In Praise of a Genuine Gold (Not Gold-Backed) Bond
Keith Weiner at Monetary Metals asks Who Would Invest in a Gold Bond?
Berkshire Hathaway CEO Warren Buffet famously dismissed gold. “Gold has two significant shortcomings, being neither of much use nor procreative.”
Nevada now has legislation pending, to enable the state to issue gold bonds. Not gold-backed bonds, which are a way to sink deeper into debt, to borrow more dollars using gold as collateral. True gold bonds, which are denominated in gold, pay interest in gold, and return investors’ principal in gold.
Interest. That is what Warren Buffet declared that gold has not got. And now an AA-rated state government is close to paying interest on gold. That is an interesting development (permit me my little pun). But there is a challenge.
Although there is no downside, and no special interest groups are harmed, the bill might not pass. The Democrat majority who controls the state legislature could perceive the gold bond as a Republican partisan measure. I can say that this assumption is totally wrong. Most mainstream Republicans are not especially fond of gold. For example, it took Arizona five years to pass its gold legislation, with three vetoes by two Republican governors.
Unfortunately, politics has become hyper-partisan. If Nevada Democrats perceive this as a Republican bill, they will vote it down. Since they are in the majority, they will kill the bill. That must not happen! The decay in our monetary system is at an advanced stage. No one can predict how much time remains, but I can say one thing with absolute certainty. We need to begin developing an alternative. We need to begin remonetizing gold, and that means gold bonds.
So I am going to ask for something, which I have never done before. If you would consider buying a gold-bond, please sign my Nevada Gold Bond Petition. If you are not interested in buying but think the state of Nevada should try this out, please sign or promote the Gold Bond Petition at Change.Org.
I ask Weiner to explain why this was such a good deal for Nevada. Here are some of the things we discussed on the phone yesterday evening and via email today.
Over 160 tons of gold are produced annually in Nevada. The state tax on this is 5%, or about 8 tons (a bit less due to smelting and other costs taken off the top). That was worth over $320 million at recent prices. Nevada counts on this revenue to cover expenses. But if the gold price drops 10%, then revenues would drop $32 million. Since expenses don’t go down, there is a budget deficit.
Gold bonds eliminate Nevada’s gold price risk. Gold bonds are like regular bonds, except they pay gold. Because the payments are gold, the debt service expense falls with the gold price. If tax revenue drops and bond payments also drop the same, then there is no impact to Nevada finances.
And there’s a bigger benefit. Nevada can reduce its debt at a discount.
To do this, swap the gold bond for outstanding dollar bonds. Direct gold bond buyers to bid not in dollars, but in outstanding Nevada paper. The auctions set the exchange rate, how many old dollar bonds are retired to get the new gold bond. For example, the state issues a 1,000 ounce gold bond. The current gold price is $1,250 per ounce. Buyers might offer $1,250,000 of bonds.
However due to inflation, a dollar to be paid in the year 2028 is worth less today. Many investors will prefer gold bonds to dollar bonds (it only takes a few). They will happily trade more than $1.25 million of dollar bonds for a 1,000 ounce gold bond. This discounts the dollar bond, retiring more dollar bonds than the value of the gold backing the gold bond.
If the market sets a rate of $1.5 million per 1,000 ounces, it’s a 20% discount. Nevada cuts $250,000 of debt with one 1,000 oz gold bond. Even at 10%, the total benefit to the state could be $1 billion.
In addition to the state of Nevada, miners would also benefit by raising funds via gold bonds instead of dollar-denominated bonds.
Here's a longer Monetary Metals article on the Benefits of Issuing Gold Bonds.
Please Sign the Petition
If you are a potential buyer, please sign Keith's Nevada Gold Bond Petition. If you are not interested in buying but think the state of Nevada should try this out, please sign or promote the Gold Bond Petition at Change.Org.
Mike "Mish" Shedlock