Gold Bonds, Gold Bond
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Gold bonds or gold-convertible bonds are debt instruments that are typically issued by gold mining firms. These bonds are secured by a stored quota of gold and their yield depends heavily upon fluctuations in global gold prices.
Not many companies in the US sold gold bonds before the 1850s. The American Civil War in 1865 led to extremely high inflationrates, resulting in significant deflation in the value of the US dollar. This was followed by recession in 1872. During such trying times, more and more companies began promising repayments in gold, rather than paper money, to attract loans. The popularity of gold bonds among investors rose further when, in 1971, President Nixon took the US dollar off the gold standard.
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Gold Bonds: How do they work?
Gold bonds are typically issued by gold mining companies. They are purchased by investors who wish to gain exposure to fluctuations in gold prices without physically buying the metal. With the purchase of gold bonds, the issuer gets the right to convert the bonds into gold. Due to this right, gold bonds typically offer low interest rates. The gold bonds also act aspotential gold sales at a future date.
Advantages of Gold Bonds
The advantages of investing in gold bonds are:
- Convenience: One can gain exposure to gold without physically buying the metal. The investor, thus, does not need to store or insure gold.
- High liquidity: Gold bonds offer instant conversion to physical gold or hard cash. Also, this easy conversion boosts the demand for these bonds.
- Safety: Unlike other bonds, the returns on gold bonds are shielded from geopolitical turbulences in a country.
Drawbacks of Gold Bonds
Against the backdrop of the global financial crisis of 2008, gold bonds have emerged as a save haven for investors. However, one must not forget that gold bonds can be prone to the following risk factors:
- Strong fluctuations in gold prices will result in substantial fluctuations in the price of gold bonds.
- The mining company might stop the production of gold when mining costs exceed global gold prices. In such cases, the redemption of existing gold bond will yield lower returns.
- These bonds have a lower rate of return than do other variable-income debt instruments.
