As South Africa Reels From Unexpected Bailout, One Bank Has A Modest Proposal: Give Us Your Gold

Tyler Durden's picture

In a historic first, three days ago, South Africa's Rand Merchant Bank, a division of FirstRand Bank Limited, announced it would issue the FirstRand Gold Bond, or a bond denominated in South African Krugerrand gold coins. In other words, for the first time "holding" gold will pay a dividend (or in this case, interest). Sound odd? Maybe because it is.

Here is the statement from the Johannesburg Stock Exchange:

The Gold Bond has a term of five years and the first issue amounts to R2 billion. It requires investors to buy Krugerrands, which they then lend to FirstRand when purchasing the bond. At its expiry the value of the bond is determined by the current gold price, the Dollar/Rand exchange rate and the interest earned. This interest is calculated in terms of ounces of gold as represented by Krugerrands. Investors may take physical delivery of the Krugerrands on maturity or opt to get settled in cash.

Or they may end up with nothing if the bank is "suddenly" found to be insolvent. The marketing pitch is clear: have your gold and collect interest on it:

"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," says RMB Debt Capital Markets co-head Dale Wood.


Investors may not hold gold in unwrought form according to South African law; however they still need to pay for the administrative costs associated with holding and storing gold when they invest in products which track the price of gold. These costs are eliminated by the Gold Bond because investors earn a yield on the bond instead of paying fees. Investors can also opt to take physical delivery of the underlying gold because it is in the form of Krugerrands which are legal tender in South Africa. "Investors also benefit as they are able to buy and sell the Gold Bonds on the JSE, with RMB acting as a market facilitator to ensure liquidity and price transparency of the notes," says Wood.

In an attempt to get as many possible investors, the issuer has made the smallest bond denomination anyone can participate in this once in a lifetime opportunity to collect 0.5% per year for their gold: "Investors can also get a Gold Bond note with a single Kruger rand, which means that retail investors can use it to gain exposure to the gold price. Investors who already own Krugerrands can use the Gold Bond to achieve the same exposure to the gold price they would have enjoyed when physically holding Krugerrand coins, while also earning interest on the bond."

So is this truly a can't miss opportunity for institutions and, better yet, retail investors?

It all depends on one's quantification of counterparty risk: if the owner of gold believes that it makes sense to have someone else hold the gold in exchange for a meager sliver of interest, then by all means yes. The problem is that increasingly gold owners realize that possession is critical when it comes to the shiny metal in a world in which paper claims on gold are rehypothecated countless times. Which is surely the main attraction of the physical metal for all those who increasingly believe that the financial system is the precipice of completely collapse. Perhaps FirstRand Bank underestimated this part of the sales pitch.

However, one entity for which the deal makes perfect sense is none other than FirstRand Bank, because all the bank is doing is paying someone a nominal fee in order to be a gold holder. What it does with that gold subsequently is anyone's guess, and good luck trying to demand receipt of physical if something should happen to the bank.

But perhaps the biggest question is why now? This BBC report from two days ago should answer the question:

Shares in South Africa's largest banks fell on Wednesday, following downgrades from the ratings agency Moody's.

Standard Bank, FNB, Nedbank and ABSA, which is owned by Barclays, were all downgraded on Tuesday and Moody's warned of more possible ratings cuts.


The move comes a week after South Africa's central bank bailed out the smaller lender African Bank. Last week the South African Reserve Bank (SARB) announced a rescue plan for African Bank, a smaller lender that specialised in unsecured loans. The SARB bought up around $700m of bad loans from African Bank, but some investors still lost out.


On Monday, another lender, Capitec, saw its shares plunge after seeing its rating downgraded.

And some more from BusinessReport:

South Africa's decision to rescue a small lender seen as neither “too big” nor “too interconnected” to fail shows that taxpayers worldwide may have to accept that bank bailouts are here to stay.


When South Africa's central bank recently announced a $700 million (520 million euro) rescue of faltering African Bank Investments Limited, it scarcely made a splash outside the country. The bottom line, at least for the rest of the world, was that African Bank is not very big and not very important.


The bank's managers made far too many bad loans to too many South Africans who could not afford to pay them back.

Because it had not asked borrowers to put up their car or any other asset as collateral, it was left with a massive hole in its balance sheet when they failed to pay.


African Bank is not one of South Africa's “big-four” - Standard Bank, FNB, Nedbank or ABSA (Barclays Africa) - which are deeply enmeshed in the global financial system.

In other words, South Africa is just the latest country to undergo a banking sector crisis. But don't worry: "The South African Reserve Bank insisted the country's banking sector remained "healthy and robust."

So what does one of these "healhty and robust", but not systematic, banks do? It has a modest proposal: please give us your gold, for which generous offer we will pay you a whopping 0.5% per year.

Good luck.

P.S. why not just borrow the gold from the BIS, or are they also out?

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LawsofPhysics's picture

but, but, but, gold is a "barbarious relic" of no value...



Manthong's picture

Gold does not pay interest,, shysters do.

Which shell is the pea under?

knukles's picture

You get your gold back at maturity
Hah ha ha ha ha ha ha ha ha ha ah ah aaaahhhhhhh

They're just borrowing gold from in this case, the public, being the lender

What the fuck!?!?!?!?!?!?!?!?

7.62x54r's picture

OK then. Convert zero risk gold into paper with counter-party risk.

Someone is trolling for suckers. If you want an interest rate, deposit fiat currency. Depositing gold only made sense when all currency WAS gold, and you were willing to take a risk on bank solvency for interest.

0b1knob's picture

Didn't banks in Vietnam try a scam like this?   And the gold?  Its gone....

Herd Redirection Committee's picture

Hold on to your hats, folks.  They tried to get people to sell by spiking the price of gold (the run to $1900).  They tried to get people to sell via "We Buy Used and Unwanted Gold" brainwashing campaigns.  They thought price suppression would at least stop people from piling in, which was successful at the retail level, but failed for those with dry powder AKA stackers.

Now they are trying to appeal to the 'but gold doesn't pay interest' crowd.  "Give us your gold, and we'll give it back to you over 200 years, AND you'll get the principal back.  The gold, while in our vaults, magically multiplies, allowing us to pay you interest on your deposit."

No thanks.

Manthong's picture

I just about split a gut with this one.

Maybe they will use the gold as collateral on a cascading set of synthetics that are sure to lose..

Just like the pension funds are set up for now in San Diego.

Sokhmate's picture

synthesizing in the beginning. Then, resynthesizing. Or is it resynthesization? I forget.

Sofa King Confused's picture

This looks like an act of desperation to get some gold.  The end must be near.

savagegoose's picture

dont forget the   sweet sweet 0.5% interest, i work it as buy 200 krugers, and get a free 1  on maturity!   baragain mate!

Kirk2NCC1701's picture

@Theta_Burn: "What a clever scam..."

Yes, send email to

Groundhog Day's picture

I wish the day would come when buffet, munger, benanke, etc all need some and can't get their hands on any.

Alea Iactaest's picture

Pierpont: You're missing the point. The bank is performing a valuable service, almost a community service, by releiving you of any storage fees and actually paying you while we safeguard your gold.

J6P: Wait, what? You mean you are going to incur costs on my behalf AND pay me while you do that? It sounds almost too good to be true!

Pierpont: Nope, not too good to be true. Just the kind of swell folks we are.

BrosephStiglitz's picture

I agree.  If it looks like a duck, sounds like a duck and moves like a duck, chances are it's a duck.

Aaaand in this case the "duck" is an institution sanctioned con job.

Da Yooper's picture

Rule #1 with reguards to Gold & Silver


IF you dont hold it


YOU dont OWN it


THERE are no other rules


Just ask GREMANY

A82EBA's picture

Hey that's should patent that


Kirk2NCC1701's picture

Kirk's Rules 1 & 2 regarding Asset Ownership:


#1: In a Law-abiding society, possession = 90% of the Law

#2: In a Lawless society, possession = 100% of the Law

Plan and act accordingly.  IOW, in a case of Good, Better, Best, where you never know what kind of Society you'll be in when it really counts...

It is good to have the right bits of paper.  It is better to have the Assets.  And it is best to back them with Arms, and... Brothers in Arms, before you end up in Dire Straights.

-Kirk out

jaxville's picture

The Bundesbank knew that their gold would be "leased" into the market when they made the original swap arrangement with the fed back in the late nineties.  It can only be returned as fast as those who borrowed it close out their leases.  With current supply/demand dynamics, that is almost impossible and that is why the Bundesbank is now content to let their gold remain with the Fed.  If those leases were closed out rather than rolled over, gold would double in price within a year and a half.  That is not in the interest of any central bank operating a fractional reserve/credit based money scheme.

jaxville's picture

  People sometimes forget that the main reason for holding gold is to protect yourself from the excesses of the financial sector.  Might as well go out and piss into the wind if you are going to let some element of the financial sector hold gold for you.  Same goes for gold certificates.

Joebloinvestor's picture

What a fucking scam.

ciscokid's picture

Sounds interesting......

ajax's picture


"Sounds interesting"? Sounds Nigerian...

7.62x54r's picture

You can get that already by accumulating federal reserve notes and other fiat.

clade7's picture

Who can fuck in this kind of weather?


Gene Tracey

Dr. Engali's picture

So south African banks are going back to their basic banking roots (pun intended)

max2205's picture

Africa is a giant shithole

Rubicon's picture

And you are an ignorant cunt.

7.62x54r's picture

No, they are merely pretending to.

GoldSilverDoc's picture

Man.  This has to be the most hilarious post on Zerohedge for at least a year.

The idea that somebody is going to "lend" (read - "give") their gold to banksters, who will pay "interest" on it, and will let you redeem the "bond" at maturity in dollars or in gold......what kind of utter, complete, total MORON who actually OWNS GOLD UNENCUMBERED would do this?

I mean, REALLY?  

Either the people holding gold are even more stupid than I can imagine, or the banksters are.


clade7's picture

Maybe they are handing over gold thats still in the ground?  You know, like a payday loan?

A82EBA's picture

Maybe the banks see a gold rush on the horizon and are frontrunning with paper options to stem the tide so to speak

LawsofPhysics's picture

Bullion banks have been working like this since Bretton Woods actually.

Scary shit.

youngman's picture

It truly is amazing what these bankers can think up.....just amazing...

astoriajoe's picture

I remember companies like Goldman and MS and JPM coming to my campus to recruit in college. They kept talking about structuring financial products and I'm just like WTF are they talking about products? Now I'm glad I never interviewed for such a position.

7.62x54r's picture

When you get desperate, you think of new ways to get rid of risk and hand it to suckers.

Kirk2NCC1701's picture

Remember that Executives are the smartest and most creative guys around. When motivated, they are devious MFers.

So... no surprise there.

juggalo1's picture

I don't understand.  It looks like the bond gets settled in cash (or gold) based on the value of gold then outstanding.  If they are trying to make a gold bond, demand gold at purchase, and offer the option of settling in gold, wouldn't it make more sense to denominate the bond in "Kruggerand coins" and only offer cash settlement for any fractions at the final maturity?  The only reason that wouldn't make sense is if they actually wanted gold, and prefer to use cash to settle up at the end.

highly debtful's picture

First, they ignore you, then they ridicule you, then they fight you and then South Africa's Rand Merchant Bank, a division of FirstRand Bank Limited, announces it will issue the FirstRand Gold Bond, denominated in South African Krugerrand gold coins.

Right, and we're the tinfoil hatters?

CheapBastard's picture

"Dear Valued Client, Let your trusted investment bankers at the reputable firm, Corzine, Lerner, Mozillo & Assoc, Ltd., safeguard your gold in our thick vaults. We promise to pay you... mmmm ...  lots of interest at the end of 5-years PLUS give your gold back. You have our word and a solid handshake. Respectfully, The Honorable Corzine For the Firm"

RichardENixon's picture

Ok Corzine I'm sold, but only if you throw in a free toaster

astoriajoe's picture

I was wondering where he went.

Big Ben's picture

Since the banks are probably not going to make gold denominated loans, they would collect the K-rands, sell them and than make loans in some other currency. If the price of gold rises sharply, they would be unable to rebuy the K-rands at the end of the loan.

This is a highly reckless strategy. I would avoid having any kind of account with these banks.

JPMorgan's picture

haha FU assholes the gold is all mine.

Take you worthless fiat bog roll and shove it!!!

Something along those lines lol...

RaceToTheBottom's picture

"It all depends on one's quantification of counterparty risk"

Yep, ETFs started this way.  

No discussion of serial numbers; no visit your gold tuesdays and no audits.