Is it time to get phys­i­cal?

Financial Mail - Investors Monthly - - Front Page -

The usual rea­son for buy­ing gold is that it is a hedge against risk. How­ever, not all gold in­vest­ments are equal.

A gold coin or a gold ex­change traded fund (ETF) of­fers di­rect ex­po­sure to the gold price. A gold share brings ad­di­tional ex­po­sure to risks such as mar­ket sen­ti­ment and so­cial and en­vi­ron­men­tal prob­lems, for ex­am­ple sil­i­co­sis claims and col­laps­ing tail­ings dams. But an ex­tra boost to share price per­for­mance can come from pos­i­tive news like new gold dis­cov­er­ies, ac­qui­si­tions, turn­arounds or div­i­dends.

Un­for­tu­nately, for long pe­ri­ods gold shares can un­der­per­form the gold price, so are not suit­able for highly risk-averse in­vestors or those in­vest­ing only for the short term.

Iden­ti­fy­ing gold com­pa­nies that can po­ten­tially out­per­form is a bit more chal­leng­ing. They range from small, strug­gling com­pa­nies like Cen­tral Rand Gold (whose shares per­formed spec­tac­u­larly well for a few months, when Chi­nese com­pa­nies were bid­ding to take over the com­pany) to di­ver­si­fied and more con­sis­tent per­form­ers like An­gloGold Ashanti.

An­gloGold Ashanti is one of the more solid gold shares on the JSE. has com­pared an in­vest­ment of about R100,000 in the com­pany’s shares over an ar­bi­trary five-year pe­riod — Jan­uary 1 2012 to De­cem­ber 31 2016 — to a sim­i­lar-sized in­vest­ment in Kruger­rands or the Absa NewGold ETF.

In this pe­riod, gold com­pa­nies were bat­tling to con­tain costs and pay down debt, with no as­sis­tance from the gold price, which fell steadily un­til the end of 2015. So An­gloGold does not come out well from the com­par­i­son.

At the be­gin­ning of 2012 An­gloGold was trad­ing at

Gold is a store of value and a cur­rency hedge against de­val­u­a­tion

R360/share, so R100,000 would have bought about 277 shares. By end De­cem­ber 2016 the share price had plunged to R152.58. It paid div­i­dends un­til the 2013 in­terim pe­riod, and de­clared a fi­nal div­i­dend for 2016 in Fe­bru­ary, but if the shares were sold at endDe­cem­ber, the 2016 div­i­dend would not have been ei­ther priced in or re­ceived. Div­i­dends re­ceived in this pe­riod to­talled 550c/share, or R1,523.50 on this in­vest­ment.

At the end of De­cem­ber, these 277 shares would have re­alised R43,789, in­clud­ing div­i­dends but be­fore costs. If this was the only in­vest­ment made through an on­line share trad­ing plat­form, the ad­min­is­tra­tive cost would have been about R90/month for 60 months, on top of which were bro­ker­age costs on buy­ing (0.5% or R499)

and sell­ing (R211) and a cou­ple of other mi­nor items. To­tal costs are about R6,110, which means an in­vestor would have come out with R37,679, a 62% ero­sion of value.

In the same pe­riod an in­vest­ment in Kruger­rands be­fore costs with SA Bul­lion would have re­turned 23.2% gross, the dif­fer­ence be­tween the pur­chase price of R12,895.03 per coin, which in­cludes the trans­ac­tion cost, and the sell­ing price of R15,886.86 quoted by Rand Re­fin­ery, which ap­plies to all Kruger­rand sales.

All other costs, in­clud­ing stor­age and in­surance, are a max­i­mum of 2%/year for small in­vestors, SA Bul­lion MD Hil­ton Davies says, but they are on a

Gold shares have a place in a di­ver­si­fied port­fo­lio be­cause they are un­cor­re­lated with eq­uity mar­kets in gen­eral

slid­ing scale so pro­por­tion­ately cheaper on larger in­vest­ments. At the max­i­mum level, costs on a R100,000 in­vest­ment would come to about R2,000/year, or R10,000, which re­duces the re­turn to 13.2%.

Davies says in the cho­sen five-year pe­riod gold’s per­for­mance was dis­ap­point­ing — if in­vestors had sold on April 7, their gross re­turn would have been 34.3%, not 23.2%.

SA Bul­lion is li­censed as an in­vest­ment man­ager by the Fi­nan­cial Ser­vices Board, which means it com­plies with oner­ous re­quire­ments, in­clud­ing in­surance and au­dit­ing.

Davies says peo­ple in­vest in Kruger­rands rather than shares or un­se­cured deben­tures be­cause phys­i­cal gold can­not “go bust”. “As with one’s home, it should be owned di­rectly and with­out an in­ter­me­di­at­ing in­stru­ment. This way it forms a bedrock in­vest­ment in one’s port­fo­lio that talks to ul­ti­mate se­cu­rity, free from the risks of cur­rency de­base­ment, govern­ment mal­ad­min­is­tra­tion, and bank fail­ure,” he says.

SA Gold Coin Ex­change chair­man Alan Demby says gold is a store of value and a cur­rency hedge against de­val­u­a­tion caused by po­lit­i­cal de­ci­sions. But it would be un­wise for in­vestors to put all their money in Kruger­rands. Nor­mally the ex­change rec­om­mends hold­ing 10%-15% of a port­fo­lio in gold as­sets but with the in­creased po­lit­i­cal and eco­nomic tur­moil of the past few years it now ad­vises 15%-25%. The in­vest­ment should not be made for short pe­ri­ods.

A lump sum in­vest­ment in the Absa NewGold ETF through ETF-SA would have re­turned 28% in the five-year pe­riod, in­clud­ing the to­tal ex­pense ra­tio of 0.4% but ex­clud­ing bro­ker­age of 0.08% (about R80 each on buy­ing and sell­ing, so R160) and an an­nual ad­min­is­tra­tion fee of 0.65%/year, which comes to be­tween R3,250 and about R3,450 for five years on a R100,000 in­vest­ment. These costs re­duce the net re­turn to about 24.5%.

ETF-SA MD Mike Brown says Kruger­rands and a rand­based ETF like NewGold will give roughly the same in­vest­ment per­for­mance.

“Gold shares, of course, carry a far higher risk, be­cause min­ing in­ci­dents, labour prob­lems and min­ing rights risk af­fect the value of the share rel­a­tive to the gold price. How­ever, gold shares do give some lever­age on the gold price and there­fore should be con­sid­ered as an in­vest­ment op­tion, pro­vided their re­turns com­pen­sate for their higher risk,” he says.

Matt Bren­zel, joint chief in­vest­ment of­fi­cer at Cadiz As­set Man­age­ment, says Kruger­rands appeal to in­vestors tak­ing a view on po­lit­i­cal or eco­nomic risk be­cause they give ex­po­sure to the gold price, and are a tan­gi­ble as­set and por­ta­ble.

NewGold gives sim­i­lar ex­po­sure to the gold price but its ad­van­tage is that it can be sold in­stantly on the JSE.

A gold share also of­fers ex­po­sure to the gold price and the rand/dol­lar ex­change rate, but ad­di­tion­ally is an in­vest­ment in an en­tity that can gen­er­ate rev­enue growth and pos­si­bly div­i­dends, Bren­zel says. De­pend­ing on the tim­ing of buy­ing and prospects for earn­ings growth, gold com­pa­nies can gen­er­ate re­turns above Kruger­rands or ETFs. The most mar­ginal pro­duc­ers, like Har­mony Gold, re­act the most to in­creases or de­creases in the gold price be­cause they have rel­a­tively high fixed costs.

At dif­fer­ent times it might be bet­ter to be in phys­i­cal gold than shares (when the earn­ings of gold com­pa­nies are un­der pres­sure), or vice versa, Bren­zel says. Gold shares have a place in a di­ver­si­fied port­fo­lio be­cause they are un­cor­re­lated with eq­uity mar­kets in gen­eral, tend­ing to out­per­form when the rest of the mar­ket is fall­ing.

One of the prob­lems in try­ing to do a com­par­i­son like this over a spec­i­fied pe­riod is that it does not re­flect the be­haviour of real in­vestors, who buy and sell for dif­fer­ent rea­sons but would gen­er­ally hang on to a gold in­vest­ment un­til there was a price re­cov­ery. It also ig­nores the fact that in­vestors have dif­fer­ent pref­er­ences. For some in­vestors, phys­i­cal gold is much eas­ier to un­der­stand than gold shares.

Even tra­di­tional eq­uity in­vestors liv­ing in a coun­try fac­ing po­lit­i­cal tur­moil, ris­ing debt re­pay­ments and an up­swell of pop­u­lar sen­ti­ment in favour of land ex­pro­pri­a­tion with­out com­pen­sa­tion may start to see more ad­van­tages in gold coins.

Pic­ture: iSTOCK

Hil­ton Davies Pic­ture: FI­NAN­CIAL MAIL

Alan Demby Pic­ture: FI­NAN­CIAL MAIL

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