IS GOLD STILL A SAFE HAVEN?
It hasn’t been a good month for gold bulls after the gold price decreased by 6.4% in US dollars, and the JSE Gold Index dropped 17% for the month to 20 July. The reality is this isn’t a new trend. Rather it’s a continuing one since gold had its all-time high in September 2011. Since then, the index is 42% lower in US dollar, and 68% lower in rand terms.
There is nothing special about gold as a commodity. And there is most certainly no reason this commodity should be less volatile than any other – li ke platinum, copper or si l ver. Commodities are and always will be high-risk i nvestments, so don’t let anyone convince you that gold is a “safe haven” in your investment portfolio.
That said, gold (along with other commodities) has one attraction for a long-term, goal-orientated portfolio: it is a tangible asset. Such an asset can be very useful, as it provides a good hedge against inf lation.
If you had been invested in gold for the past 40 years, your returns would have come to 13% a year. This is an attractive percentage when compared with local inf lation, which grew by 10% a year over the same period. Of course, there were times when gold strongly underperformed inf lation. But over the long term, it remained an attractive investment.
I’m just not convinced t hat t he underlying mines offer t he same attraction. If you had invested R100 in the gold price – by using something like Krugerrands – 10 years ago (at the end of June 2005), your R100, after the past four tough years, would be worth only R470 today. But had you invested the same amount in the local Gold Index, your investment, excluding dividends, would be worth a shocking R49!
For those who now feel discouraged because of the fact that it is so difficult to buy this physical commodity, there is some good news. During the past few years, both Standard Bank and Investec have l isted gold (and other commodities) exchange-traded notes (ETNs) on the JSE. For those looking for exposure only on the movements in the physical gold price in US dollars, the Investec ETN may be considered, while the Standard Bank ETN offers you these movements in rand value.
There are a few f und managers who have a st rong preference for gold. According to my l atest data, the Investec Value Fund stands out as the equity f und in South Africa (excluding specialist resources funds) with the highest exposure to direct gold mines – more than 23% of the f und is currently allocated to local gold mines. The Momentum Value, Element Earth Equity and Stanlib Value funds follow closely, with their very high exposure to gold mining. People who feel gold mines are ready for recovery can consider these funds.
For others, l ike me, who feel the risks associated with investing in mines are just too high, these funds should be avoided at all costs.
It doesn’t matter which way you look at it, gold will put a sparkle in many an investor’s eyes. But beware – neither it, nor other commodities, are safe investments in your portfolio.
THERE IS NOTHING SPECIAL ABOUT GOLD AS A COMMODITY, AND THERE MOST CERTAINLY IS NO REASON WHY THIS COMMODITY SHOULD BE LESS VOLATILE THAN ANY OTHER COMMODITY SUCH AS PLATINUM, COPPER OR