Scams and hypes

Gold bond scams

In the first (1994) edition of my catalog, I tried to explain that the only value of gold bonds was their collectible value.

Sometime after publication, criminals developed scams around gold bonds and artificially distorted the prices of many collectible railroad bonds. Some people lost substantial sums of money through those frauds. Several of the frauds were successfully prosecuted, but the ultimate outcomes now seem very difficult to discover.

Why gold bonds?

Most of the reported frauds tried to convince would-be investors that uncancelled gold bonds still had value. Some of the scams wove a second myth that the United States government would pay off those old corporate bonds.

Both stories were total fabrications, but the frauds exploited an enticing 'logic' that victims fell for.

It is true that both corporate and government gold bonds specifically promised to repay principal and interest in gold coinage. During the period that gold bonds were issued, $1,000 would have been convertible into fifty $20 gold coins. Since each $20 gold coin contained 0.9675 Troy ounces of gold, a $1,000 gold bond would have been worth 48.3750 Troy ounces of gold.

It is also true that if interest had been allowed to compound at 5% over a hundred years, a $1,000 bond would be worth $131,501 or 6,361.4 ounces of gold. A $1,100 per ounce, such a heap of gold would be worth $6,997,511.

Who would pay such enormous values?

Obviously, no bankrupt railroad company was ever going to pay off a single gold bond!

Instead, criminals claimed that bonds showing 'United States of America' at the tops were guaranteed by the federal government.

(Never mind that railroad bonds did NOT compound; they merely offered simple interest payable twice per year. Moreover, bonds were payable on the stated day of redemption. Normal gold bonds did not offer any interest after that day!)

It seems ludicrous to imagine any victim falling for such distorted logic, but such is the effect of greed.

Gold bond scams depend on ignorance

Such absurd schemes depended entirely on ignorance. If investors knew anything about corporate finance, business law or American history, they would have run away. The most glaring objections to gold bond schemes involved:

• Bankruptcy law. Essentially all surviving uncancelled gold bonds originated with companies that had failed long ago. Bankruptcy courts had settled legal claims for outstanding loans over a century ago. The old bond provisions were simply no longer valid.
• U.S. law. Every reference to gold repayment in every bond was nullified by the 'Joint Resolution to Suspend the Gold Standard and Abrogate the Gold Clause' (H.J. Res. 192, 73rd Congress, 1st Session). While the language of many laws can be obscure, this one is crystal clear. 'Every obligation, heretofore or hereafter incurred, whether or not any such provision is contained therein or made with respect thereto, shall be discharged upon payment, dollar for dollar, in any coin or currency which at the time of payment is legal tender for public and private debts.' The nullification of the "gold clause" had been thoroughly litigated and upheld as early as 1935 and has been revisited as late as 1996 (Adams v. Burlington Northern Railroad Co.)
• Lack of guarantee. The United States government never guaranteed old private debt. Nowhere in any railroad bond is there reference to the Federal government guaranteeing repayment.

Federal and state authorities prosecuted many gold bond schemes, but there is no guarantee that a new brood of criminals will not try this again. In fact, at the time of this writing, an increasing number of questions about this subject suggests another wave of scams are underway.

Artificial collectible "values"

Criminals saw tremendous potential for "profit", but they needed uncancelled gold bonds to complete their con. In order to acquire gold bonds for resale to victims, criminals drove up prices for collectible gold bonds dramatically in 1998 and 1999. While numbers of unfortunate individuals lost large sums in the gold bond frauds in the late 1990s, the trickle-down effect was to artificially inflate the prices of uncancelled gold bonds from American railroads.

Criminals, of course, were not the only buyers at that time. A certain number of willing participants deluded themselves into believing that maybe, just maybe, there was something to the myth. After all, the myth of gold bond redemption seemed more plausible (and profitable) than flying saucers!

Between crooks and delusional collectors, prices for some uncancelled railroad gold bonds topped $2,000 in the collector market of late 1999. Criminals successfully re-sold some of those bonds to victims for tens of thousands of dollars!

Once law enforcement moved in and exposed the frauds, prices for otherwise worthless gold bonds started dropping, but it took years for many to fall back to levels reasonable for average collectors. My catalog and online database always took the long view of the hobby. I purposely ignored artificially inflated values for uncancelled gold bonds.

Has all the fraud stopped?

Price records proved that it took at least 10 years after the 1998-1999 frauds for prices to fall back to reasonable levels. Even today, supplies of some bonds used in the gold bond scams still remain tight. I suppose no "collector" wants to admit their earlier errors by liquidating their poor "investments" for $25 to $100.

But, has all the fraud stopped? I don't think so.

Since 2011, we have seen a substantial runup in prices for certain pre-Revolutionary War Mexican government bonds denominated in gold. Never mind that the Mexican government is no more likely to redeem old corporate bonds than the U.S. government. I am unaware of any government in the world that would redeem old gold bonds.

Then, on March 24, 2012, I recorded a sale of an uncancelled Columbus Shawnee & Hocking Railway Co. gold bond for $2,400. (eBay(US), lot 16076499064. The seller was in Germany).

Columbus Shawnee & Hocking Railway Co. bonds are not particularly rare. Between 2007 and 2012, prices for that particular bond ranged from about $35 to $60. The starting price for the bond in the aforementioned auction in question was $1. During the first six days of that auction, several collectors had raised the bid to $35. About five minutes before the close of the auction, one person bid $2,375 and was ultimately outbid by a $2,400 bid four seconds before the close. Truth be told, we don't know how much the winning bidder offered; we only know that the winner offered $25 more than the previous bid.

I looked at the sale several times and could not see anything special about the bond in either the description or the photograph. I cannot imagine anyone overbidding so fiercely unless they mistakenly envisioned the prospect of converting the bond to gold.

The point? If two people out there believe they can convert a Columbus Shawnee & Hocking Railway Co. bond into gold, more certainly do. If anyone believes they can convert old gold bonds into millions of dollars, you can be sure that crooks will take notice! Consequently, I warn my readers as I have warned them continually since 1994.

Do NOT believe the myth of converting gold bonds into massive profits.

Court cases and many prosecutions prove otherwise.

Want more info?

A U.S. Treasury document offers a substantial amount of information about gold bond scams, although the page seems to have been updated little since 1998. If wanting to find more information, I advise using "gold clause" and "fraud" as keywords for starting additional research.

(Please note: the Treasury changes its sites frequently. It is sometimes VERY DIFFICULT to find the document linked above. Please tell me if this link gets broken.)

This may have been the most popular type of certificate used in the 1998-1999 gold bond scams: the 30-year $1000 gold bond of the Chicago Canada & Saginaw Railroad Co. I currently estimate its collectible value at about $100.

At the height of the frauds, some of those bonds sold to unfortunate "investors" for several thousand dollars!

As mentioned above, values of artificially-inflated gold bonds subsided after 2000 although many uncancelled gold bonds have remained hard to find in the intervening years. A prosecutor once reported to me that law enforcement agencies had confiscated many of the bonds. I have never learned how many frauds were successfully prosecuted, but it seems many bonds may still reside in evidentiary lockup. It is always possible that many of those bonds will never return to the collectors' market and some may have destroyed to prevent further fraud. I can't say.

What about scheme to redeem Mexican bonds for gold?

Come on! Is there some reason to believe the Mexican government would redeem corporate or governmental gold bonds when the U.S. would not?

Currently, no one outside of law enforcement is sure what is happening with elevated "prices" for certain Mexican bonds. If there are law enforcement concerns, no one is talking.

However, by searching the web for "mexican gold bond redemption," you can find numerous discussions on various forums. The basic upshot it that scammers promise all sorts of things, make victims jump through hoops acquiring "authentication documents" and charge money at each step. It is also fairly easy to find untraceable people who claim that they have successfully collected.

Yeah, RIGHT!

The reality is simple. Regardless of whether it is the United States, Mexico or the lost continent of Atlantis, no government is going to pay anyone in gold for decades-old bonds.