I wanted to write to you today to tell you about commodity bonds. That is, I wanted to tell you about good, fiscally sound publicly traded companies in the commodity sector that issue bonds you can buy. Being a bond investor should be the end-goal for anyone running any portion of their own money.
Bonds are safer than stocks - no one would disagree with this statement. They provide income in the form of regular payments, and they return your principal. It's tough to lose money as a bond investor. You have to seek out risk by searching for bonds with sub-par ratings.
Think about that for a second; no stocks come with any kind of rating. They just exist. But every bond has a very specific rating from at least two rating agencies. And though these rating agencies can be wrong - at least their ratings give you a clue as to what kind of risk you take on when you buy one bond over another.
And when you buy a bond, you have a crystal clear picture of how much you'll get paid. That's what a bond is: a guarantee to pay you a certain coupon payment over a period of time for the privilege of holding your principal. Bonds are essentially loans.
And so, Bonds can default - but they don't go bust very often, especially when you consider a comparison to stocks, which go down all the time. When you lose money in bonds, it's because something went drastically wrong. When you lose money in stocks, that's called a Monday, Tuesday, Wednesday, Thursday or Friday.
So what's the problem? Well, right now, you'd be hard-pressed to find a bond worth buying. You simply pay too much for the yield to make it very worthwhile. That's especially true if you're a commodity bull. The exceptions to this assertion are in the financial sector. You can buy a whole bunch of bonds from too-big-to-fail banks right now that pay pretty decent yields. But I have no interest in loaning money to them.
Consider one bond I was looking at, The 2013 Placer Dome Inc. Mtn Bond 7.56%. It's a bond issued by the world's largest gold company, Barrick Gold (NYSE: ABX).
It matures in 2013, and pays a 7.56% coupon. But the price of the bond is currently more than par. So you're paying a little extra for that yield. Right now the bond sells for almost $110. The yield is closer to 5%. And that's okay, I guess. It's certainly better than a 10 Year Treasury bond. But is it worth it? I'd rather just buy Barrick stock - which yields a 1.3% dividend. I also happen to believe that it offers a much higher upside than 5% per year.
The real conclusion here is that money is too cheap. And we know who makes our money cheap: the U.S. Treasury and Federal Reserve. The cost of cheap money is that today's retirees, savers and investors, get bupkis for yield.
That's because the benchmark for all bonds are sovereign debt bond issuances from the U.S. Treasury. If the U.S. Treasury only pays 2% a year, then corporate bond issuers don't have too high of a hurdle yield-wise.
Someday, bonds will be a great place to park your cash. But today, I don't see the upside. Stick with your core holdings of physical gold and silver, as well as quality commodity stocks.