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What are gold bonds?

What are gold bonds and are they a suitable investment for private individuals?

January 19, 2012

One Answer

  1. Trustable Gold Posted 

    Definition of gold bonds

    Gold bonds and gold-convertible bonds are debt securities. Gold bonds have primarily been issued by mining companies, but there were also some issues of gold bonds by governments.

    The issuer of a bond in general, i.e. a corporation or government, owes the lender (i.e. the bond holder) interest payments and a repayment of the principal at the end of the maturity.

    Whereas the interest payments and principal repayment are normally payed in a currency such as the U.S. Dollar, in the case of a gold bond the payments are made in amounts of gold. A gold-convertible bond gives the bond-holder the right to exchange the bond into gold.

    Gold Exchange Traded Commodities

    Gold bonds are not to be confused with Gold Exchange Traded Commodities. Gold ETC are bonds or notes that are typically backed by assets, most often by gold. Gold ETC are issued by banks or asset management companies. Gold ETC sometimes allow withdrawal of physical gold but typically they are just sold for cash by the investor.

    Characteristics of gold bonds

    Gold bonds offer investors interest payments and a repayment in gold and gold-convertible bonds offer the investor the exchange for physical gold. Gold bonds therefore can provide a hedge against possible currency devaluations (e.g., in case of high inflation) or major risks like global recessions or geopolitical risks. The investor, who purchases a gold bond, acquires a claim for gold, which will be paid out in the future.

    Gold bonds or physical gold investments?

    Unlike direct investments in pyhsical gold, e.g. by way of professionally vaulted gold, the holders of gold bonds or gold-convertible bonds do not acquire direct ownership in gold, i.e. legal property of gold. A gold bond is a debt instrument and the holder of such a bond has only a claim against the issuer, typically a gold mining company. In case of a default of the issuer, the bond holder is just one of potentially many creditors and may not get the full amount of gold he is entitled to. The holder of a gold bond therefore bears a counterparty risk. On the other hand, in contrast to a direct gold holding, a gold bond pays an interest, even if the interest rate is regularly below interest rates for normal bonds.

    Risk-averse investors should carefully review issuers of gold bonds and their terms and conditions or choose to acquire direct gold ownership, if they want to avoid the counterparty risk of a gold bond.

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