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A guide to investing in gold

By Staff Writer
Investing in gold offers one of the safest means of diversifying your portfolio, as it provides the security of a stable, reliable commodity. The last two decades have shown that both gold and South Africa are a good future bet, says Alan Demby, Chairman of The South African Gold Coin Exchange (SAGCE).
 
The fluctuating local currency has pushed people towards considering gold as a safeguard for their future as well as wealth preservation, says Demby. Since 1994, the Rand has depreciated by over 309% against the US dollar. "Gold has become the perfect hedge against the local currency, which has become unpredictable for local and foreign investors," says Demby.
 
There are different ways to invest in gold – gold medallions, Krugerrands, and gold shares. We look at the pros and cons of each to help you pick the best way to invest in gold.
 
Gold medallions
 
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 (the physical value), plus a mark-up, which has to do with the collectability of a coin. With medallions the collectability is a very important part of the total value of the coin.
 
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.
 
Medallions rely on people's tastes and fashions at the time. So, as an investment they are not the best. However, they do make good collector's items. Just remember, that finding a buyer for a medallion is difficult, and you could end up losing money in the long run.
 
Pros:
 
  • Medallions are great as collector's items.
 
Cons:
 
  • They are difficult to sell.
  • As they trade on a mark-up.
 
Krugerrands
 
"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," says 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 Krugerrands. This means that if you buy a Krugerrand from a dealer, for example, and you later want to sell it quickly then you 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.
 
If you only have gold bullion in mind, then the Krugerrand bullion coin is a better investment. The Proof coin, just like the medallions, is great as a collector's item.
 
"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.
 
Pros:
 
  • You know exactly what you are investing in.
  • You can sell them easily.
 
Cons:
 
  • Proof coins are collector's items.
  • Proof coins can be difficult to sell.
 
Gold shares
 
When investing in gold shares, you, as the investor, take a view on the gold price, the exchange rate, management ability of the mine to efficiently and profitably get its assets. You would also need to know about the regulatory environment and keep an eye on the worker's strikes that occur frequently and that can impact on the price of your gold shares.As an investor, you 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 explains that before investing in gold you should ask yourself why you want to invest in gold, and what would be the best for you 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), so this may be an advantage for you depending on your investment strategy. But gold is not an investment for everyone and it is certainly not an asset class in which you should put all your savings.
 
While gold is described by most commentators as 'genrally safe', that is 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.
 
Pros:
 
  • You invest in more than just the gold.
  • So you can end up having double exposure and benefit dually if gold goes up in value.
 
Cons:
 
  • If the mines do poorly, you could lose money.
  • Gold can lose its value depending on the market.
 
General tips
 
Demby gives some general tips for investing in gold:
 
  • Start small: whether R5 000, R10 000 or R15 000, depending on what you can afford, but just start.
  • Don't put all your spare cash into gold.
  • Take your time. Allow time to help you become more comfortable and familiar with the process – this will provide you with the knowledge to buy more coins and you will experience the benefits of Rand cost averaging.
  • Buy what you like: If it appeals to you - buy it and lock it away. But remember what you want in the long run. Medallions are great as collector's items, but not the best investments. If you need the cash in a hurry you may find it hard to sell the medallion for the right price.
  • Collect with purpose: Whether it is for your children or grandchildren, for better times or worse or for a new property further down the line.
  • The gold/Dollar relationship: Remember that gold has a strong relationship to the US Dollar. "When the dollar strengthens, gold appears to weaken, and vice versa. This accounts for part of the fluctuations we see in the value of gold. The other part is an actual increase in the supply or demand for gold," says Demby.
 
"It is important to know that a collection you have built up can be converted into money one day, if the need ever arises. But, if you're buying with the intention of speculating within a short period of time for a quick profit, you could lose. Over time you can benefit financially but just like fine wine, coin collections need to collect dust before they reveal their true value. And, because collectors' ambitions are to complete their collections, they usually profit more than investors in both the short and long run," says Demby.

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