Tuesday 11 October 2016 by Opinion

Income in a crisis – gold bonds

Volatility is never “expected” by definition, but the chances of more volatility are much greater in the next few months as we head into an extraordinary US election and the US Fed attempting to raise rates again.  Gold producers’ corporate bonds make a strong income producing hedge in such times


Following up from last week’s note, “Gold: Have your hedge and eat it too”, this week we look at how gold has performed in financial market crises in recent years.

Below we look at 6 month periods surrounding some of the volatility producing events and fears over the last ten years.  None of these are Australian events as there hasn’t been an Australian event that has created volatility for our markets in the past ten years, a telling fact in itself.

Figure 1 shows how five different investments have performed during these crisis periods.  The colour coding reflects how the investments performed relative to each other during that crisis, eg even though Gold Bonds AUD (gold producers’ corporate bonds AUD value) lost 5% in total value in the first crisis period, they were the second best performer after gold itself and so are shaded light blue. 

Insights from this data:

  1. ASX Gold Shares were in fact the worst place to hide in a crisis.
  2. Gold itself performed well, but not as well as ordinary corporate bonds
  3. Gold Bonds were the strongest performer
  4. Corporate bonds, whether gold producers or not, were never the worst performer, even if the crisis was directly related to interest rates (Taper Tantrum or Fed raising rates)

Figure 1: Total returns from gold, equities and corporate bonds during the largest crises in the past decade (all returns in AUD)

Source: ASX, S&P, Federal Reserve Economic Database, Markit


Gold remains a good hedge in volatile times. But as we concluded last week, gold producers’ share prices do not rise with the price of gold; in fact, they are negatively correlated.  On the other hand, the bonds of gold producers are a good proxy for investing in gold as they are positively correlated.  Gold producers’ bonds will not rise (or fall) as much as the gold price does, but the potential lower gains are compensated by something that investing in gold does not offer - income.

For Australian investors looking to invest in gold as a hedge in an increasingly uncertain economic environment and one with increasingly inflated equity markets, gold producers’ corporate bonds make for a great option.  Yield to worst* on Newcrest, Kinross and IAMGOLD bonds range from 4.86%pa to 6.62%pa, with income from 5.59%pa to 6.67%pa.  These are all in USD, creating the hedge effect discussed above.

*The yield to worst (YTW) is the lowest yield an investor can expect when investing in a callable bond. More information on yield to worst can be found here.External link - opens in a new window