Gold just hit a record high - here are some of the investment options for South Africans

Author: keyline
Date: July 27, 2020

Phumi Ramalepe , Business Insider SA

  • On Monday morning, gold hit a new record - as investors seek a 'safe-haven investment' amid conflict between the US and China.
  • Negative interest rates and the slumping dollar also contributed to the rally.
  • For SA investors, there are plenty of investment options - but not all experts are keen on bullion.

The precious metal has been rallying as the dollar slumped to its weakest levels against the euro in 22 months. The dollar is traditionally an investment competitor to gold.

The dollar is under pressure as it is currently not offering an interest rate that is above inflation - and investors don't believe the US central bank will hike rates any time soon.

For investors in the developed world, investing in physical gold actually makes sense, because many of these countries now sit with engative interest rates, says Schalk Louw, a portfolio manager at PSG Wealth. 

The dollar also took a hit amid worries about the economic fallout of the coronavirus pandemic, as well as new China-US tensions.

On Friday, the Chinese government ordered the closure of a US consulate in the city of Chengdu. Earlier last week, the US government demanded that the Chinese government closes its consulate in Houston, Texas.

Meanwhile, in an inflammatory speech on Thursday, US Secretary of State Mike Pompeo called on "free nations" to triumph over China's "new tyranny." He also reportedly told UK politicians that the head of the World Health Organisation, Tedros Adhanom Ghebreyesus, was "bought by the Chinese government."

Gold is seen as a safe-haven investment in times of turmoil, and there has been record investments in the precious metal - with exchange traded funds (ETFs) now holding a record 3,300 tonnes of gold.

Gold is also benefiting from expectations that massive amounts of quantitative easing – when central banks create money out of thin air to pump into markets – will eventually trigger inflation.

Theoretically, high inflation is good for gold. Inflation means money loses its value, which encourages investors to turn to gold.

"The scale of quantitative easing is staggering, and that is causing real concern that the extra money in the system will lead to inflation," Ed Moy, chief strategist at gold seller Valaurum and former director of the US Mint, said. "When people are scared, they want to take chips off the table, and gold is typically one of the places where people put their chips in times of crisis."

Some analysts think gold has plenty of room to run. Goldman Sachs has a 12-month price target of $2,000 per ounce. 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

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 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.

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.

“I’m the worst gold bull you’ll find,” says Louw. “Gold as an investment do not make sense to me. You’re not going to earn an income out of buying a block of gold. You’re just going to buy yourself short-term safety.”

“The best time to invest in gold is never,” adds 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."

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.”