

According to research done by the World Gold Council using the European gold reserves as collateral for new sovereign debt issues would mean that without selling an ounce of gold, Eurozone countries could raise €413 billion. This is over 20% of Italy's and Portugal's two year borrowing requirements. 

The move to back sovereign bonds with gold would lower sovereign debt yields, without increasing inflation, which would help to calm markets. This should give European countries some vital breathing space to work on economic reform and recovery.

Some citizens would be concerned that there may be a risk that the sovereign nations who pledge their gold as collateral could ultimately end up losing their gold reserves to the ECB, or whoever the collateral of the gold reserves are pledged to, in the event of a default.

Unlike currency debasement and the printing and electronic creation of money to buy sovereign debt, under schemes such as Draghi's “outright monetary transactions” (OMT), the use of gold as collateral would not create fiscal transfers between Eurozone members, long term inflation or currency devaluation risk.

The proposal shows how gold is being increasingly seen as a safe haven asset and currency.

Indeed, it suggests that those who have suggested returning to some form of gold standard are not as deluded as they have often been portrayed.

Mobilising Europe's gold is a temporary move which the World Gold Council and leading academics believe will help to create a more permanent solution which in time would help the Eurozone extract itself from its debt crisis.

Europe and the world faces an exceptionally challenging period and unconventional policy responses are called for. 

A gold-backed bond may offer at least a partial solution to Europe’s woes. 

The video 'Leveraging Gold Reserves To Help Lower Eurozone Sovereign Debt Yields' explores why such a measure could offer an alternative to austerity for the Eurozone: 'Leveraging Gold Reserves To Help Lower Eurozone Sovereign Debt Yields' 


Gold Seen by Morgan Stanley Extending Rally as QE3 Runs to 2014 - Bloomberg

Gold bounces from near 2-week low on euro, Japan policy - Bloomberg

Interest Rates Will Spike This Year: Soros - CNBC

Petrol Price Rise On Way As 'Floodgates Open' – Sky News

Russia central bank to keep buying gold: Ulyukayev - Brecorder

Ghana may repatriate Gold reserves from US, Europe – Bullion Street


Video: Gold Price To Rise In 2013 – The Telegraph

Bank of America issues `bond crash' alert on Fed tightening fears – The Telegraph

Video: Dalio's Perspective on Gold's Importance As Diversification - CNBC

Who Are the Whales Buying Gold? – Economic Policy Journal

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GetZeeGold's picture



I'll take the can have the bonds. The Euro was supposed (ok implied...loosely) to be backed by it turns out......not so much.

Ghordius's picture

First: the Euro was supposed to shelter the eurozone from the ravages on the internal supply lines by a possible currency war. Without the euro everyone here in ZH would be joining the speculative forces against the DEM or the Franc or the Peseta, etc. Up to now, it did it's job, mainly through it's size, btw

Second: the Euro was supposed to provide a solution to the 1971 question: "and now WTF?", also called the "it's our (global reserve) currency, and your (to be silent europeans) problem". Up to now, it did it's job

Third: you need austerity if you want to have even one snowflake's chance in hell to survive a return to gold-backed currencies. Because all this "austerity this and austerity that" is nothing else than balancing your budgets. The one and only reason why gold backed improves economies - everybody economizes, i.e. does not go in unicorn fantasy land with debt and so on. It's the same calculatory sense that makes socialism such a lost cause. Up to now, the eurozone sovs are doing this part of their homework

Fourth: nobody can go gold backed as long as King Dollar reigns. Nobody. It would be economic suicide at several level.

Nope, all this gold, irrelevantly where it's stored, it's going to sit on the fences until a completely different monetary environment emerges, so forget about gold bonds, it will continue to be the last part of the FX reserves of the eurozone


even the question is disingenuos: if you emit a gold-backed bond you need a balanced budget - aka austerity, so it's not an alternative, it's only the pious wish of the goldcore people for some gold-backed bonds

Badabing's picture

So let me get this straight.

The European countries that cant “no way in hell” pay back there debt can use the European gold reserves as collateral for new sovereign debt………………..and………… has two years to pay it back.

I smell a gold grab.

Fucking banks!    

jayman21's picture

My nose was smelling the same thing.

Harlequin001's picture

Well at least they got one thing right, gold will solve all the current problems...

as for the rest of it, bollocks.

Glitterbug's picture

No Harley, not all, only 20% of their problems.

But it will create a 100% problem when they have to back a new currency after fiats fail.

If G Sucks is involved, get the hell away from the deal. They intend to end up with the gold, by fair means or foul.

Theosebes Goodfellow's picture

To a certain extent I think we're missing the point. The primary problem, both in the USA and the EU, is one of curtailing spending and cutting liabilities. Until those things become part of the overall gameplan, whatever they chose to use as collateral for their borrowing will be subject to loss, (or default) and theft.

Here's the deal: if you know with certainty that the counterparties, in this case the US and EU governments, are thieves and cheats, why in heaven's name would you lend them money in the first place? Why climb on the crocodile's back if you know that he's going to make supper out of you in midstream?

The inherent problem for this whole story is two-fold. The first is that there are people out there, (namely those floating this idea of gold-backed sovereign debt), who actually believe that these governments are honest, i.e., that they will pay back the debt they are accumulating. The second part is that it puts on display the raw naivete of these people and that they are considered sanguine enough for formulating policy at all. Are you really going to trust the judgement of someone who doesn't know the crocodile when he sees it?

zrussell's picture

<p>Because the "money" to loan is being producd out of thin air (i.e. no risk).  QE3 here is in effect doing the same thing.  Print money- trade it for the "toxic" bank MBS (secured by US land)- watch banks leverege the hell out of it (0% reserves)- wait for the default- get land.</p><p>The only difference is- it's the sovereign gold reserves.</p>

ArgentoFisico's picture

Everyboby keep their fucking hands off my nation's gold!

Ghordius's picture

oh, and to all City banksters still asking for the eurobond: I sincerily hope you get some nasty sexually transmitted disease

Matt's picture

Have I got a deal for you, my friend. You put up your gold as collateral, and I will print some money and lend it to you with compounding interest. Heads I win, Tails you lose.

francis_sawyer's picture

Quick ~ PRINT up some gold 'certificates' & see if the cats lick it up... [While you're at it ~ Why don't you hand me over your guns & ammo & I'll write you a RECEIPT saying that YOU officially own these things]...

Matt's picture

Collateralized Firearm Obligations? Certified Ammunition Swaps? We can put the FIRE in Firearms with some good old financialization.

tuttisaluti's picture

“outright monetary transactions” or better ostrich monetary transactions

NoDebt's picture

Yay!  A new piece of paper that can then be rehypothecated and turned into more leveraged fiat because it's "as good as gold"

GetZeeGold's picture



Let's be checking that attitude at the door little mister.

Matt's picture

Leveraged Gold backed bonds, what can go wrong? 

Step #1: I deposit 1 ton of gold

Step #2: I borrow 10 times the value of the gold, at 1 percent interest for 10 years

Step #3: I buy gold with half of the borrowed money, and use the rest to finance my structural deficits.

Step #4: see step #1.

orca's picture

Great idea, however 2 small problems:
1. Investors would want an audit of sais countries gold reserves, since they have lied about everything else.
2. Which brings me to the second point, related to the 1st one: the stuff is not there!
So nice idea, however not very practical.

Matt's picture

The pessimist's approach to Shrodinger's Cat: It's dead until proven otherwise.

texas goldfinger's picture

If they can still print fiat, then there will never be a default, and gold backing is really just a way to steal yield from investors.  Nothing else changes.

IllusionOfChoice's picture

Yeah, it seems like such a plan could guarantee no default, but on the flip side guarantee a hyper inflation event to protect the gold if things got too hairy.

percolator's picture

Here's a better idea - just default on the bonds and keep the gold.

Killtruck's picture

Serious question: If my father moved all of his retirement into bonds about a year ago to get away from falling equities, didn't he basically just move from the frying pan into the fire? I keep hearing that U.s. Bonds are in a bubble (Max Keiser and others like to state this), but what I'm seeing is more and more people flowing out of equities and into bonds. So I see this is as he's playing a giant game of poker - He moved out of equities and into bonds, but where does he go to get away from a bond collapse? I keep trying to tell him to cash out and buy gold, but he's sold on paper and reluctant on shiny things. There's nowhere else to run though, right?

GetZeeGold's picture



Your father had something you don't.......time.

Killtruck's picture

Ain't that the truth. But there really isn't anywhere to go...even if he piles back into equities to beat the bond collapse, his only hope is the Bernanke put on equities and the PPT not losing control, right?

Thisson's picture

The problem is that equities and bonds are now correlated.  If interest rates rise, that could lower asset values for both bonds and equities.  Gold does well when real interest rates decline.  So if you want to be clever, use gold to hedge the bonds. 

Killtruck's picture

Thanks, Thisson. I take it from your response that you feel the safer of the two (bonds v. equities) is to stay with bonds (obviously with a gold hedge)? Are there any other paper assets that I can show him that would be better than bonds?

Thisson's picture

Not that I can think of.  But the saying "dont put all of your eggs in one basket" comes to mind.

Donnie Duvanie's picture

Just wait until the US offers to repatriate Germany's Gold with USA 'Gold Backed Bonds', Bitchez! Then the shit will really hit the fan!

The Swedish Chef's picture

Germanys gold will repatriated in an orderly fashion as soon as the miners have dug it out of the ground and the US Treasury has bought it from them.

theprofromdover's picture


But they still will only be able to post one a month over the next 7 years.



Doesn't this mean the gold price would start to get honest?

Schmuck Raker's picture

My respect for the WGC has diminished.

Like so many others, they consider more debt a solution?

youngman's picture

"A one-time sale of all of their gold reserves would probably not cover even one year’s worth of their debt service costs. This would be akin to an individual selling everything they owned in order to make one month’s mortgage payment."

this says it all......not China maybe........I bet in the near future they announce a gold backed money...they really do not need a bond...but they do want to be the worlds leader

GetZeeGold's picture



So what is the real value of gold then?

The Swedish Chef's picture

Aaaaand it´s gone! 


Because that is what happens with collateral when someone defaults on the bonds the collateral is backing. It´s kind of the idea...

See why no PIIGS has done this? 

bigbwana's picture

The documentary THRIVE exposes the Banks and their evil NWO.  Never happen. Thank God!

swabeyjw's picture

Ok, I am in. My only conditions are that I get 2 to 1 leveage going in and I get to hold the gold.

Materially I see little difference between bond default and gold default when push comes to shove and they argue they need to hold the gold or the other 80% will get to costly to renew.

Then again one could look at this as gold mining without the labor issues - games for the twirl heads in Wall Street.

SoundMoney45's picture

Selling assets to sustain unsustainable spending for a few months only benefits those buying the assets.  

Selling a country's paper gold currently on deposit in London and New York to Bullion Banks who are short physical gold clearly benefits the bullion banks, as Gordon Brown can attest to.  Then the Bullion banks can clear the books and banker party continues.  Not so good however, for the citizens in Greece, Italy, France, Portugal, Spain and the like. 

Lemon Squirt's picture

These bonds would be a good baby step towards addressing the real problem, but there is more to do to fix the situation.

The problem is that the US and the UK nominally hold a lot of gold belonging to other countries and simply can't repay it because not only do they not have it, but market conditions make it near-impossible to just go out and acquire it.

This is the real problem that needs solving - how to unwind these claims - because this is at the core of the economic misallocations that are taking place now, i.e. the cover-up is becoming too expensive and threatening the system itself.

Gold-backed bonds issued by these governments which are convertable upon presentation to the *physical custodian* of the gold, i.e. the Fed, is the first step in the right direction. It lets everyone save face.

And they don't have to sold to just anyone. What happens next is these governments then peddle/exchange/trade these gold-backed bonds with the likes of Goldman Sachs, JPM, etc. in return for essentially discharging/wiping out debt issued by these governments held by Goldman Sachs, etc. In fact all debt owed to the US, public and private, could be aggregated by these governments and cycled through this payment mechanism. Preferably after a revaluation of gold.

The result is then that European indebtedness is substantially reduced, the gold delivery problem is handed back to Goldman Sachs, etc. and the US can then deal with the claims within its own legal system, gaining control of its gold problem again. Same procedure for the UK.

sawman's picture

Sounds like a reasonable idea with one major problem. It's based on a widely held assumption that these assholes have the gold their ballance sheets say they do. I wonder how quickly this idea would get dropped if a condition of the bond issue was that each country repatriate and independantly audit it's gold.

MFLTucson's picture

But Warren the con man said Gold was a Barbareic Relic!  Who the hell would want Gold backed bonds??

theprofromdover's picture

Warren, him speak with forked tongue.

He is probably first in line (that is, the insider's line)

ouchtouch's picture

China, is that you?  Seriously, what nation would be stupid enough to put up it's gold as collateral to help it borrow more so it can pay uncollateralized debts?

sawman's picture

Answer- A country that doesn't really have any gold but claims to hold thousands of tonnes held a the Fed vaults or B of E. The reality is the gold is gone and they get to borrow money out of thin air as there really isn't any collateral there. Oh wait haven't we seen similar schemes somewhere before in the banking system. Yet another Ponzi con.

The gigs up shits - don't piss on my shoes and try telling me it's raining. 

Sudden Debt's picture

I also kicked out a gold tooth from this guy. CAN I USE IT TO BACK A LOAN TO BUY ANOTHER HOUSE?!?!?!


edifice's picture

Who wouldn't want: substance-that-has-a-similar-atomic-weight-and-is-microplated-in-gold-backed bonds?

proLiberty's picture

Every public balance sheet has been leveraged to the max it would support.  Shazzam!  A new asset to leverage! And a good one too!  Kick that can down the road as are as it will fly.


Lemon Squirt's picture

No it is not "based on a widely held assumption that these assholes have the gold their ballance sheets say they do"

It is in fact based upon the assumption that 'these assholes do not have the gold.' Read more carefully next time.

The point of the scheme I mentioned was to do a reverse ponzi on the folks who stole the gold and make them eat their own paper. There is no other end game.

There's no reason the Europeans can't double down and pretend it is just as real as the Fed says it is and then sell all that 'paper' gold back to them at the top of a short squeeze as if it really were pyhsical gold. If the Americans won't stand behind their own 'products' then nobody else is going to either.

Gold-backed bonds where the physical custodian is on the hook to deliver makes that happen. The Fed has a huge incentive to want to buy them all up so as to avoid 'making delivery'.