Gold is rocketing - and there are many ways to invest. But some experts are not biting

Author: keyline
Date: July 6, 2021

Phumi Ramalepe , Business Insider SA

  • The gold spot price broke through $1,800 per ounce for the first time since 2011 on Wednesday.
  • Investors are worried about the prospects of inflation and a weaker dollar, and seeking shelter in the so-called "safe-haven" investment.
  • There are plenty of gold investment options for South Africans.  

Gold spot prices broke above $1,800 per ounce on Wednesday for the first time since 2011.

Investors are fleeing into the "safe haven" investment amid nervousness about spiking coronavirus cases and fears that the pandemic's impact on unemployment will be far worse than during the financial crisis.

If the world economy doesn't recover soon, interest rates will remain very low - which will hit the dollar, traditionally an investment competitor to gold.

Also, authorities will continue to pump new money into the US and European economies. And this kind of stimulus may over the long run create inflation, which is also good news for gold. Gold is considered a good hedge against inflation.

The precious metal traded as high as $1,804.80 per ounce on Wednesday, up roughly 19% year-to-date - and close to an all-time high of around $1,900.goldLong-term gold price.

Some analysts think gold has plenty of room to run. Goldman Sachs raised its 12-month price target for the popular hedge on June 19 to $2,000 per ounce, expecting gold to reach a record high amid lasting virus damage. With interest rates set to remain close to zero for years to come and the US dollar facing significant pressure, the metal's rally shows no signs of stopping, the bank's analysts said.

"As we have argued in the past, gold investment demand tends to grow into the early stage of the economic recovery, driven by continued debasement concerns and lower real rates," Goldman said. "Simultaneously we see a material comeback from [emerging-market] consumer demand boosted by easing of lockdowns and a weaker dollar."

Investment options for SA investors 

For South African investors who want exposure to gold, there are a plenty of options:

Gold shares

As SA is one of the biggest gold producers in the world, there are many gold miners listed on the JSE. A company like DRDGold has already rallied more than 250% since the start of the year.

You will have to do your homework before deciding which company has the best investment potential, and could run even further.

Buying shares directly can also be quite costly, in terms of brokerage and other fees. Experts warn that investment in gold shares should be part of a diverse portfolio – they can be quite volatile.

Gold unit trusts 

If you aren’t sure which gold shares to buy, there are plenty of ETFs and unit trusts on offer in the sector, says FNB portfolio manager Wayne McCurrie.

A unit trust pools investors' money together to buy a number of different gold mining shares. 

There are a number of gold-focused unit trusts from investment companies like Coronation and Old Mutual. Their fund managers decide which companies offer the best growth over time.

Gold exchange traded funds

Exchange traded funds (ETFs) are a bit like unit trusts: they also pool investors’ money together to invest in assets. But unlike unit trusts, there are no experts to pick investment winners on your behalf. ETFs simply track an index, or an asset price. It should give you the same performance of an index (of shares, for example) – minus costs.

The most popular of the gold ETFs in South Africa, Absa’s NewGold and 1nvest Gold, track the price of gold. When you buy one NewGold security, for example, it is the equivalent of 1/100th of a fine troy ounce of gold.

ETFs are currently massive buyers of gold.

Across the world, year-to-date gold buying for ETFs tracking the metal reached 655.6 tonnes on Wednesday, Bloomberg reported, surpassing the full-year increase seen in 2009. Gold ETF holdings currently sit at 3,234.6 tonnes.

Medallions and Kruger rands

There are two types of Krugerrands.  Bullion Krugerrands, manufactured by the SA Rand Refinery, are 22 carat gold. Their value is directly linked to the gold price. You can currently buy a bullion Krugerrand from around R3,700 for a 1/10oz coin, up to almost R33,000 for a full ounce coin.

There are also proof Krugerrands, which are collectors' items and produced by the SA Mint in limited numbers.

Then there are other collectable gold coins or medallions, which are tricky to invest in if you do not know much about them or what to look out for. These coins are also risky because they can be difficult to sell.

“Krugerrands normally trade at the face value of the gold content. I would not recommend medallions that trade at above the actual gold value. These ‘collectable’ medallions normally have low liquidity,” says McCurrie.

It is much easier to sell a Krugerrand - the South African Reserve Bank must, by law, buy it as a last resort.

But is it a good time to buy gold?

There are plenty of gold sceptics, among them the investment guru himself, Warren Buffett. He has repeatedly bashed gold over the years, most recently calling it a " magical metal (that is) no match for the American mettle."

Apart from jewellery demand, gold doesn’t have any intrinsic value, and – unlike the shares of listed companies - also don’t offer any dividends or other type of income to its investors.

“The best time to invest in gold is never,” says Bright Khumalo, analyst and portfolio manager at Vestact Asset Management.

“And if you're trying to buy gold now, you're probably committing another cardinal sin that most investors fall for and that is buying high and selling low.

“At $1,800 an ounce, gold is at its highest level in 11 years, and every contrarian bone in me says I'm probably buying high. This doesn't mean it can't go up any further.”

McCurrie adds that “gold is an emotional asset” that performs well when there is turmoil in the world’s economy.  

“Therefore, if you think that the worst is behind us now as far as the virus is concerned, then now is not the correct time to buy gold. If you are of an opposite view, then now is a good time to buy gold.”

Additional reporting by Ben Winck