Beware gold’s hidden costs

Financial planner warns an investor of price volatility.

Kirsty Scully CFP, a financial planner with Core Wealth in Durbanville, advises a reader who’s thinking of buying gold.

Q: I’m selling my house for about R1 million to pay off our debts. I should have R500 000 over and, considering market volatility and that all my other money is locked up in investments and another property that I own, should I buy physical gold or a money market account generating 6.4%?

I want something safe.

A: It is vital that you meet a financial planner. It is not wise to give recommendations based on only a portion of your investment information.

It is unlikely that allocating the full amount to gold would be appropriate as the price of gold can be volatile over short-term periods. I would also assume that the lump sum of R500 000 is unlikely to be a small portion of your overall portfolio and this makes it even less appropriate to allocate it all to gold.

In addition, you specifically ask about physical gold, which in most cases is Krugerrands. When investing in Krugerrands there are fees of about R3 000 per ounce (you can buy for R21 000 versus selling for R18 000 as per the Cape Gold Coin Exchange), which need to be taken into account. Over the short term, these costs are punitive.

The gold price would therefore have to increase substantially in two years to beat the 6.4%. Remember, you will also have to pay for storage and insurance. Therefore, I would consider gold to be a relatively high-risk investment for you.

The money market is probably one of your safest options. However, I am interested that you quote an interest rate of 6.4%, as I know other options that offer up to 8.0% per annum. Make sure that you do your homework well, in conjunction with your financial planner. You may even look at the possibility of a 24-month fixed deposit, where the interest offered is higher.

Depending on your marginal tax rate and your age, a more efficient investment may well be through a dividend income-type of portfolio.

Ask your financial planner about this because you should be able to achieve an improved growth rate after tax compared to a money market.