How Loans Against Gold and Krugerrands Work

What a bullion-backed loan is

A bullion-backed loan is a form of secured credit. You offer gold coins, Krugerrands or bars that you own as security, and the credit provider advances money against them. The bullion is held in custody for the duration of the loan. When the loan, interest and agreed charges have been repaid, the security is released back to you.

Because the loan is secured by an asset with a visible market price, the amount offered is driven largely by the value of the metal. That does not mean the lender ignores the borrower. Under the National Credit Act, a credit provider must be registered with the National Credit Regulator, must give you a pre-agreement statement and quotation before you sign, and must carry out the affordability and credit assessments the law requires.

Knox Precious Metals (Pty) Ltd is a registered credit provider, NCR registration number NCRCP21466.

Knox considers loans against items made of gold, silver and diamonds, and against luxury high-end watches and handbags. Examples include gold and silver coins or bars, gold and silver jewellery, cutlery and trophies, watches from brands such as Rolex, Cartier and Patek Philippe, and bags from brands such as Chanel, Louis Vuitton and Hermès.

The credit agreement is the document that governs your loan. This guide describes how such loans generally work; the agreement you are offered sets out the specific terms that would apply to you.

How gold and Krugerrands are valued for a loan

Valuation starts with the metal itself. A 1 oz gold Krugerrand contains one troy ounce of fine gold and is struck from 22-carat gold, an alloy of gold and copper. Fractional coins contain proportionally less fine gold. Bars are generally valued on their weight and stated fineness, and recognised refiner marks help to confirm what a bar is.

The lender then applies a market price. Precious-metal benchmark prices are set in US dollars per troy ounce, so the rand value of your gold moves with both the metal price and the exchange rate. A lender will usually work from a price closer to what it could realise if it had to sell the metal, rather than the retail price you would pay to buy the same coin. That is one reason a loan valuation is normally below a dealer's selling price.

Before a valuation is confirmed, the items are physically inspected. Weight, fineness and condition are checked, and testing may be used to confirm metal composition. Damaged, cleaned or altered coins, and bars without clear provenance, may be valued differently or may not qualify at all. Proof of ownership and identity documents may also be required.

Loan-to-value explained

Loan-to-value, often shortened to LTV, compares the amount you borrow with the value placed on the security. If a lender values your bullion at a given amount and lends you a portion of it, the loan-to-value is that portion expressed as a ratio. A lower loan-to-value means you borrow less against the same metal, which leaves a larger cushion between the loan and the value of the security.

Lenders keep that cushion for a reason. Gold prices move, and the lender must be able to recover what is owed even if the value of the security falls before the loan ends. The cushion also absorbs the costs of holding and, if necessary, selling the metal. For the borrower, a wider cushion reduces the chance that a fall in the gold price will cause difficulty during the term.

The loan-to-value Knox applies depends on the item: up to 75% of the assessed value for gold, 60% for silver and 50% for watches and handbags.

When comparing offers, look at the rand amount you would receive, the total cost of credit over the term and the conditions attached, rather than the loan-to-value on its own. A larger advance with stricter conditions is not necessarily the more suitable arrangement for you.

Price movements during the loan

Gold can rise or fall during a loan, and so can the rand. These movements do not usually change the amount you owe, which is set by the credit agreement, but they do change the value of the security behind it.

• If the gold price rises, the gap between the loan and the value of your bullion widens. You generally keep the benefit of that rise once you repay and your bullion is released.
• If the gold price falls, the gap narrows. Depending on the agreement, a significant fall may lead the lender to ask you to take action, and if the loan is not repaid, the proceeds from selling the security may be lower than you expected.

Gold prices can fall as well as rise, and no one can reliably predict the direction over the term of a loan. Borrowing against bullion keeps you exposed to the metal price for the whole term, which is worth considering whether you are hoping to benefit from a rise or concerned about a fall.

Margin calls and what the agreement says

In some forms of secured lending, a margin call is a request from the lender for the borrower to restore the cushion between the loan and the value of the security after that value has fallen. The borrower might be asked to make a partial repayment, to provide further security or to settle the loan. If the borrower does not respond within the period allowed, the agreement may permit further steps.

Not every bullion-backed loan works this way. Some agreements set the loan amount conservatively at the start and do not provide for margin calls at all; others include a defined trigger point and process. Whether margin calls apply, how they would be calculated, how you would be notified and how long you would have to respond are all matters for the credit agreement.

Knox's pawn agreement has no margin-call clause: the amount you owe does not change with the gold price, and Knox does not ask for additional security or early repayment if the price falls.

If anything about price-related terms is unclear, ask for it to be explained in writing before you sign. Make sure you understand what would happen in a sharp fall, not only in normal market conditions.

Interest, fees and storage during the loan

The cost of a bullion-backed loan is made up of interest and any fees and charges the National Credit Act allows, such as an initiation fee or a monthly service fee. Storage and insurance of the security during the loan may be included or dealt with separately, depending on the arrangement. The pre-agreement quotation sets out these amounts so that you can see the total cost before you commit.

Interest is charged at the fixed rate shown in your quotation, calculated daily and charged monthly. The quote also shows an initiation fee and a monthly service fee. Knox charges interest of 5% per month on a client's first loan. On later loans the rate ranges from 3% to 5% per month, depending on the loan.

Compare the total amount repayable with the amount you will receive. For a short-term need, the total cost over the period you expect to borrow is often a more useful figure than the interest rate alone.

Repayment, early settlement and rollover

Repayment terms vary. Some loans are repaid in a single amount at the end of the term, while others allow or require instalments. Once the loan and all charges are settled, the security is released. Ask how your specific coins or bars are recorded and returned, so that you know whether you will receive the exact items you pledged.

Yes. Pledged items are stored separately from other goods and the same item is returned to you, in the condition in which it was held, once the settlement amount is paid. You must present your barcode receipt, proof of identity and your signature.

Under the National Credit Act, consumers have a right to settle a credit agreement early. The agreement and quotation explain how an early settlement amount is calculated.

A rollover or extension continues the loan beyond its original end date, usually on revised terms. Rolling over can help if the need for funds lasts longer than expected, but it adds to the total cost of credit and keeps you exposed to gold-price movements for longer. Any extension should be agreed in writing, with the updated costs disclosed before you accept.

There is no automatic right to extend a loan. Any change to the term must be agreed and recorded in writing.

Business use and short-term bridging

Some businesses hold bullion as part of their reserves and may consider borrowing against it to manage a temporary gap in cash flow, such as while waiting for a customer to pay. A business borrower usually needs to show that the bullion belongs to the business, that the people signing are authorised to bind it, and that the business meets the lender's compliance requirements. A resolution, registration documents and identification for directors or members are commonly requested.

Whether the National Credit Act applies to a particular business loan depends on the type and size of the borrower and the size of the credit, so the protections described in this guide may apply differently. A business should take its own legal and accounting advice, including on how the loan and the bullion are recorded in its books.

Short-term bridging, whether for a business or an individual, is easier to manage when the source of repayment is clear and reasonably certain. If the expected funds are delayed, the loan may need to be extended or settled in another way, which is why it helps to understand the rollover and default terms from the outset.

Default and what happens to the security

Default generally means failing to meet the obligations in the credit agreement, most often by not repaying on time. The National Credit Act sets out specific steps a credit provider must follow before enforcing a consumer credit agreement, and the agreement explains how notices are given, what options are open to you and how the security may be realised. Realising security usually means selling the bullion and applying the proceeds to the amount owed.

If a payment is missed, Knox sends a written default notice giving you time to pay. If the arrears are not paid within that period, the loan ends and Knox may sell the pledged goods without a court order. The proceeds settle what you owe: any surplus is paid back to you, and you are not liable for any shortfall. Default interest is charged at the same rate as the loan.

If you think you may struggle to repay, contact the credit provider early. It is usually easier to discuss options such as settling part of the loan, arranging an extension or selling the bullion yourself before a default occurs than after it. If you have a complaint about how a loan has been handled, the agreement sets out the complaints route, and you may also approach the National Credit Regulator or an appropriate ombud scheme.

When borrowing may or may not suit you

Borrowing against bullion and selling it are different decisions, and neither is right for everyone. It can help to think through the following in light of your own circumstances.

Borrowing may suit someone who:

• needs funds for a defined period and has a clear, realistic source of repayment;
• wants to keep particular coins or bars, for example for family or long-term reasons;
• understands that the gold price can move against them during the term; and
• has compared the total cost of credit with the alternatives.

Borrowing may not suit someone who:

• has no clear way to repay, or whose repayment depends on an uncertain event;
• is likely to need repeated rollovers, which add cost over time;
• would be placed under strain by a margin call or by losing the bullion; or
• is borrowing mainly in the hope that the gold price will rise.

Selling ends your exposure to the metal and carries no interest, but you give up the bullion and any future change in its price, and a sale may have tax consequences. Borrowing keeps the bullion but adds cost and keeps you exposed to price movements. The right choice depends on your finances, your plans and your tolerance for risk. If you are unsure, speak to an independent financial adviser before you decide.

Practical checklist before you apply

• Gather your bullion together with any purchase invoices, certificates or other proof of ownership.
• Bring your South African ID or valid passport and any other identity and verification documents the lender asks for.
• For a business, prepare a resolution authorising the loan and the business's registration documents.
• Ask how the bullion will be valued and which market price the valuation uses.
• Read the pre-agreement quotation carefully and check the total amount repayable.
• Confirm whether margin calls apply and, if they do, how they would work.
• Ask how repayment, early settlement, rollover and default are handled.
• Confirm how your specific coins or bars will be recorded, stored and returned.
• Plan your source of repayment before you sign, and keep copies of every document.

Bring your ID, proof of address (dated within the last 3 months), the bank details for the account the loan should be paid into and for the debit order, and any certificates, invoices or papers for the item. If you are married in community of property, your spouse must consent to the loan.

Key takeaways

• A loan against gold or Krugerrands is secured credit: the bullion is held as security and released once the loan and charges are settled.
• The loan amount depends on a physical valuation of the metal and the lender's loan-to-value approach, not on the retail price of the coins.
• Gold-price and exchange-rate movements change the value of the security during the loan, and whether margin calls apply is set out in the credit agreement.
• The pre-agreement quotation and credit agreement set out interest, fees, repayment, early settlement, rollover and default terms.
• Borrowing and selling suit different circumstances, so plan your repayment and take independent advice if you are unsure.