In recent times, the Treasury and the U.S. government have pointed to gold-convertible bonds as a new tool for achieving lower interest rates with which to finance the financial system. Furthermore, this could build trust in government debt. The logic is simple: purchase a bond and receive a fixed interest rate, but, at maturity, the investor could choose between receiving USD or a quantity of gold (determined in advance).
This mechanism could offer investors protection against a potential depreciation of USD, as the instrument is backed by gold. In addition, the Treasury or the FED could lower interest rates, given that the loan is backed by gold in this manner. The mechanism functions similarly to TIPS (Treasury Inflation-Protected Securities). These bonds could have a maturity of 50 years. [Shelton, 2024]
The US Government argues there are enought gold in reserves. The most critical is another situation. In the past—before 1933—the USA had issued debt backed by gold. However, during the Great Depression (W. Churchill), the country nullified this clause and defaulted on its commitment; subsequently, the US devalued the dollar against gold. A situation analogous to a default occurred in France with the "Giscard loan" (indexed to gold) in 1973. Finally, another default time when was the US broke the USD gold-standard, with R. Nixon. In all cases, nobody gets the gold. The real debate is: why trust a country that lacks credibility, is in decline, has no incentives to comply, and has a track record of non-compliance?
The neural basis for these theses is a lack of confidence in the US Government and USD. The problem is nobody want their fast fall because, all current debt will fall and everyone lose. Due to above, the underlying asset will be gold. Nevertheless, gold is another asset that can be easily manipulated with derivatives financials instruments. In addition, the U.S. can also—by virtue of its control over the financial system—impose asset freezes (as happened with Russia) and indirectly trigger defaults.
The Shanghai Stock Exchange could be a great counterpart. Perhaps, the main problem is the lack of trust in Chinesse goverment. For this reason, the U.S. is desperate to invade Venezuela and other countries with large gold reserves. It would allow the U.S. to continue the fallacy regarding the strength of the USD. What is clear is that it will also have no incentive to comply.
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J. Joel Padilla
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