An old bond strategy is new again — and it's good as gold

If you already thought gold investing was a fringe strategy, you might want to sit down for this one.

A fledgling, but interesting operation out of Scottsdale, Arizona, is hoping to turn back the clock by introducing gold bonds that are purchased and repaid with actual gold.

The company, Monetary Metals & Co., already has one deal under its belt and is jockeying to gain traction by reminding folks that this was a common practice about 90 years ago before FDR’s Gold Reserve Act put the kibosh on all the fun.

In addition to a gold leasing business that enables people to essentially rent out their gold to companies for yields between 2% and 4.5% a year, Monetary Metals last month orchestrated the issuance of its first gold bond by Australian gold mining company Shine Resources.

The one-year bond, worth approximately $6 million, or 3,000 ounces of gold, was purchased by investors for a minimum buy-in price of 10 ounces of gold, which is currently trading at around $1,900 an ounce.

Under the terms of the agreement, investors earn a 2% yield on their bond until their share of the proceeds is withdrawn and used by Shine Resources, at which point the bond yield jumps to 13% annualized, net of fees.

Keith Weiner, founder and chief executive of Monetary Metals, said the initial bond offering was oversubscribed, suggesting liquidity options for any investors looking to cash out (um, gold out) before year's end.

Weiner said the next gold bond issuance, involving an unnamed public company based in Australia, will be in the 50,000- to 70,000-ounce range, or between $100 million and $140 million, and have a five-year maturity.

To navigate the logistics of using gold as a currency, Monetary Metals has partnered with New York-based broker-dealer Ashton Stewart to help investors acquire the gold needed to buy the bonds.

The physical gold is held at the Delaware Depository, the country’s largest nonbank depository for precious metals and gold futures.

"Before Monetary Metals, gold is just a pet rock, or just a lump of metal, in the words of Warren Buffett."

Keith Weiner, founder and CEO, Monetary Metals

The arm’s-length service of buying and holding physical gold is part of Weiner’s selling point in trying to get investors on board with the idea of replacing dollars with gold for the buying and selling of the bonds.

“We’ve done the research, and if you’re holding gold in a depository you have about 50 basis points of carry cost,” he said. “Even if you’re owning gold or gold futures in an ETF there’s a carry cost.”

It’s true that, while dirt cheap at just 40 basis points for the SPDR Gold Shares ETF (GLD) or 18 basis points for SPDR Gold MiniShares ETF (GLDM), there is still a cost of gaining exposure to gold.

NOT JUST A LUMP OF METAL

While Weiner makes a convincing case for gold as a small inflation hedge in a world where central bankers and governments are not even pretending to care about debt levels, he isn’t arguing for a gold-bug-style race to the precious metal. But he is saying if you’re going to own gold, why not earn some interest on the tangible asset while not paying a fee to own it.

“Before Monetary Metals, gold is just a pet rock, or just a lump of metal, in the words of Warren Buffett,” Weiner said. “That’s true about a lump of metal, and it is speculation. But when you put a yield on that, it becomes a financial asset.”

Weiner also acknowledges the uncertainty around the price of gold, that does fluctuate and is only up about 70% over the past five years. But so does the value of the dollar fluctuate, and that’s what Weiner is pitting payments in gold against.

“There is uncertainty about the future price of gold, but the dollar is being relentlessly debased, and the value of gold cannot be debased,” he said.

Weiner rightly cites the Federal Reserve’s target inflation rate of 2% per year, which translates to an equal 2% debasement of the dollar. And just because the Fed has been falling short of its inflation target is no reason to assume it will stop trying.

“You’re not making a huge bet on the price of gold because the tail risks are all in the direction of a radically higher gold price, because the global central banks have gone all in on unprecedent monetary policy in the wake of 2008, and with Covid they’ve have gone even further,” he said. “Risk of inflation went up dramatically last year. With the CARES Act and supplements to it we’re heading toward $6 trillion deficits. With those kinds of deficits, you have to be asking where it all is going. Meanwhile, you look at gold sitting there in the corner.”