A bond that pays interest in gold

Post by **jacob** » Sat Sep 08, 2012 6:52 pm

Is no such thing available? Why not? How to construct the synthetic?

Dragline · Post by **Dragline** » Sat Sep 08, 2012 7:08 pm

Not in the U.S. since 1933. I suppose such a thing could be constructed. I think I would be most worried about counter-party risk. It would also be wildly volatile if it were a long-term instrument.

ToFI · Post by **ToFI** » Sat Sep 08, 2012 7:16 pm

Why you want to do that? You can buy gold with dividend from bonds/stock.

Post by **jacob** » Sat Sep 08, 2012 7:39 pm

@ToFI - To lock in a stream of hard asset payments. Normally dividends are paid in paper money.

mfi · Post by **mfi** » Sat Sep 08, 2012 9:09 pm

@Jacob - even gold does not appear to have had stable purchasing power http://krugman.blogs.nytimes.com/2012/0 ... stability/

Hoplite · Post by **Hoplite** » Sat Sep 08, 2012 11:27 pm

I don't believe there are legal impediments in the US since the law was amended to allow for gold payment clauses in bonds, at least since about 1977. An interesting case where the holders of some old railroad bonds, interest payable in gold until the gold clauses were struck down in 1933, tried to revive them under the change in the law, but alas no luck:

http://www.treasurydirect.gov/instit/st ... _adams.txt
I think that bonds with interest payable in gold are not available because it's hard enough to get paper interest out of a bond, let alone gold, unless you were willing to accept a few micrograms of gold dust as payment

At least until the interest rates go negative, in which case you'd have to send it back

KevinW · Post by **KevinW** » Sun Sep 09, 2012 2:58 am

If you bought an inflation-linked bond and were disciplined about buying gold the minute that coupon payments cleared, that would be pretty close, right?
Or, you could invest directly in a hands-off venture that produces hard assets periodically. The things that come to mind are woodlots, sugar maple crops, and oil fields.

Post by **jacob** » Sun Sep 09, 2012 5:00 am

Or gold mines.
The problem with the ventures is that their cash stream duration tend to be rather long.
The TIPS trick is not as stable as one should think, see
http://inflationdata.com/Inflation/imag ... _chart.htm
if it worked, the red line would be flat---which only appears to hold when some kind of gold standard is enforced.

KevinW · Post by **KevinW** » Sun Sep 09, 2012 9:12 pm

I suppose you could do some fancy footwork with a ladder of gold options synchronized to the coupon payments, to hedge that the payments will be able to purchase a set number of ounces of gold. But such a complicated scheme based on derivatives seems at cross purposes with the idea of hard assets.
Or you could roll your own as some others suggested. I can't see why you couldn't create a private contract with bond-like terms denominated in ounces gold. There might be a critical mass of hard money advocates to form a small but functional market on such instruments.