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