Should you be hold­ing gold?

Tra­di­tion­ally, South Africans are big on in­vest­ing in gold. But are there smarter al­ter­na­tives?

Finweek English Edition - - ON THE MONEY - By Mar­cia Klein editorial@fin­week.co.za

ataround R18 000, the price of a Kruger­rand is pretty much where it was in 2010. In other words, it has been a poor in­vest­ment over the past few years. But in­vestors have tra­di­tion­ally in­vested in Kruger­rands and gold coins as an “in­sur­ance pol­icy”, and many fi­nan­cial ad­vis­ers en­cour­age in­vestors to keep coins as a small por­tion of their port­fo­lios.

The launch of gold ETFs and other in­vest­ment prod­ucts, which es­sen­tially re­place coins, should have made in­vest­ment in phys­i­cal coins or Kruger­rands ob­so­lete. Yet, many in­vestors are still keen to hold onto their coins de­spite the fact that the newer prod­ucts of­fer an ex­cel­lent – and in many cases cheaper – al­ter­na­tive.

The cost of gold

The cost of stor­ing and in­sur­ing coins is one of the con­cerns as­so­ci­ated with choos­ing them as an in­vest­ment, says Ne­rina Visser, eftSA strate­gist: “You can take a coin out of the box and look at it and feel it, but that com­fort comes at a cost. If you have one or two you can keep them in a safe at home, but for a larger col­lec­tion, this won’t work any­more.”

It is also in­creas­ingly dif­fi­cult and ex­pen­sive to store coins in safety de­posit boxes – and banks are be­com­ing re­luc­tant to have safety de­posit boxes, es­pe­cially fol­low­ing the FNB rob­bery in De­cem­ber last year, when 360 safety de­posit boxes were stolen from the bank’s Fern­dale branch.

Gold ETFs, like those of­fered by Absa (New Gold) and Stan­dard Bank (Africa Gold) are ex­cel­lent al­ter­na­tives for most in­vestors. There are also gold ex­change-traded notes (ETNs), which are not nec­es­sar­ily backed by phys­i­cal gold. (Also see side­bar.)

Craig Gra­didge, ex­ec­u­tive di­rec­tor of pri­vate wealth man­ager Gra­didge Mahura In­vest­ments, says ETFs of­fer in­vestors the same pro­file with­out the risk of los­ing the coin or in­sur­ing it. A gold coin is also “bulky” as you can’t sell half a coin. With NewGold ETFs, for ex­am­ple, say you buy R100 000 worth, you could sell off R15 000, so there is di­vis­i­bil­ity and liq­uid­ity is bet­ter, he ex­plains.

While the cost of in­sur­ance and stor­age of gold coins is in­creas­ing, there are also costs as­so­ci­ated with ETFs, from ini­tial buy­ing stock­broking charges, which can be a small cost com­po­nent, to on­go­ing costs. In the case of Absa’s NewGold ETF, these are 0.4%. If, how­ever, you have mil­lions of rand in a gold ETF, the charges may be­come higher than the stor­age and in­sur­ance of gold coins.

In­vest­ment in gold ETFs, like coins, is not for every­one and in­ter­est in in­vest­ing in them fluc­tu­ates in line with the at­trac­tive­ness of gold, says Ne­rina Visser.

Whether it is coins or gold ETFs, one of the big­gest prob­lems with gold in­vest­ment is tim­ing, adds Gra­didge: “There are two volatile price driv­ers – cur­rency and gold price – and the re­turn has been neg­a­tive over the past few years, with only some re­cov­ery lately. “When things fall apart gold is your one saviour, but the long-term in­vest­ment case for gold is dif­fi­cult to nail down.”

So, which op­tion should you go for?

Gra­didge says that from an in­vest­ment per­for­mance point of view, hold­ing gold should be seen as noth­ing more than be­ing part of a well-struc­tured port­fo­lio. “We see gold as in­sur­ance and be­lieve that in a port­fo­lio it should have a 3% to 5% al­lo­ca­tion at all times.”

Sim­i­larly, Visser agrees that for in­vestors that are look­ing for the in­sur­ance el­e­ment that gold of­fers, an ETF does the job .“If you see an end to the global fi­nan­cial sys­tem as we know it”, gold coins re­main an op­tion. Ex­ec­u­tive di­rec­tor of pri­vate wealth man­ager Gra­didge Mahura In­vest­ments

Craig Gra­didge

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