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Gold’s Value and Government Balance Sheets

by Michael Rozeff

Sometimes people ask me about valuing gold by taking into account the assets that a government
owns, like land, bridges, and highways. Maybe they are thinking of the suggestion that Greece
sell some of its islands in order to pay down its debt. That would indeed improve its cash flow

The thought of Land is what people usually think of first when they bring this approach up, and
that’s what gets us into this analysis; but we’ll hardly even consider Land. It’s really taxes,
income growth, and liabilities that matter far more.

A balance sheet method is feasible. It’s just hard to put numbers on it. Yet it’s worthwhile to see
how it works. This gives us a grip on the qualitative factors influencing the value of a paper
currency. As the value of a paper currency rises, the price of gold in that currency falls. So this
method helps us see what large factors may be influencing the price of gold. It also helps us
understand government finances. We can cut down on a lot of confusion using this approach.

Think of the government as having issued government currency, like United States Notes. That’s
what the Federal Reserve Notes amount to, except that they are issued by a kind of captive
finance subsidiary of the government, which is the central bank. This simplifying assumption is
not important. The Notes issued are liabilities of the government.

A government has a balance sheet. Let all the social capital assets be called “Land” for
simplicity. They include military hardware, ships, etc. They include all sorts of things like
buildings, software programs, intangibles, etc.

The government’s assets include Land, gold, and the present value of future tax receipts. The
latter is the largest asset, I believe. The total annual tax revenues of the United States are running
about $2.2 trillion dollars, down from a high of about $2.7 trillion. Think of forecasting the
future stream of these revenues and discounting them back to the present using some interest rate
or rates. For example, if the revenues grow at 2% a year forever and the discount rate is 4.5%,
then their present value is about $90 trillion.

We forecast the tax receipts into the future and discount them to the present to find their present
value. That’s the major government asset.

On the other side of the balance sheet we have the liabilities. We find their present values too.
They include debts, currency Notes issued, guarantees made, promises made, and the present
value of future spending commitments. We hunt for all off-balance sheet assets and liabilities
and include them too. The present value of all future liabilities is going to add up to a large

Assume gold is the standard of value. This means that all prices are measured in terms of ounces
of gold. What's the value in gold of the currency Notes issued? That’s the question. The balance
sheet gives us an equation: value of assets = value of liabilities. I assume no equity. We solve this
equation for the currency Notes. We find

value of Notes = value of Land + gold in ounces + present value of future taxes - value of debts -
value of guarantees - value of promises made - present value of future spending.

It’s possible that the value of all the assets exceeds the value of all the liabilities. If so, the
government distributes the surplus by reducing taxes. Conversely, the value of the liabilities can
exceed the value of the assets. To get balance, the government might raise taxes, or it might
reduce the liabilities by default or by reducing spending or by cutting back on promises and

We read that for the United States, the present value of the liabilities exceeds the present value of
the assets by a large number, like $60 trillion in real terms. I haven’t done this estimation myself.
I realize I have switched from measuring value in gold ounces to measuring in dollars here. The
idea is the same. There’s a big shortfall.

If this is true, then the value of the currency Notes is not what their face value says. The same for
the other liabilities. Their values are also overstated, since the assets are not large enough to pay
them off. This poses a bit of a paradox. Bankruptcy always poses this paradox. The liabilities
have to be written down in some way. They are promises that cannot be kept. There’s not enough
“money” (actually meaning assets), as Mogambo Guru recently told us in his inimitable way.

Bankruptcy or not, we see from this equation the following. Other things equal, the value of
currency Notes rises (which means the gold price in that currency falls) as the value of Land
rises, as the gold holding in ounces rises, and as the present value of future taxes rises. It falls
(which means that the gold price rises) as the value of debts rise, the value of guarantees rise, the
value of promises made rise, and the value of government spending rises. Of course, if more
Notes are issued and nothing else changes, the price per Note must decline because their value
doesn’t change. That’s inflation. We are not considering inflation in this setup. That’s extra.

We now have a useful way to think about some influences on the price of gold. For example,
other things equal, if economic growth rises (and government spending, debt. and commitments
stay the same), the tax collections go up, and this implies a rise in the value of the currency Notes
and a decline in the gold price. If, other things equal, a government starts up an expensive health
care program, then its currency declines and gold’s price in that currency rises.

Gold rose in Euros recently because Euroland decided to issue more debts and because it inflated
(it issued or promised to issue more Notes, so that the price per Note had to fall, other things
equal.) All these thought experiments always are ceteris paribus. In the real world, this doesn’t
work out so neatly. Several things happen at once and sometimes they are correlated in various
ways. Furthermore, the markets anticipate processes.

It’s possible that a currency is selling at a higher price in gold (or gold is too low) than what the
government assets and liabilities suggest. Why might that be? (1) Maybe markets are slow to
understand the government’s balance sheet, in which case some of us have time to convert that
currency into gold and other assets. (2) Maybe people expect the government to renege on its
debts, guarantees, and promises, but not on its currency Notes. People expect the government to
reduce its other obligations, which will strengthen the currency. (3) Maybe people expect future
GDP to rise so that the present value of taxes will rise.

What I’ve done here is separate inflation’s effect on gold from effects arising from government’s
actions. Inflation, which means more Notes being distributed, will, other things equal, make the
gold price rise. In addition, even if the number of Notes stays the same, their value has to fall
(and gold rise in price) if the government issues more debt while the value of its assets stays the
same. If economic growth improves, tax collections improve. If the growth improves without any
new liabilities being issued, then their value in terms of gold has to rise or gold’s price falls.

I don’t expect it to be easy to relate this model to changes in gold prices in order to explain them
or forecast them. That’s because the reality is so much more complex. The markets may be slow
at times and anticipate at other times. The causal factors operate together, not one by one. Market
prices are quite heavily influenced by technical factors of plain old supply and demand. But I do
think that a balance sheet is a reality that cannot be avoided, so that if we get the balance sheet
framework properly analyzed, we get some kind of a handle on what is going on. Have I done
this analysis properly? I think so, but I don’t know for sure. I haven’t seen anyone else write this
down as I have in this article, so I don’t have much to go on. Think of it as a proposal or a first
step, subject to revision and correction.