‘For the first time, investors can gain exposure to the gold price, have access to physical Krugerrands and earn a positive yield,’ says Ettienne van Wyk, head of metals and energy trading at Rand Merchant Bank (RMB). Van Wyk is referring to the R2 billion FirstRand Gold Bond, the first of its kind in the world, issued by RMB (a division of FirstRand Bank Limited) in August on the JSE.

The corporate bond is denominated in gold Krugerrand coins, which are legal tender in SA. Investors buy the promise by FirstRand to deliver the face value of these gold coins plus interest on maturity.

The bond trades like a normal equity on the Main Board of the JSE. With a face value of a one-ounce Krugerrand rand, it accrues interest at 50 basis points per annum, which is payable at the end of a five-year term, says Van Wyk.

On expiry, the value of the bond is determined by the current gold price, the dollar/rand exchange rate and the interest earned. The interest is calculated in terms of ounces of gold as represented by Krugerrands. On maturity, investors can take out these gold coins or be settled in cash.

RMB acts as a market facilitator for investors who buy and sell the bonds on the JSE, ensuring liquidity and price transparency of the notes.

For the JSE, it’s a novel and exciting option for investors seeking exposure to the gold market.

‘The JSE was founded in 1887 as a result of the first South African gold rush. This issuance provides investors with a way to gain exposure to one of the oldest assets on our exchange in a new and innovative way,’ says Donna Oosthuyse, Director: Capital Markets at the JSE.

The innovative listing has echoed the pioneering history of these gold coins in SA.

‘South Africa trailblazed bullion coins via the Krugerrand. To date, it is the most successful gold bullion coin in history, with about 67 million coins in circulation worldwide. FirstRand, in some shape or form, has been involved in the precious metals market for almost 174 years now,’ says Van Wyk.

‘Investors can gain exposure to the gold price, have access to physical Krugerrands and earn a positive yield’

ETTIENNE VAN WYK, HEAD OF METALS AND ENERGY TRADING, RAND MERCHANT BANK

Gold has had a fascinating journey at the JSE. ‘Many years ago you could only get exposure to gold through gold listed companies, followed by ETFs holding physical gold, and thereafter gold derivatives traded in rands,’ says Chris Sturgess, Director: Commodity Derivatives at the JSE. ‘That was followed by gold quanto contracts, removing the currency influence and giving you a closer correlation to the dollar value of gold. Now we have RMB’s gold bond as well.’

With so many options, investors wanting to move or expand into the gold market are spoilt for choice.

With the current rand/dollar weakness and expectations of higher inflation, current market conditions are attractive for investing in gold.

‘Gold is a very good portfolio diversifier. It provides protection against tail events in the global economy. It’s always a good asset to include in a portfolio,’ says van Wyk.

According to SA law, while investors may not hold gold in unwrought form, they still need to pay for the administrative costs associated with holding and storing gold when they invest in products that track the price of gold.

These costs are eliminated by the bond as investors earn a yield on the bond instead of paying fees, says Dale Wook, RMB Debt Capital Markets co-head.

The JSE says investors can also get a Gold Bond note with a single Krugerrand, enabling retail investors to gain exposure to the gold price.

So far the interest in the gold corporate bond has been encouraging. Van Wyk says RMB has issued R2 billion of this security so far. Further interest has indicated that there is an excellent market for the new bond.

By Kim Cloete
Image: Gallo/GettyImages