By Ashleigh Brown, journalist, Justmoney
There are many ways to invest in gold. You can buy gold bullion (gold in its physical form) from banks, the Scoin shop or other gold investors. It is also a ‘universal’ currency in that it can be exchanged or bartered for the currency of the country you are in.
However, not many know the difference between a Krugerrand, gold medallions and investing in gold shares. This is following the Fin24 article
, where a reader bought a Mandela medallion gold coin, at a high price - a gamble which ended up in the reader losing money. Clearly even the death of the former struggle icon didn’t increase the value of the coin.
“A gold medallion is anything excluding a Krugerrand or a gold bar. Something like an old bullion coin, or Mandela medallion. When you invest in something like that you invest in two things: you invest in the bullion value and you invest in the coin or the medallion’s value – the collector’s value,” said Etienne van Wyk, part of the metals and energy trading group at Rand Merchant Bank.
These coins normally trade at the bullion value, plus a mark-up, which has to do with the collectability of a coin. The collectability of the medallion is normally a very substantial part of the total value.
“If you look at something like old gold Roman coins, there the bullion value is actually a very small percentage of the overall value, because people buy the coins more for the historic value than for the fact that they are made out of gold. The same goes for collectable coins like the Mandela coin,” said van Wyk.
Therefore, collectable coins or gold medallions do not give investors a very clear bullion view and thus not a very efficient way of investing in gold. Furthermore, collectable coins are quite difficult to invest in, if potential investors are not in the know about the collectability, or what to look out for.
“People’s tastes and fashions when it comes to coins is so difficult to call, that really when you get into the collectable coin field, unless you really know what you are doing, rather stay out,” advised van Wyk.
Furthermore, if investors want to sell a medallion coin, they first have to find a collector, or someone interested in the medallion before they can sell it. This is why investing in medallion coins is a risk, especially if the investor does not fully understand the collectors market, or the full collector value of the coin. Research clearly needs to be conducted before investing in gold medallions.
“If you have a pure bullion view in mind, then Krugerrands are a perfect investment vehicle. When you buy a Krugerrand you take a view on the gold price in Dollars, and you take a view on the Dollar-Rand exchange rate. So even if the Dollar price of gold doesn’t do anything, but the Rand depreciates, you still make money. For that reason, it is a very good hedge against inflation – both local inflation and Dollar inflation,” explained van Wyk.
Krugerrands normally trade at 4% premium to the bullion value, which is a lot less than Mandela coins which can trade at twice the bullion value. Therefore, a Mandela coin trades at a mark-up of 100%.
“In the case of the Krugerrand, you see what the gold price is today, you know what Dollar-Rand is today, and in two months’ time the Rand value might depreciate a lot and you know what the value of your [Krugerrand] is and you can go and sell it. There are no unobservable premiums which make up the value of the coin,” said van Wyk.
It’s a lot easier to sell a Krugerrand than it is to cash in a medallion. The South African Reserve Bank (SARB) is by law, set to act as buyer of last resort for Krugerands. This means that if an investor buys a Krugerrand from a dealer, for example, and wants to sell the Krugerrand in order to get their Rands back, they need only go into a SARB branch and exchange the Krugerrand for its cash value.
There are also two types of Krugerrands: they come in bullion and in Proof coins. The difference between the two, is that Krugerrand Proof coins image and finishing’s are better than that of a bullion coin. Adding to this, the Proof coin will come in a box, and has 220 serrations around the edge, whereas a bullion coin only has about 180 serrations. This is due to the quality of the mint. Furthermore, if investors only have gold bullion in mind, then the Krugerrand bullion coin is a better investment.
“If you want to buy a Proof coin as a gift, as it comes wrapped in a box and looks very nice, then that is fine. But as a gold investment I don’t think that that is a very efficient way of accessing [gold investments],” said van Wyk.
“Gold provides a very good tail-hedge, so if the world falls apart or there is another stock market crash, the gold price goes up. So that is the reason why you invest in gold,” said van Wyk.
When investing in gold shares, investors take a view on the gold price, the exchange rate, management ability of the mine to efficiently and profitably get its assets, and they look at the regulatory environment. Therefore, investors in gold shares take a view on a lot more than just gold prices.
If the gold price goes up then generally mines will want to maximise production. If you hold gold shares this will mean that you have double exposure [on your paper shares]. In other words, you will benefit dually if gold prices go up and if mining companies increase their output.
“However, we have not seen that in the past couple of years. The principal reason for that was mining inflation, which has typically performed on par with the gold price, so there was not an increase in income to be expected from the gold price,” said van Wyk.
Van Wyk explained that before investing in gold investors should ask why they want to invest in gold, and what would be the best for them in the long run. Gold acts as a ‘tail-event insurance’ (i.e. when most other investment types go down in price, gold goes up or holds its value).
That’s not to say that gold can’t lose value. A report by the New York Times illustrated that gold has gone through booms and busts before, including at least two from its peak in 1980, when it traded at $835 (R9180), to its high in 2011.
Commentators agree that gold can be a good investment but that it should never be solely relied upon and as the case with the Fin24 reader shows it’s best not to gamble all of your money. Diversifying your portfolio (spreading your savings over more than one asset class) is still key.
Glossary of terms
• Gold bullion: The physical form of gold, which comes in either gold bars or in gold coins.
• Krugerrand: A South African gold coin with President Kruger on it, first minted in 1976.
• Gold medallion: Any gold coin other than a Krugerrand, which has collectors value, e.g. a Mandela coin.
• Gold shares: investing in gold on the JSE.
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