Over 160 tons of gold are produced annually in Nevada. The state tax on this is 5%, or about 8 tons (a bit less due to smelting and other costs taken off the top). That was worth over $320 million at recent prices. Nevada counts on this revenue to cover expenses. But if the gold price drops 10%, then revenues would drop $32 million. Since expenses don’t go down, there is a budget deficit.

Gold bonds eliminate Nevada’s gold price risk. Gold bonds are like regular bonds, except they pay gold. Because the payments are gold, the debt service expense falls with the gold price. If tax revenue drops and bond payments also drop the same, then there is no impact to Nevada finances.

And there’s a bigger benefit. Nevada can reduce its debt at a discount.

To do this, swap the gold bond for outstanding dollar bonds. Direct gold bond buyers to bid not in dollars, but in outstanding Nevada paper. The auctions set the exchange rate, how many old dollar bonds are retired to get the new gold bond. For example, the state issues a 1,000 ounce gold bond. The current gold price is $1,250 per ounce. Buyers might offer $1,250,000 of bonds.

However due to inflation, a dollar to be paid in the year 2028 is worth less today. Many investors will prefer gold bonds to dollar bonds (it only takes a few). They will happily trade more than $1.25 million of dollar bonds for a 1,000 ounce gold bond. This discounts the dollar bond, retiring more dollar bonds than the value of the gold backing the gold bond.

If the market sets a rate of $1.5 million per 1,000 ounces, it’s a 20% discount. Nevada cuts $250,000 of debt with one 1,000 oz gold bond. Even at 10%, the total benefit to the state could be $1 billion.

Best Regards,

Keith