Gold Hypothecation Ponzi Scheme Of The Highest Order: The First Rand Gold Bond Deal Is Old Mother Hubbard’s Cupboard – Dave Kranzler

TND Guest Contributor: Dave Kranzler | 

It’s a gold hypothecation Ponzi Scheme of the highest order.  The world’s first gold corporate bond deal - issued by South Africa’s FirstRand Bank (Rand Merchant Bank) is a scam.   Investor beware.

In my curiosity to confirm my suspicion that this deal was nothing but a paper Ponzi Scheme designed to redirect investor money that otherwise might have been used to buy and take delivery of actual Krugerrand gold coins into a fiat paper fraud deal, I contacted representatives of First Rand to get a term sheet so I could see how the deal was structured.   Here’s an outline of what I found and it confirms my suspicions (I’ve linked the term sheet and product pimp sheet below):

1) The investor “buys” Krugerrands from First Rand (Rand Merchant Bank) -
technically, First Rand does not send you any coins or transfer ownership
title of the coins to you. Instead…

2) The investor is issued a note which pays interest in more Krugerrands but that interest is not received by the investor until the note matures;

3) PLEASE NOTE: this bond is UNSECURED, meaning if First Rand defaults, you are
standing in line to get paid out behind secured creditors. IT ALSO MEANS THAT THE
GOLD COINS YOU PURCHASE ARE NOT PLACED IN AN ALLOCATED ACCOUNT
AND YOU WILL LIKELY NEVER SEE THOSE COINS IN THE EVENT OF DEFAULT;

4) I have serious doubts as to whether or not the Krugerrands you buy were ever in the
the possession of First Rand (Rand Merchant Bank) to begin with. This is a pure
“fractional fiat system” gold sale transaction;

5)  If and when you redeem the bonds, First Rand makes it quite cumbersome for the     investor to receive the coins. You have to notify First Rand 60 days in advance AND you have to personally travel to the Rand Refinery to PICK UP your coins.

So let’s review: You give First Rand money upfront to purchase gold coins that may or may not exist. You receive an unsecured note that bears interest.  IF you decide to redeem your note a maturity in physical coins, you have to personally travel to the Rand Refinery to get the coins.

Perhaps the worst aspect of this deal is that Rand Merchant Bank is getting  free money to use as it wishes by merely issuing an unsecured loan.  “Free” because the interest is not paid out until maturity.   At the very least this bond should bear an interest rate that reflects the subordinated, unsecured nature of the deal.  But it’s been issued under the pretense of the investor being entitled to gold coins.  Clearly this deal is neither secure nor backed by real gold.

This is a Ponzi Scheme that is designed to give Rand Merchant Bank FREE money to use as it wishes (see the term sheet), is unsecured and it was issued with the intent of NEVER having to redeem ANY of the bonds in physical gold.

TermSheet           SalesPropaganda            

Investor beware – caveat emptor – because Atlas Shrugs.

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About Dave Kranzler:

 I spent many years working in various analytic jobs and trading on Wall Street. For nine of those years, I traded junk bonds for Bankers Trust. I have an MBA from the University of Chicago, with a concentration in accounting and finance. My goal is to help people understand and analyze what is really going on in our financial system and economy. You can follow my work and contact me via my website Investment Research Dynamics.  Occasionally, I publish on Seeking Alpha too. As a co-founder and principal of Golden Returns Capital, LLC Mr. Kranzler co-manages the Precious Metals Opportunity Fund, a metals and mining stock investment fund.

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