ETF: Understanding the Krugerrand Custodial Certificate

The physical nature of a gold investment provides investors with a sense of security. Ironically, though, taking delivery of a physical gold investment comes with risks. RMB’s Krugerrand Custodial Certificate (KCCGLD) offers an opportunity to invest in Krugerrands without having to resolve issues around storing physical assets.

Like the Dollar Custodial Certificate (DCCUSD), the Krugerrand Custodial Certificate is a franken-ETF. It’s listed and traded as an exchange-traded fund (ETF), but unlike ETFs, it only invests in a single commodity. For this reason this ETF is not permitted within the tax-free investment space.

Each share is backed by an actual hold-it-in-your-hand Krugerrand. After RMB issues a certificate, Rand Refinery produces a coin. Once minted, the coins are delivered to a custodian – in this case Brink’s Southern Africa – who will store the coin on your behalf. The product is designed to remain listed for 30 years from date of issue, which was October 2014. It will mature in ten-year periods, so at some point you can gain access to your physical coin, should you so choose. If you’re not so keen on keeping gold in your house, RMB will sell the Krugerrands on your behalf.

Of course, none of the risks are eliminated by storing physical gold with a company. Physical gold can go missing. Since each Krugerrand is numbered and registered to the holder of the KCC, issues could also arise should the seller of a KCC die after selling the contract, but before the transfer takes place. It’s worth familiarising yourself with the risks and the associated contingency plans laid out in this lengthy legal document. Good luck!

You are investing in a Scrooge McDuck-style gold coin, weighing in at a hefty ounce. The KCC should cost somewhere around the market value of gold per ounce – somewhere north of R21 576 at the time of writing. Since this is a tradable financial instrument, the value of the ETF is determined by both the gold price and market forces. That means if someone in the market is willing to sell at a price other than the prevailing gold price, KCCs would be trading at a lower or higher value.

The NewGold ETF from Absa, on the other hand, holds 1/100th of an ounce of gold for every ETF unit you hold. That makes one ETF unit much more affordable. To cover the cost of storage, however, Absa sells a little of your gold every year to cover the expenses associated with storing physical assets. The KCC charges an upfront storage fee and you continue to hold one ounce of gold.

Says RMB’s Ebrahim Patel, “We have taken a different approach, as we believe that 1oz of gold should always remain 1oz – investors should not have to see their physical gold holdings eroded through fees over time.

“Therefore, we have charged 10 years of storage upfront – the storage calculation decreases through time and is included in the NAV. Therefore, if an investor bought the KCC at inception and sold after three years, the value of the KCC would reflect the seven years unused storage – the purchaser would be paying for three years storage and not the full 10.

“After 10 years, the product resets – investors can either opt to take physical delivery of their coins or to continue for another ten years, paying the storage for next 10 years upfront again.”

If you feel strongly about owning a real Krugerrand, this product might be for you. Access to fractional shares through Easy Equities will also enable you to work your way up to buying a full one over time. If nothing else, it’s a fun way to spend your money.