South African Investors Gain Exposure to Gold Through Newly Listed Bond on JSE

The Johannesburg Stock Exchange has issued the world's first gold bond to give private investors direct exposure on the price

South Africa’s main stock and derivatives exchange, the Johannesburg Stock Exchange (JSE), reported that it has listed a new gold bond. Africa’s largest producer of gold will allow investors to take advantage of the volatility in the yellow metal. One of the country’s leading banking firms, Rand Merchant Bank (RMB), is the issuer of the product, which is defined as the FirstRand Gold Bond.

The new instrument is the first to be launched on the JSE. Details outlined by the exchange in a notification, states that the gold bond has a term of five years and the first issue amounts to $187 million. It requires investors to buy Krugerrands, which they then lend to FirstRand when purchasing the bond, the bond is Krugerrand-denominated. In addition, upon 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.

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Dale Wood, Co-Head of Debt Capital Markets at RMB, commented about the new product launch in a statement: “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.”

South Africa’s economy has been facing difficulties as it battles with inflation and maintaining stable economic growth. Last month the country’s central bank altered the benchmark interest rate in a bid to curb inflation, an ideal time to launch the gold bond.

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Mr. Wood added: “Current market conditions are particularly attractive for gold investment because of rand/dollar weakness and expectations of higher inflation.”

South Africa is one of the largest producers of gold, gaining its economic fame over one hundred and twenty years ago through the sourcing of precious metals. Investors can trade gold futures and options contracts on the bourse, the new gold bond adds to the venues commodity derivatives contracts.

“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,” explains Donna Oosthuyse, Director of Capital Markets at the JSE, in a statement.

Private investors who own individual Krugerrand can purchase a Gold Bond note, additionally, investors who already own Krugerrands can use the Gold Bond to achieve the same exposure to the gold price they would have enjoyed while physically holding Krugerrand coins, as well as also earning interest on the bond.

The new contracts are expected to bolster the country’s FX and precious metals CFD volumes, as investors will seize opportunities in the rand-denominated gold contract. Furthermore, they will hold dollar risk which can be hedged and managed through USD ZAR spot FX contracts.

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