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Gold is not like a zero coupon bond

by on May 16, 2016

Gold analysts like to describe gold as being like a Zero Coupon Bond. But the analogy seems a weak one to me.

A zero coupon bond means an investor will receive a known par value at a known date in the future, so that if they hold it all the way to maturity the investor will know their nominal return in advance (assuming no default occurs). If you buy gold you are actually buying an asset much more like a zero coupon perpetuity. Just like a perpetuity the holder can sell their gold at any time but will be uncertain of the payoff when they do, as there is no promised par value.

For central banks, who can lease their gold more easily than ordinary investors, gold is different again. For them it is much more like a variable rate perpetuity. The graph below shows the difference between a buy and hold strategy; and a buy, lease and reinvest strategy for a central bank. The bank is assumed to own gold from 1989 when gold lease rate data starts and the chart shows the difference returns between the strategies if the bank were to sell their gold at any point after that. Long leases (12 months) were a better postion than a simple buy and hold over the whole period. Short term leasing (1 month) has been more variable and would have gone from profitable up until the turn of the century to mostly loss making since, owing to the fact that short gold lease rates are frequently negative .


 But regardless of a central bank options, the fact that no one is promising to pay you back the principle in future when you buy gold makes it a very different asset to a zero coupon bond.



From → Gold, Opinion

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