In these post-credit-crisis days, true innovation in the shell-shocked world of money is a rarity. Mistrust of the financial industry, central banks and fiat currencies, however, is ubiquitous. So a new breed of security that combines innovation and mistrust is noteworthy.
FirstRand Bank Ltd., South Africa's second-biggest lender, has created what seems to be the world's first fully gold-denominated bond, borrowing 2 billion rand ($188 million) for five years. Investors have to pay for their bonds in krugerrands, gold coins minted by the South African government with one troy ounce of the metal.
One of the charges leveled against gold -- the "barbarous relic" in the sweeping judgment of John Maynard Keynes -- is that you don't earn interest or dividends on the precious metal; the FirstRand bond offers 0.5 percent:
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.
The idea of tempting investors to lend money with the promise of repayment in gold isn't new. In the half-century leading up to the Great Depression in the 1930s, U.S. railroad companies relied upon gold bonds to finance their expansion. In 1873, for example, the Chicago, Saginaw & Canada Railroad Co. issued 5,500 gold-backed bonds, each with a face value of $1,000, offering 7 percent interest for 30 years. Three years later, the company went bust and investors got back less than 25 cents on the dollar, according to a U.S. Treasury website. In Tom Wolfe's novel "The Bonfire of the Vanities," bond trader Sherman McCoy tries to cement his status as a Master of the Universe by cornering the market in "Giscards," gold-backed bonds purportedly issued by the French government.
The novelty of the FirstRand project is that the initial purchase is made in gold; and, unlike the railways, the borrower has a natural protection against a surge in the price of the yellow metal, since it plans to use the proceeds to fund its gold-trading adventures. Krugerrands now trade at about $1,295, according to Bloomberg data, down from as high as $1,406 in March and a September 2011 value of $1,882:
We learned last month that a company called Anthem Vault Inc. wants to create the world's first virtual money backed by gold. In these times of financial repression, I'm willing to bet that more securities will emerge tied to the value of gold. These will no doubt appeal to the distrustful crowd who are convinced that the experiment of showering the world with central-bank cash will end in tearful inflation.
To contact the author on this story:
Mark Gilbert at firstname.lastname@example.org
To contact the editor on this story:
James Greiff at email@example.com