Judy Shelton’s Gold Bonds May Have Found Their Moment

Could Judy Shelton’s gold bonds cut America’s borrowing costs and counter China’s push to build a gold-based alternative to the dollar? Spoiler alert… Yes.

Was Judy Shelton Hired to Build America’s Gold Response?

The recent appointment of Judy Shelton as Counsellor to the United States Treasury is intriguing. With her views on the overreach of the Fed, she’ll find herself in good company with the leadership at both the Fed and the Treasury. An agenda is taking place. Her appointment did not require Senate approval, proxies for the new economic orthodoxy, unlike the stalled gubernatorial nomination to the Fed in 2019/20. She has been specifically appointed to “advise the Secretary on currency policy, with a particular focus on evaluating financial conditions in China.”^[1]

Enter the TTB

Enter the TTB. The idea is a long-dated bond that provides cheap funding to the US Treasury as it gives the holder the option to chose redemption in gold or USD. A simple version is shown below. Assume a $1 million investment with a gold price of $4 thousand per ounce:

• Face Value (Notional): $1,000,000
• Maturity: 50 years
• Coupon: Zero
• Gold Price at Issuance: $4,000 per ounce
• Embedded Future Gold Conversion: 250 ounces ($1,000,000 / $4,000)

The zero-coupon bond paying $1 million is worth around $50 thousand at a yield around 6%. The option to redeem in 250 ounces of gold is worth substantially more but is incredibly difficult to value. More on this later. For now, assume that the US Treasury can extract considerable value from this call option on gold and the purchase price of this bond is $750 thousand.

Purchase Price: Investor pays $750,000.

To keep the optics simple, we’ll assume two scenarios, and two relatively minor movements in the gold price. Please note that the forward price of gold in 50 years is around $70 thousand per ounce^[3].

Scenario A: Gold Price Falls to $3,000 per ounce at maturity

$ value of redemption in gold: 250 ounces × $3,000 = $750,000

$ value of cash redemption: $1,000,000 guaranteed face value

The bond holder takes cash

Scenario B: Gold Price Rises to $6,000 per ounce at maturity

$ value of redemption in gold: 250 ounces × $6,000 = $1,500,000

$ value of cash redemption: $1,000,000 guaranteed face value

The bond holder takes 250 ounces of gold

From the perspective of the Treasury, it has funded at a rate around 0.6% of instead of around 6% by risking part of its gold stock.

Given these, and other technical difficulties, the Counsellor may consider that avoiding private sector pricing is in the Nation’s best interests. A template for this is the Treasury Buyback program. The Treasury General Account (TGA) could be employed to provide a liquid market. The Treasury would provide its own curves for long-term volatility and long-term lease rates. More importantly, it could provide a floor price. The assumption would be Bill financing of the TGA^[4], however, the door would be opened to gold revaluation on the balance sheets of the Treasury and Fed. Decisions on the degree of ring-fencing of gold earmarked for the TTB, opportunity costs of leasing and investor trust would need to be made. The implications of this are far reaching and radical. For now, suffice to say that it limits the spheres of influence of the Fed and the Banking system in monetary policy.

Assuming that the Counsellor is successful in gaining support for the TTB, what purpose does it serve in the Sino-US power struggle? The key consideration is how does an instrument that straddles both the deep and liquid US Treasury market and gold rival an exchange system that is “enveloped” by gold.