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Monday, August 25, 2014

Convertible Gold Bond or Gold Krugerrand is New Investor Option


Posted on August 25, 2014 by Pat Heller

Two weeks ago, Rand Merchant Bank, a subsidiary of FirstRand Bank, Ltd., South Africa's second largest bank, listed on the Johannesburg Stock Exchange a new five-year security called FirstRand Gold Bond. This issue is limited to 2 billion rand (about U.S.$188 million).

The unique feature of this bond is that it is possibly the world's first fully gold-denominated bond. Investors may only purchase the bonds by using South African one-ounce gold Krugerrands for payment. Minimum purchase amount is one Krugerrand.

At maturity, the value of the bonds is determined by the price of gold, the dollar/rand exchange rate and the earned interest. 

Owners can opt to take redemption in either Krugerrands or in paper currency. The value of the bonds is fixed in ounces of gold rather than in the South African rand, U.S. dollars, or any other currency.

Dale Wood, the co-head of the Bank's Capital Markets operations touted the advantages of such bonds when saying, "The notes provide direct exposure to the rand gold price and a positive yield in the form of interest ounces payable on maturity. It offers both inflation and rand/dollar exchange rate protection while avoiding the significant storage and administration costs associated with other direct gold investment options available.  Current market conditions are particularly attractive for gold investment because of rand/dollar weakness and expectations of higher inflation."

Constant liquidity is theoretically provided as these bonds are bought and sold on the Johannesburg Stock Exchange.  The JSE has been in operation since 1887, which provides some assurance of stability.

As far as it goes, this sounds like a possible venue for someone to invest in the price of gold without the hassle and costs of purchasing and holding the physical metal. However, as with pretty much any investment, there are some downside risks.

First, the additional reporting requirements imposed by the U.S. government on July 1 under the Foreign Account Tax Compliance Act (FATCA) may make it either difficult if not impossible for Americans to acquire these gold bonds.  If it is possible to acquire them, the Rand Merchant Bank would be required to file reports with the Internal Revenue Service every three months disclosing balances held by Americans. At a minimum, this is a serious compromise of financial privacy.

Second, although the South African rand has generally been weak against the U.S. dollar over the past decade or so, the South African government recently joined with the governments of Brazil, Russia, India and China to form a $100 billion bank to compete with the International Monetary Fund, World Bank and the Bank for International Settlements.  In the first month since this bank was organized, the value of the rand rose against the U.S. dollar.  There is some risk that if the rand's appreciation continues, American investors could suffer a net loss, as measured in U.S. dollars, on the investment.

Third, the stability and safety of the Rand Merchant Bank and the Johannesburg Stock Exchange could be negatively affected by political developments in South Africa.

There is one other factor to consider.  The issuance of gold-denominated bonds, especially if it is repeated by other issuers in South Africa and elsewhere, would be perceived by the U.S. government as an attack against the U.S. dollar.  Possible U.S. government reactions could include economic sanctions against owners of such bonds or the nations from which such bonds are issued. Americans potentially interested in investing in these FirstRand Gold Bonds should keep these risk factors in mind when making their decisions.

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He owns Liberty Coin Service in Lansing, Mich., and writes "Liberty's Outlook," a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at Other commentaries are available at Coin Week ( and He also writes a bi-monthly column on collectibles for "The Greater Lansing Business Monthly"( His radio show "Things You 'Know' That Just Aren't So, And Important News You Need To Know" can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at