Episode 7: Gold Bonds Are Back, Baby!

Once upon a time, gold bonds were the norm. They effectively financed productive enterprise & generated income for bondholders – until 1933. It took 87 years, but now the gold bond market is reemerging.

• • How a gold bond differs from a gold lease
  • Why borrowing in gold is so appealing to a gold business seeking financing
  • The choice that investors now have for their capital
  • Details on our newly-issued bond
  • How this achievement impacts Monetary Metals in 2021 & beyond

 

Additional Resources

• • Reflections Over 2020
  • Monetary Metals Issues World’s First Gold Bond Since 1933
  • Professor Antal Fekete
  • Austrian Economics

Episode Transcript

John Flaherty: Hello, everyone, and welcome back to the Gold Exchange podcast. I’m John Flaherty and I’m here with Keith Weiner, founder and CEO of Monetary Metals. We are recording this podcast on January 3rd. So happy New Year to our audience. Happy New Year, Keith.

Keith Weiner: Happy New Year, John.

John: So, Keith, you just released your reflections on 2020. As you described it, that was a heck of a year for Monetary Metals with many significant milestones. Would you like to give us a few highlights?

Keith: Yeah, sure. I got on a plane in early February. At the time I booked the flight, I don’t think I’d really heard of Covid. By the time I got on the plane. I’d heard of it. I thought, oh, that was something in China like the bird flu or one of those other things. I certainly didn’t think it would be what it was here. And I flew to Australia where everything was business as normal, the airports are crowded, et cetera.

And I flew to Southeast Asia and in Southeast Asia, the airports were like a ghost town. The airplanes were like 80 percent empty. It was really eerie, really creepy. I got back in time for our annual shareholders meeting March 7, which turned out to be the last Saturday that we could possibly have done it, because I think it was the following Thursday that they declared lockdown and that was it. We only had two investors that couldn’t come, one from China and one who decided he didn’t feel comfortable coming.

Other than that, we had about fifty percent of our equity investors came to Scottsdale for the event. Right after that, obviously lockdown. At first we had no idea what was going to happen. I don’t think anybody did. But what we noticed was a big increase in clients signing up for accounts and inflows of gold as people became much more interested in gold once they started to see first the economic consequences of lockdown and then the government’s ginormous $2.8 trillion CARES act.

Last week, Congress just signed another nine hundred billion. So almost another trillion. So after that, we had good growth in all of our leases, signed some new leases, gold leases, that is, we raised equity capital for the company. We raised about $1.3 million. Just late in the year, raised the first gold bond that the world, certainly America has seen, but I believe the world, since 1933. That is just an amazing, amazing thing. That’s been a lot of years in the coming.

John: Correct me if I’m wrong, but that closed on Christmas Eve. So a Christmas present for the world there. Keith, tell us what is a gold bond and how is it different than the more than two dozen leases that Monetary Metals has brokered since 2016?

Keith: So what makes a lease a lease is that the gold is physically present. We could go on site to any lessee. We could scrape up all the gold, you know, take a scale out of our suitcase, put it on the floor, put all the gold on the scale and then all the gold to match the lease and more would be physically there and adding weight to that scale. So a lease is not credit. It’s not an asset on the balance sheet of the lessee, not subject to bankruptcy risk and is the lowest risk way to earn a return on gold, earning a yield on gold.

A bond is credit. It is lending, in this case gold, to a productive company. In this case, a mining company, who’s using it to…they’re not storing it. It’s not sitting in a vault. They’re selling it in order to pay salaries and buy diesel fuel and tools and hire contractors and all the things that businesses do. And so it’s credit. It’s “OK, I’m lending you this gold and you agreed to pay it back.” And there’s a business plan and capable management team and obviously a gold resource in the ground and all the things necessary and proper to being able to repay. A lease isn’t repaid. The leased gold at the end is simply returned, but a bond has to be repaid in the sense of being amortized. And then, of course, the other difference being the interest rate on the bond is much higher.

John: So this gold bond is issued in gold and repaid in gold. Why would someone want to borrow in gold?

Keith: So in this case, the borrower produces gold. They literally pull gold out of the ground. They convert dirt and rock into gold. So if you borrow in dollars, you now have a currency risk. And that is, what if the price of gold goes down? And if so, then your ability to repay the dollar – remember, you’re selling the gold for dollars in order to repay your loan.

The price of gold goes down. That means you’re getting less dollars for the same gold production. So that risk is one of the things that keeps mining management up at night. And it’s a risk that they can’t really mitigate, although lenders force them to hedge. And by hedging, typically that’s done by selling some of their gold forward. So they enter into a short position on gold. And so then that that flips the risk and as the price of gold goes up, then their hedge book is losing money.

So I remember reading an article in Mining Journal. This is going back almost a year and a half to summer of 2019. And the gold price at that time was already rising significantly in Australian dollar terms. And that article said that of the 14 public mining gold mining companies in Australia that Macquarie Bank follows, that those 14 companies in aggregate had lost just about a billion Australian dollars on their hedge books. And so if they borrow in gold then all that cost goes away, the cost of hedging, all the risk price risk goes away, you know, in either direction.

So it’s a simpler, lower risk, more user friendly finance product that allows the mining company to just match their asset, which is gold production to their liability, which is a gold loan or gold debt. And so just makes it simpler and lower risk and therefore less expensive than conventional dollar financing.

John: So would you like to share a few specifics about this particular bond? What was the return offered to the investors? Who was the borrower? What were the proceeds used for, et cetera?

Keith: So the borrower is a company called Shine Resources in Western Australia, the interest rate on gold that is drawn….so there’s going to be a certain reserve that’s sitting safely in the vault, which obviously pays a lot less. But for the gold that’s actually drawn by the mining company, the interest rate to the investors is 13 percent. So assuming that the full one year maturity of the loan goes to the full term and assuming you had one hundred ounces in there, 13 percent interest means you’re paid 13 ounces of gold as your interest.

So you start with 100, you end up with 113. Term is one year. The mining company may be able to get their thing through production fast enough to repay sooner than that. And obviously that’s good news for everybody.

John: Did Monetary Metals receive any bilateral assurances?

Keith: Yeah. As is typical in our deals, we seek to get all the assets of the borrower as collateral. So that includes the gold-bearing ground.

John: How was this bond received by your investor group? And what were some of the typical questions and or concerns, this being the first one in a very long time?

Keith: A lot of people just have to wrap their arms around…What does this mean and what is it worth if the dollar price of gold goes up? Or down? And then you try to explain, no, look, it’s nothing to do with the price of gold in dollar terms.

Just, you know, if you have 100 ounces, then you get 113 at the end. So a lot of investors asking about that. And then I think generally, pretty excited. And we filled the bond. Most of the investors have an appreciation that this is a historic moment and I’m pretty happy to be part of something that hasn’t been possible for 87 years. Since 1933. And I think they’re appreciative of that.

John: I mean 13 percent interest…Keith, that is a massive payoff. Did that raise any eyebrows in terms of the the risk-reward?

Keith: You know, obviously investors ask questions about that, but I think given the market for, you know, first of all, this is private debt, this is not Treasury bonds and this is not debt that trades in the public market. This is not a Google bond or an Apple bond or IBM bond. It’s a small private company and it’s in Australia, where I think they’re resource rich and a little bit starved for capital. I think the interest rate is appropriate. And I don’t think I don’t think the risk is is too great.

John: So, Keith, you’ve described this bond as an inflection point in the monetary system. I’ve heard you even compare it to the shot heard round the world in terms of its potential impact on said monetary system. Why is this smallish bond to the smallish miner in Western Australia such a big deal? Why is it big news?

Keith: If you look at where the world is today and where it’s been for 87 continuous years since 1933, gold has not had, domestically in the US, gold has not had a monetary role since 1933.

And internationally, Nixon ended gold redeemability of the dollar to foreign governments and foreign central banks. So you know, for going on fifty years gold has had no monetary role. It has just been a dry asset that serves no discernible purpose. And I say that with some awareness of the irony of that. But the mainstream, I’ll call it the Warren Buffett objection.

He says, gold is useless if you buy a lump of gold and you put it in your desk drawer. Twenty years later, you take it out. It hasn’t done anything. You have the same lump of gold. Gold is not procreative nor productive. I believe he’s called it a pet rock. You know, it’s just a speculation that the dollar is going down. A very smart speculation because the dollar is going down and in fact, the dollar’s planners publish right on their website that their game plan is at least two percent, possibly more, annual going down-ness, i.e. debasement, of the dollar every year.

And so if you buy gold, then basically it’s a way of holding savings and avoiding the ravages of that deliberate game plan to make the dollar go down. But they’ve relegated gold to this almost frivolous role of something you bet on. It just becomes another chip in the Fed’s casino. And some people prefer to bet on stocks, and maybe some people prefer to bet on gold. And that’s how it’s been and that’s how the system wants it to be. But gold for thousands of years was used to finance productive ventures, productive enterprises and the investors were rewarded in the form of more gold for providing the finance to enable productive activity to go into production. I keep using and repeating the word production, because that’s the purpose of finance.

And I think it’s easy to lose sight of that, given how much the financial markets have become casinos. But the core of it, it’s about somebody wanting to produce something is currently not producing it. And of course, the world benefits, the consumer benefits by having something else be produced that isn’t currently being produced. And that needs financing, takes money, takes capital to do that. This is the first time in 87 years that gold could be that capital – is that capital – not ‘could be’.

I’ve spent years and years talking about how gold “could be”. Gold is money, money should produce a return in the form of more money. Well now in December 2020, it’s not “could be” and “should be” and “might” and “will be”. It is. Yes, it is. It is now a fact that gold is being used to finance something productive and generate a return for investors.

So it’s an inflection point. Now, for the first time, investors will have a choice.

Suppose you want to invest in something and you’re going to get paid back in ten years. This happens to be one year bond. But if you can do a one year bond, you can do a ten year bond. And we will.  Suppose an investor has a choice to put in one hundred ounces of gold worth of value to be approximate one hundred ninety thousand dollars in dollar terms and be repaid in ten years. What would most investors choose? One hundred and ninety thousand dollars to be repaid in ten years, or would they choose one hundred ounces of gold?

I don’t think it’s pretty difficult to realize that with gold….you know exactly what you’re getting in ten years, the dollar you don’t. If the Fed exactly hits its target, then $190,000 in the year 2031 will be worth about 81 ounces. So the Fed is planning for the dollar to go down by about 19% percent. That’s what 2% compounded annually over ten years is. People now have the choice to whether they want to invest to get a return in gold or whether they want to invest to get a return of dollars.

John: So what does this bond mean for Monetary Metals as a business going forward to 2021 and beyond?

Keith: So, really simply the first thing you have to do is….we did this with leases. We proved, there’s a market of investors who have gold who want to get a return on it because getting paid to have gold is better than paying to store it. Most investors are paying probably three quarters of one percent per year to store their gold. And now we’re giving them a way to get paid instead, two to three percent per year.

So it’s a it’s a swing of close to three to four percent. So you have to prove that there’s the market there. And now we’ve extended gold leases, which are a simpler and lower risk product to bonds, which are a higher yield product. If the leases are paying, you know, roughly two to three percent – we have one lease paying four and a half – and now the bond is paying thirteen percent, it’s a different market and to some degree a different investor.

The investors in the bonds have to be accredited investors, which is not necessarily the case in a lease. And so we’re proving that that is a market there. And now we want to scale it up. Which is the next….so first you have to prove that the market then you have to scale it. But we’re at a point now where we have lots of investors with gold that want to get a return on it. We have a pipeline of prospective borrowers.

And so now it’s a matter of scaling. And so something I say in my reflections over 2020, it’s really interesting for me to go from spending years and years developing my economic thought and going around the world and lecturing about it and writing constantly and just thinking about theory and thinking about how is this going to work. To now, it’s about Business 101. It’s about winning a client, it’s about building systems and processes, it’s about press releases and podcasts and all these things. And so it’s becoming an ordinary business rather than a, “Oooh, gee whiz, wouldn’t it be cool if we could do we could do that?”

It’s an exciting transition for a business to go through.

John: So, Keith, how does this bond – and hopefully the future ones that will follow it –  pave the way back to a gold standard?

Keith: If you look at how the world works, outside of Monetary Metals today, everybody has their income in dollars, everybody has their expenses in dollars. And perhaps most importantly of all, everybody has their debts in dollars.

So if you’re a farmer and you have a square mile of agricultural land that you’re farming and you owe a million dollars, you must service that debt in dollars.

And if you fail to do so, the bank will foreclose and you’re going to lose your farm and probably your house and everything else with it. So it’s the struggles of the debtors that support the value of the dollar because every debtor is frantically working as hard as possible to produce and dump on the bid price in dollars, whatever it is they produce, whether that farmers producing wheat or beef, pork bellies, whether it’s a mining company, whether it’s a factory, whether it’s a distributor, whether it’s a hamburger restaurant, everybody’s producing as much as they can to service their debts.

And so everyone says, well, you should have goals and you should have your own personal gold standard and all these things. But what does it really mean? It just means buy gold and then what? Store it. You have a lump of gold in your desk drawer, as Warren Buffett derides, but store it and then eventually sell it. And hopefully the price is higher. And so gold is serving no role in the broader economy. It’s saving the individual investor from the ravages of monetary debasement, depending on the time frame and how long they hold the gold and so forth. It’s obviously volatile. But it isn’t it isn’t doing anything productive.

Now, for the first time in 87 years, we’re enabling gold to be used to finance something. And as we scale this more and more, not only does gold get pulled into the monetary system because it’s being used to create service and extinguish debt. There is no extinguisher of debt in the dollar system today, which is why the debt necessarily has to grow exponentially. But that’s a whole other topic.

Notice for the first time now, in the world outside Monetary Metals today, everybody has their income in dollars. And so when it comes to spending gold, why would anybody spend gold? You have to take your dollar income and buy gold. And then the vendor has to take that gold and then sell it in order to pay for the cost of goods sold, plus payroll and rent and everything else. So you just have to buy gold and then sell it in order to use gold as a currency. It doesn’t make any sense. And so nobody’s doing it.

Now, our investors are getting an income in gold. So for Monetary Metals investors, it’s not true that all income is dollar income. There’s now gold income. And so I think it’s no exaggeration to say that a simple working definition of a gold standard is when anybody who wants to, can come to the table with their gold deposited and earn interest on their gold, in gold. And so as we scale up and as we bring more bonds and more leases to the market, we are increasingly delivering on that proposition.

John: It’s really fun to ponder the implications that this might have and to to think that this might be the start of something really big in terms of a move back towards sound money.

Keith, this bond is the culmination, as you mentioned, of a lot of years of thought, of toil, of sweat, of persuasion for you and the team you’ve gathered around you at Monetary Metals. I wonder, how satisfying is this to you personally to see this come to pass? And how does it compare to your last successful venture building up that software company?

Keith: You know, there’s a similarity in that, the thing starts as just an idea. You picture in your mind, this is how….the last company was 3D audio for voice communications. And I pictured what that would sound like, two people like on a conference call, talking over each other. And I pictured in this case, you know, what does it take to pull gold out of private hoards, out of hiding? Essentially. Gold goes into hiding. That’s what it does. That’s what even Warren Buffett realizes that and of course, sneers at it.

And I pictured, what does it take to pull it out? Well, it’s interest. I used to have slides talking about that and presentations and so forth, and to go from that, to having demonstrated that objectively, that Monetary Metals offers interest on gold and Monetary Metals, has raised quite a lot of gold. And so there. That’s proven.

And to go from that and then to say, OK, well beyond leasing is going to be a bond market and people will lend their gold to get interest in gold. And to go through all the compliance and all the legal and all the everything to go from crazy theory…and I use the word crazy, with some deliberate emphasis, both as a self deprecating term as well as a wonderment that all this came together. And, of course, as clear as you can picture something in your mind, there’s nothing like objective proof, there’s nothing like actually demonstrating it in reality. And then having done that and now to say, yeah, you know, we’ve issued the first gold bond, it’s done, it’s closed. It’s delivered.

All the investors are in. And all the paperwork is signed, the ink is dry. There are no words to describe what it feels like to go through. You know, for me, I sold I sold my last company in August of 2008, sat bemused watching the entire world crashing in the fall of 2008, and then started to study markets & economics to figure out how to protect myself. That was really my ambition at the moment at that time. And then eventually getting into the studies deeper, eventually developing the ideas that led to my dissertation and led to PhD granted by Professor Fekete and the new Austrian School of Economics.

And then, developing these ideas around, how could you bring about the re-emergence of the gold standard….developing those ideas starting in around 2010, it’s been a ten year journey to actually see the first bond at the end of 2020. It’s amazing.

Keith: Well, Keith, this has been a fascinating discussion today. This gold bond is certainly very exciting and historic news. I’d like to encourage our audience to help spread the word. Thank you for joining us on the Gold Exchange. And from all of us at Monetary Metals, wishing you a Happy New Year and all the best in 2021.