How to Own Gold AND Earn Interest

One of the principal reasons investors typically cite for not holding their money in gold, and instead saving their cash in a government sponsored currency like Dollars, Euros, or Yen, is that gold doesn’t pay interest.

I’ve struggled with this idea for a long time. Dollars don’t earn interest by themselves either. They only acquire their interest earning properties when lent to another party to pay it back. So it’s the borrowing and lending of an asset that creates the interest, not the asset itself. And the market to borrow and lend dollars is enormous.

True, it’s much harder to borrow and lend gold. But it is possible to earn something resembling interest on gold. Over at Hard Assets Investor, Brad Zigler writes about how to do it. Here are a few excerpts:

Who Says Gold Doesn’t Earn Interest?

Written by Brad Zigler

Monday, 04 January 2010 10:12

Real-time Monetary Inflation (last 12 months): 1.5%

Gold aficionados have for many years contended with the plaints about the metal’s sterility. “Gold doesn’t earn interest” is a constant refrain heard from nonowners.

But that’s not necessarily true. Gold can offer a money market return regardless of its price trajectory. Spreads between gold futures’ delivery months, in fact, implicitly reflect short-term rate expectations. The gold market, through cash-and-carry operations, tells us what traders think short-term rates ought to be.

A cash-and-carry is accomplished by taking possession of gold through nearby futures (or the cash market) and redelivering the metal against a forward contract. A December 2010 gold contract, for example, might be purchased with the intent to take delivery and store the metal until the expiration of a December 2011 future sold short. If storage costs ran $10 per month per 100 oz. bar, a return of 1.1 percent could be earned currently. That’s a 63 basis point (0.63 percent) premium over one-year Treasurys.

In fact, the rates for one-year cash-and-carries - essentially “risk-free” transactions - have been, on average, 60 basis points above Treasurys this past quarter. Thus, the market’s pointing the way to higher Federal rates. How so?

Posted on January 5th, 2010 under Commodities, Currencies • RSS 2.0 feed • Leave a response, or trackback

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Written by Brad Zigler
Monday, 04 January 2010 10:12
*Real-time Monetary Inflation (last 12 months): 1.5%*
Gold aficionados have for many years contended with the plaints about the metal’s sterility. “Gold doesn’t earn interest” is a constant refrain heard from nonowners. But that’s not necessarily true. Gold can offer a money market return regardless of its price trajectory. Spreads between gold futures’ delivery months, in fact, implicitly reflect short-term rate expectations. The gold market, through cash-and-carry operations, tells us what traders think short-term rates ought to be. A cash-and-carry is accomplished by taking possession of gold through nearby futures (or the cash market) and redelivering the metal against a forward contract. A December 2010 gold contract, for example, might be purchased with the intent to take delivery and store the metal until the expiration of a December 2011 future sold short. If storage costs ran $10 per month per 100 oz. bar, a return of 1.1 percent could be earned currently. That’s a 63 basis point (0.63 percent) premium over one-year Treasurys. In fact, the rates for one-year cash-and-carries - essentially “risk-free” transactions - have been, on average, 60 basis points above Treasurys this past quarter. Thus, the market’s pointing the way to higher Federal rates. How so?