This is a gold bond bought by the President and Fellows of Harvard College, on 27 Nov 1905. The amount is $5,000 payable in “the Gold Coin of the United States of America”. That coin was the Liberty Head. The double eagle $20 coin had just under 1 troy ounce (i.e. 31.1 grams), or 0.05oz per dollar. Thus $5,000 meant 241 7/8 ounces.
The interest rate was 3.5 percent, paid semiannually until the principal was to be returned on 1 Feb 1998—a 92-year maturity. This may seem incredible, but the gold standard had a stability that we can only dream of today.
Unfortunately, less than 30 years later President Roosevelt decreed all gold clauses void. In 1998 (assuming the bond hadn’t defaulted), Harvard was finally paid $5,000. This is a loss of 93% of its original investment, as it was then worth less than 17oz gold.
There has not been a gold bond in the U.S. for 85 years. Yet a government (which I will be able to talk about soon) is moving towards issuing gold bonds. I have written tens of thousands of words on the benefits of gold bonds to investors. Today, in light of this impending momentous event, I am writing about the benefits to the issuer of the bond, including government issuers. There are also benefits to mining companies within such government jurisdiction.
Photo: Keith Weiner
Benefit to Government
The Federal Reserve has a policy of two percent per annum debasement of the US dollar. Other central banks around the world have similar targets, for example both the Bank of England and the European Central Bank set their targets at two percent. Creditors should prefer gold assets over dollar-, pound, and euro-denominated assets because gold is not subject to this debasement. The 10-year Treasury yields 2.9% as I write this. Assuming that the Fed hits its target without overshooting it, then the central bank is robbing the investor of most of their return.
However, this leads to a question. For the very reason that creditors should avoid dollar assets, shouldn’t debtors prefer dollar liabilities? Isn’t it good to borrow in a falling currency? Repaying in devalued dollars should ease the burden of debt. In 2001, the dollar was worth over 122 milligrams of gold. By 2011, it had declined to less than 16mg. Any gold producer who borrowed dollars in 2001 could repay that debt for 87% less gold.
Matching Gold Debt to Gold Income
There’s just one problem. The decline is not smooth, but quite volatile. The dollar can go up, sometimes sharply (as in 2013). By 2015, the dollar was up to about 30mg. Any gold producer who borrowed dollars in 2011 would have to pay 90% more gold just four years later.
If a debtor has a dollar income (as nearly everyone does) then it can ignore the dollar’s ups and downs. When the dollar goes down, both income and expense goes down. When the dollar goes up, income and expense go up.
However, if your income is gold, then any drop in the price of the metal can strain your capacity to pay your dollar debts. A falling price of gold is just the flip side of a rising dollar.
Debt should be matched to the income that services it. If the income is gold, then the debt should be gold. And if you’re a government which taxes gold mining activity, your income is gold. This is true, whether the tax is remitted in gold metal, or whether the miner pays the equivalent value of the metal in dollars. If the price of gold drops, then your revenue drops. If you have dollar-denominated debt, then a gap will open up in your budget.
