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Krugerrand demand skyrockets

Gold is a safe haven in turbulent times – FNB Share Investing CEO.

JOHANNESBURG – The demand for Krugerrands has skyrocketed during the past week as investors tried to benefit from the weaker gold price.

The gold price dropped to its lowest level in months earlier this week after it emerged that Cyprus might be selling gold in order to help finance its bailout.

Gusta Binikos, chief executive officer of FNB Share Investing, says the average ounces bought back from customers per month has increased by 30% for this month, compared with the average for the prior 12 months. However, this is only a slight increase compared with the increase of sales to customers of 331% for the same period, says Binikos.

Source: FNB (Average ‘buy’ is buy back from customers and average ‘sell’ is selling to customers)

“Customers are not selling, but rather adding Krugerrands to their existing portfolios. FNB Share Investing sold more ounces in the last few weeks compared to the ‘gold rush’ in August 2011 when gold rallied to nearly $1,900,” says Binikos.

“Our customers are generally buying-to-keep rather than to sell. We have seen increases in Krugerrand sales not just when gold rallies up but also when it drops down.”

Since its launch in February 2011, FNB has sold more than R400m in Krugerrands. Two thirds of clients keep their coins with FNB.

“Although sales are affected by the R/$ exchange, our clients invest in Krugerrands for diverse reasons and they generally don’t speculate.”

Alan Demby, chairman of the SA Gold Coin Exchange/The Scoin Shop, says its sales increased by 468% during the past week, compared with the prior week.

Demby says from a South African perspective – with a vulnerable currency that depreciated significantly over the past few months – coupled with unrest and uncertainty related to Marikana – people felt that the lower gold price offered a great buying opportunity.

Demby says gold and Krugerrands are still ostensibly in a bull phase and while there is a bit of a shakeout in certain parts of the market – the market has already started to claw its way back.

Despite the selloff in local markets this week, he says share markets are probably still pretty good all round, except for gold mining shares, which are vulnerable.

Even if the gold price should deteriorate further, chances are that the rand/dollar exchange rate will also worsen, he says. Demby believes one of the better ways for investors to protect themselves against such a scenario is still to enter the gold market.

“You know the thing about gold is – and this has always been our contention – that you should put 10-15% of your money into gold, two thirds into bullion coins such as Krugerrands and a third into collectables. At the end of the day it is really a matter of having a small proportion of your whole portfolio in gold.”

“I think Krugerrands and physical gold are as relevant today as they were pre-1994,” he says.

Glenn Schoeman, chief executive officer of Gold Reef City Mint and chairman of the South African Numismatic Dealers (SAAND) also indicated to Moneyweb that the dramatic drop in the gold price during the past week has sparked off a “massive, massive buying spree”.

Schoeman says Gold Reef City Mint’s Krugerrand manufacturer – Rand Refinery – is currently unable to meet the demand for the coin.

“Quite honestly the supply does not even meet it (the demand) by any manner or means,” he says.

He estimates that the increase in demand over the past week was “probably four or five times what it would be under normal circumstances”.

Schoeman says gold has been a safe haven during the financial crisis. “A lot of people have been sitting on the fence waiting for gold to come down – this is obviously the opportune moment for them to climb in.”

He says investors ultimately feel that in the long run gold is going to be a good investment. 

“As long as gold carries on going up, I foresee that there is going to be a great demand for Krugerrands.”

But even a slump in the price of gold could trigger another massive buying spree from people who want to get into the market, he notes.

The context

Fiat currencies are not backed by gold, says Binikos.

“When most currencies were on the gold standard, a unit of currency could be exchanged by central banks for a fixed weight of gold. That way, paper money could be used instead of using gold or silver coins.”

“The world’s monetary system used to be backed by gold – until Richard Nixon scrapped the dollar’s convertibility into gold 40-odd years ago. This made the dollar the de facto reserve currency, but successive administrators have mismanaged government policy and the US economy is now drowning in a sea of debt.”

Binikos says gold is by no means expensive.

“Its inflation-adjusted high, reached after the 1970s oil crisis is about $2,300. Central banks around the world – including China and South Korea are buying again – and investor demand couldn’t be higher. Gold is a safe haven in turbulent times – and it is going to take years to untangle the mess that has been made of the world’s financial system.

“Gold is the only alternative to fiat money – and that’s why it will move higher,” says Binikos.

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