Both
governments and mining companies issue gold-backed bonds as a means of borrowing
money in the capital markets, although the precise formula varies. Among government
bonds, the best example is the French Rente Giscard issues in 1973 which matured
on 1 January 1988. This bond carried a guarantee that both the seven per cent
interest and the maturity value of the bond were indexed to the price of a 1 kilogram
bar on the Paris Bourse if the official link between
the value of the French franc and gold was severed during the lifetime of the
bond. In the event, it had been, so the maturity value was based on the average
Paris gold price over the last thirty trading
sessions of 1987.
Gold mining companies, especially
in North America, have issued bonds to raise finance, usually at 7.5 per cent
and often linked to gold warrant calls
on their future production. Such bonds differ
from a gold loan in that they offer direct investment
opportunities for the holder and have been known to be issued with long maturity
dates. The rationale behind the issues is to take advantage of gold’s perceived
counter-cyclical behaviour, which means that when all other investments are under-performing,
the gold price might rally.