Debt-crippled euro zone countries could see the yields on their sovereign bonds fall dramatically if they used their gold reserves as collateral for that debt issuance, according to Sylvester Eijffinger, professor of financial economics at Tilburg University.
Funding costs have risen to unsustainable levels for several euro zone countries, forcing them to seek financial aid from their fellow euro partners.
If governments were to use gold as collateral, sovereign credit risk would be reduced and the European Central Bank would no longer have to buy up debt from struggling euro zone members, Eijffinger told CNBC.
The ECB's plan to buy unlimited amounts of short-dated government debt, known as Outright Monetary Transactions or OMT, has been heavily criticized. Although the scheme eased investors' nerves, many analysts argue it will be equivalent to the ECB printing money to finance governments.
Using gold as collateral would pose fewer risks to the ECB's balance sheet than the ECB's recently launched bond-buying program, Eijffinger said.
Of all euro zone countries struggling with high debts, Portugal and Italy would benefit most from the method because they hold large reserves of gold. Spain, Ireland and Greece would not gain as much.
Italy holds 2450 metric tons of gold, and Portugal has 383 metric tons of gold. This compares to Spain's 282 metric tons of gold, and Greece's 112 metric tons of gold, according to the World Gold Council.
Italy holds gold reserves of 24 percent of its two-year funding requirements, for Portugal this is 30 percent, according to the World Gold Council.
A recent EU study titled "A More Effective Euro Area Monetary Policy than OMTs -Gold-Backed Sovereign Debt" also recommended that the central banks of euro zone countries use gold as collateral for highly distressed bonds to allow the euro area to reduce financing costs, like it did in the past.
The study, authored by Professor Ansgar Belke University from the Duisburg-Essen university in Germany shows that in the 1970s Italy and Portugal employed their gold reserves as collateralfor loans from Germany's Bundesbank, the Bank for International Settlements (BIS) and other institutions like the Swiss National Bank.
"Italy received a $2 billion bail-out from the Bundesbank in 1974 and put up its gold as collateral. More recently, in 1991, India applied its gold as collateral for a loan with the Bank of Japan and others. And in 2008, Sweden's Riksbank used its gold to raise some cash and provide additional liquidity to the Scandinavian banking system," the study said.
"It would be more transparent, would not be inflationary and would foster reforms," the study said.
There are some restrictions to using gold as collateral however.
Central banks of euro zone countries along with the Swedish Central Bank and the Swiss Central Bank signed a contract in 2009 which stated they would not put more than 400 tons of gold on the market over the course of the five years that followed.
Since the euro zone was formed, all of the gold that euro zone member states hold has been pooled by the ECB. Member states' central banks are not allowed to make decisions over these holdings without getting approval from the ECB.
"This may limit the options until 2014, but a country will only have to sell if [it defaulted on its debt] they do not live up to all the conditions that are being set ," Eijffinger said.
Dr. Moorad Choudhry, treasurer at RBS corporate banking, told CNBC that the option "is not a solution to the euro zone's structural problems."
"It would just be kicking the can down the road and wouldn't solve anything in the long term," he said.
"It holds troubled euro zone countries back from taking any critical decisions. The structural problems of these countries need urgent attention, and an ability to borrow cheaper than what they are paying now doesn't address these problems. As a technical option the idea works, but for more emotional reasons it probably won't happen ," Choudhry said.
The ECB declined the comment on the possibility of using gold as collateral.
The euro area holds 10,792 tonnes of gold, which is about 6.5 percent of all gold that has ever been mined and worth some $590 billion, according to the European Parliament study.
—By CNBC.com's Liza Jansen; Follow Her on Twitter @lizajansen