The Best Economies for Gold Bonds

Gold bonds are exactly what they sound like: bonds based on gold. While you spend dollars to purchase the bond and your interest is paid in dollars, the actual earnings will be based on the price of the underlying gold asset. These bonds can be issued by gold mines or refineries, or they may be offered by funds looking to hedge the gold they are holding. Gold bonds are considered high risk because the price of gold fluctuates, but they can be profitable in certain economic situations.

Periods of High Inflation

During a period of high inflation, a bond will need to have a very high interest rate in order to remain profitable. Otherwise, the bond could actually lose its value even if it pays back its principal in full. There are a few options to overcome this problem. One option may be to invest in inflation protected securities or bonds, such as Treasury I Bonds. Another option will be to convert your dollars into something more stable, such as the price of gold. The price of gold is not generally stable, but it may be more stable than the value of a dollar in a recession or period of high inflation.

Falling Value of the Dollar

The dollar is valued not just based on what it can purchase in the United States but on its exchange rate abroad. Even if inflation is low, a dollar can be losing value when compared to other currencies like the Pound or the Euro. While it is always an option to invest in these other currencies, foreign currency trading involves a high amount of tax implications. It may be easier to invest in a domestic gold bond, since the value of gold is not tied to the value of the dollar.

Long Term Holdings

If you plan on holding a bond long-term, investing in gold becomes much safer. While the price fluctuates on a daily basis, it will grow on the whole in a long-term period. Of course, there is no safe bet, and many challenges can arise in a long term bond situation. However, the bond is not tied to a flat interest rate, partially overcoming some of these risks. As long as the value of gold holds constant or rises slightly over the time you hold the bond, you are guaranteed to be repaid in full on your investment.

Sophisticated Commodities Knowledge

There are few novice investors in the market today that can accurately estimate how gold will perform in the next five or ten years. However, there are some sophisticated commodities traders who can estimate this to a fairly accurate degree based on analysis. Barring unusual circumstances, they may know when it is a wise time to invest in gold instead of investing in a currency. If you are receiving advice from a trusted commodities broker, you can ask about a gold bond. It is important to realize this will not be a fast profit scheme like some commodities trades. Instead, you will hold the bond for a lengthier period of time.

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