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As South Africa Reels From Unexpected Bailout, One Bank Has A Modest Proposal: Give Us Your Gold
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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but, but, but, gold is a "barbarious relic" of no value...
/s
What a clever scam...
Gold does not pay interest,, shysters do.
Which shell is the pea under?
You get your gold back at maturity
LOL
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!?!?!?!?!?!?!?!?
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.
Didn't banks in Vietnam try a scam like this? And the gold? Its gone....
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.
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.
synthesizing in the beginning. Then, resynthesizing. Or is it resynthesization? I forget.
This looks like an act of desperation to get some gold. The end must be near.
dont forget the sweet sweet 0.5% interest, i work it as buy 200 krugers, and get a free 1 on maturity! baragain mate!
@Theta_Burn: "What a clever scam..."
Yes, send email to Kruger@RandCorp.com
I wish the day would come when buffet, munger, benanke, etc all need some and can't get their hands on any.
And to top it off, backed by nothing!
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.
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.
Rule #1 with reguards to Gold & Silver
IF you dont hold it
YOU dont OWN it
THERE are no other rules
Just ask GREMANY
Hey that's good..you should patent that
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
who's gremany?
Gremany cricket!
Reguards,
SSA
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.
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.
What a fucking scam.
Psych.....
Sounds interesting......
"Sounds interesting"? Sounds Nigerian...
Paper gold.
You can get that already by accumulating federal reserve notes and other fiat.
Who can fuck in this kind of weather?
Gene Tracey
So south African banks are going back to their basic banking roots (pun intended)
Africa is a giant shithole
And you are an ignorant cunt.
No, they are merely pretending to.
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.
Maybe they are handing over gold thats still in the ground? You know, like a payday loan?
Maybe the banks see a gold rush on the horizon and are frontrunning with paper options to stem the tide so to speak
Bullion banks have been working like this since Bretton Woods actually.
Scary shit.
It truly is amazing what these bankers can think up.....just amazing...
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.
When you get desperate, you think of new ways to get rid of risk and hand it to suckers.
Remember that Executives are the smartest and most creative guys around. When motivated, they are devious MFers.
So... no surprise there.
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.
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?
"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"
Ok Corzine I'm sold, but only if you throw in a free toaster
I was wondering where he went.
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.
haha FU assholes the gold is all mine.
Take you worthless fiat bog roll and shove it!!!
Something along those lines lol...
"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.
Banster: If you give me your gold I will give you some paper dividends in return. We will just....keep it safe for you.
One can lease one's gold having it inside one's f**ing fist.
All one needs is a C O N T R A C T. Meanwhile, YOU hold the paper, I hold the GOLD... you know.
Scam.
Why don't I hold the Krugerrand and they still pay me the .5% interest? It makes as much sense as their bond plan.
they probably dont trust you
/s
Ask for a vault fee on top of it.
There's a very clear reason why they called this the Gold Bond:
That stuff's for itchy crotches. I think it kills crotch crickets.
So, rather than buy this bond, just go to the drug store and get some Gold Bond and sprinkle a little here and there and, poof! The crotch crickets be gone!
Don't fall for these crotch-stinky scams to get their hands on your physical gold.
As if people holding Kruggerands don't have exposure to the gold price - it's fucking GOLD.
What a nonsensical idea.
How many gold dental incursions will the bank receive?
so its a securitized leasing arrangement with direct public participation? Awesome.
I wonder if they would destroy/refine the coins? I ask because you can get some nice Chinese gold plated tungesten in Krugerand form I think at alibaba. That would be fun just for kicks to see what happens.
Maybe the American Dental Association (ADA) can start swaping out gold grill teeth on popular auction sites.
Sign on the dotted line, there , there and there. The gentleman with the white coat will see you to your room.
Gold for paper! Sensational idea!
Aaaand, it's gone.
"Is it safe?"
https://www.youtube.com/watch?v=kzw1_2b-I7A
All gold and silver paper is backed by a frozen pea.
Well if it is a gold exposure RMB wants to offer clients, then they should link the bond coupon payment to the price of gold. That way RMB can raise cash via the bond offering price, and hedge themselves accordingly for the gold price coupon exposure (call options, futures etc..).
Now if gold price drops the coupon payment could go to zero, but not impact the principle amount if held to maturity (2 - 5 years ?). This would attract a lot of interest from yield hungry investors with a gold component built in as well.
Of course the above would be a paper transaction, and RMB would not be getting their hands on clients physical gold. So.....
Good theory, so? Do we continue to print on free money and hit hyperinflation or come to a compromise and fix the broken wheels?
Let me know.. Adding zeros on the currency never works.
Hadn't India proposed something similar recently, i. e. paying interest on deposited gold?
Central banks lease and lend gold all day long in return for 'interest' payments and have for decades. It's false that gold pays no interest. That is anti-gold media bullshit that most Americans, sadly, have come to believe. It doesn't pay interest as long as it's in your hands, but it does if you are a central bank and let another central bank 'borrow' it. The question is, if you own gold, why would you risk it for a few pennies in interest, as the article says. A dollar bill pays no interest either, until you hand it over to a counter-party. As long as you hold that dollar in your pocket, it also pays no interest. No form of wealth pays interest until you had it over to a counter-party. Contact me and I will pay you 10% above T-Bills for your physical gold. You will become an unsecured creditor, just as you are when you open a bank account and for that 10% over T-Bills you take your chances that I will be around at contract's end. But I don't want your dollars. You keep those.
Turkey's gov. also wanted people deposit gold for interest payment, to help with financial stability by giving up that shitty unwanted relic.
There will probably be vault fees, so you are essentially going to be paying them to confiscate your gold.
The Golden Rule updated for the 21st. century: "Those with the physical gold, make the rules."
An American, not US subject.
I bet the fine print is micro-print on this puppy.
You'll need a microscope to read it: In the unlikely event that the bank becomes insolvent, we will not return your gold deposit. Instead, you will receive a stock certificate for shares of the bank, suitable for framing (Updgrade to priority shipping available)
This is the way you should look at Gold as an investment - One buys (invests) in gold at a discount to its future price. What is the discount rate you ask? No one knows, because so one knows the future. It’s the same as buying a T-bill. You buy it at a discount and get par back. You really don't know what the "real" discount rate" is because you don't know the risk premium of counterparty risk, inflation, currency exchange, tax rates, etc. With physical gold you know that you have no counter party risk, limited inflation and currency risk, and manageable tax risk. When I say invest, I mean a time horizon of 10 years plus. Trading day-to-day or even year over year is speculating not investing.
Looks like Warren Buffet will have to STFU now. Slam. Gold has cash flow. Explain that Warren. Things still work just like they did in the old days when the US was king.
Gold provides cash flow only as long as the futures market remains in backwardation.
Issuing long-term, coupon-paying bonds denominated in Gold suggests to me that Gold futures are going into perpetual backwardation.
NO FUCKING WAY WILL I FALL FOR THIS BULL SHIT.
Sorry, double post
Why should Nigeria be the only african state to have a monopoly on running scams.Welcome to black Africa.
gold leasing with a different name.
I read somewhere that in a world shrinkage of legitimate investment opportunities,scams will abound.
I agree.We must be near the end.But,hey,gunsales are up in North America!
I'm not very knowledgeable on gold transactions and have to ask why there is no retail market for the buying and selling of gold? (storefront type for precious metals) Each person could decide when to hold and when to sell - a transaction fee would have to be paid like any other financial transaction.
I can go to the bank and buy US or Canadian money based on the current rate less the bank fee (a scam but if the spread is great enough the fee is acceptable) Why not gold and silver?
I heard about that scam before. It's called the bankers reverse Mon Labe
This is peak stupidity.
So instead of the bank posting collateral on a bond issued, they want investors to post collateral for a lousy 5 basis points?
Is any gold investor this stupid? I doubt it.
Why do banks, that basically print money, need anyone to loan gold to them? Hell, if I could print money, my house would fall in for all the gold in it.
I have a better idea. How about I just max my credit card out on precious metals, I'll keep paying you interest of course, and if you want to run your little ass down to the local coin shop every month with the $100 or so dollars of interest I paid you to buy a tenth ounce Krugerand with it, that's your business. Now you have some money to buy gold with and you also have incentive to not fuck with my purchasing power. Its win-win for you. See, gold does equal money. You wanna play chicken? let's go! I've been poor before, so I'm not afraid to lose.
Somewhere in all this, there's a Nigerian 419 scam just begging to get out.
Now where did Field Marshal Mobutu's long lost cousin go to?