The world’s most popular gold coin is actually legal tender
It is the world’s most popular gold coin, an international currency that can be bought in Johannesburg and exchanged for cash in Dublin or Dubai. And because it is issued under authority of the reserve bank, it is legal tender, Gavin du Venage reports
CAPE TOWN // The world’s best selling gold coin, the Krugerrand, is still going strong after half a century in production, as it retains its allure as a store of value.
The Krugerrand was first minted in 1967 to promote South African gold; it was the world’s first coin aimed specifically at investors rather than collectors. It is named after Paul Kruger, the Boer leader who led the Transvaal republic against the British in 1899. It is his dour profile that graces one side of the coin, with a more cheerful dancing springbok on the other.
But it is not the Krugerrand’s dubious artwork that draws investors. “An investment in Krugerrands is essentially an investment in gold,” says Ebrahim Patel, a commodities strategist at Rand Merchant Bank in Johannesburg. “Gold has a multi-millennia history of being a sought-after store of value.”
Gold is now so firmly an international currency that a Krugerrand bought in Johannesburg can easily be exchanged for cash in Dublin or Dubai.
The coins are produced by the South African Mint on behalf of the country’s reserve bank. According to the mint, sales of the Krugerrand run at about 1.1 million ounces a year, or about 25 per cent of the global market for bullion coins. It is particularly popular in Europe, especially in Germany, the mint says.
The coin has not always served the best interest of its makers. During South Africa’s apartheid years it became a go-to way to smuggle wealth out of the country, at a time when the white nationalist government restricted the amount of money an individual could move abroad.
In one instance during the late 1980s, customs officials inspecting a Rolls-Royce loaded into a container for shipment to the United Kingdom for repairs, found a bag of Krugerrands hidden in its spare wheel. They, and the car, were confiscated.
The 1980s were not a particularly happy time for the Krugerrand. It became the focus of worldwide anti-apartheid sentiment, especially as the springbok was at the time the symbol of the country’s national sports teams, which were almost exclusively white.
In 1985, the US president Ronald Reagan enacted a ban on its import. “The Krugerrand is perceived in Congress as an important symbol of apartheid,” Reagan wrote in his missive to policymakers. “This view is widely shared by the US public. I am directing this prohibition in recognition of these public and congressional sentiments.”
A United Press International report from the time said more than two million Americans had coins salted away in safes and trunks under the bed.
A decade later, apartheid was gone and South Africa was now led by Nelson Mandela’s African National Congress. There was talk at the time of the new Mandela government scrapping the Krugerrand and replacing it with something untainted by a racially tarnished past. This idea was soon scrapped, though, as by now the coin’s brand was so well established that the mint continued to produce it.
The decision has paid off for South Africa, which for much of the past century was the world’s number one gold producer. According to mint data, about 53.5 million ounces of gold in Krugerrands have been sold since the first mint and more than U$21.5 billion of foreign currency revenue generated.
Krugerrands are legal tender in South Africa as they are issued under the authority of the reserve bank. As such, South Africans can convert between the local currency, the rand, and Krugerrands.
As is so often the case with gold-related products, the Krugerrand benefits from times of uncertainty. At home, the increasingly racially charged politics in South Africa has led to raised demand from people wanting a pick-up-and-go store of wealth. International events ranging from the emergence of ISIS to Brexit have investors looking at easily moveable money.
“The value of gold as an investment is becoming evermore apparent and many people are looking to actually save in gold,” says Mr Patel “It follows then that the Krugerrand, as a premier gold investment vehicle, will receive a fair portion of global demand.”
There have been attempts to replicate the Krugerrand’s success – with suggestions that a platinum and even silver version be produced. While commemorative versions of the coin in both these metals have been minted in limited numbers for the 50th anniversary of the Krugerrand, the reserve bank believes there is too little demand for the concept to take hold permanently. The reserve bank expects demand for platinum coins to be no more than 50,000 ounces a year – less than 5 per cent of the gold version. That is because platinum, also regarded as a precious metal, is primarily used in industrial applications, such as catalytic converters. Gold’s only real attribute is its rarity and it seldom finds itself sullied with being a useful base commodity.
“The Krugerrand contains one full troy ounce of gold,” says Hylton Davies, the managing director of SA Bullion, a Cape Townbased dealer. “Physical gold does not change over time but currencies do.”
Mr Davies says that since the Bretton Woods Accord was signed in 1944, gold has been priced in US dollars. Following this, global currencies were referenced against the dollar to measure their own value.
But in 1971, the US abandoned the gold standard and in nearly half a century since, the dollar has declined in value, as measured by its loss of buying power against gold. Bullion cost about US$31 per ounce in 1971; it currently trading at around $1,266, Mr Davies says.
Technically, the Krugerrand does contain some copper to strengthen it for wear-resistance as gold on its own is exceptionally soft. But the guarantee of each 1 ounce coin containing 22 carats of gold is what gives it its underlying value.
“This trend will continue into the future as the US becomes an evermore indebted nation, Mr Davies says. “Two thousand years ago an ounce of gold fed a family for a month. It does so today and will do so into the future.”
As is so often the case with gold-related products, the Krugerrand benefits from times of uncertainty
A half ounce, 22 carat Krugerrand gold coin with the dancing springbok. During South Africa’s apartheid years it was used to smuggle wealth out.