During times of economic crisis, such as a recession, a currency collapse, or very high inflation, many investors turn to gold for its ability to hold its value.
South African investors are currently on edge, as the rand, a volatile currency, has lost significant value due to a combination of factors that include load shedding and political risk.
This article explores whether gold may be a good investment in uncertain times, and how you can gain access to it.
Tip: Targeted investments help you to meet your short- and longer-term savings goals. Find out more here.
Why gold retains its glitter
As a metal, gold is intrinsically valuable, meaning, it has value in and of itself. There is a limit to it, and thus it holds some level of scarcity.
It also falls outside the investment universe. In this universe, currencies issued by the government, which are not backed by a physical commodity, exist as bytes on a computer’s bank ledger.
“Physical gold is a bedrock asset that should form part of any investment portfolio,” says Kevin Creasey, owner of Amethyst Financial Resource Solutions.
“Very few pension funds have exposure to physical gold – perhaps 1% – which shows a lack of savvy for managing people’s retirement savings wisely.”
Regulation 28 of the Pension Funds Act places a 10% limit on commodities in investment portfolios.
“As some economies teeter on the brink of recession, gold’s role as a long-term, strategic asset could take centre stage. It has a history of delivering positive returns in the past five out of seven recessions,” notes Louise Street, senior markets analyst at the World Gold Council.
A “safe haven” in times of crisis
Mike Brown, managing director and founder of etfSA.co.za, says recent geopolitical shifts have worked in gold’s favour, especially amid talk of a “post-dollar” world and the fact that central banks are purchasing gold as a counterweight to foreign currencies.
“Gold is not a political instrument and is typically seen as a ‘safe haven’ during times of crisis,” he notes.
The price of gold, which is quoted in US dollars, can however fluctuate wildly, depending on market conditions.
“The rand value of gold increases as the currency depreciates,” explains Roelof Feenstra, portfolio manager at Independent Securities.
“Gold has long been viewed as a form of money, and because it's accepted worldwide, it's a good alternative for people concerned about the value of their currencies.”
Ways to invest in gold
Creasey says that unless you want to speculate in gold proxy tokens, gold should be owned directly, with no third parties involved. “It is best under your personal control and custody,” he says.
An easy – if slightly costly – way to invest is to purchase Krugerrands.
“A one-ounce Krugerrand cost R13,200 in March 2013, and R38,000 in March 2023,” says financial planner Sylvia Walker, the author of Smartwoman: How to Gain Financial Independence and Create Wealth.
“Inflation over the past ten years was around 5.1%, so if your R13,200 had kept pace with inflation, it would have been worth R21,734 after ten years – not quite as much as gold.”
Feenstra cautions that it’s in your best interest to insure any physical gold you own against loss or theft.
A popular alternative is investing in gold exchange-traded funds (ETFs), and unit trusts that specialise in gold by investing in gold mining companies. These gold proxies give you access to the commodity without you having to physically purchase it.
“Gold ETFs are backed by physical bullion, but you don’t have to worry about the often-prohibitive cost of purchasing gold, or where to store it,” says Brown.
Although gold ETFs do not pay dividends, even though they’re invested on stock exchanges, they provide a useful “hedge” against inflation and can help to reduce overall portfolio risk.
“Gold ETFs have provided low-cost exposure to metals that investors would otherwise not have had,” Brown points out.
Tip: Looking for a source of income to maintain your standard of living after retirement? Consider investing in a retirement annuity.