The recent good results from gold mining companies have focused the attention on the quiet increase in the gold price to the highest level in five years, as well as the weakening in the rand against the dollar to the worst levels since 2016. Gold coin devotees would have noticed that prices of their beloved coins – in rand terms – are setting new records.
The gold price has increased from around $1 150 per ounce in November 2015 to more than $1 526 this week, the highest in more than a decade, except for a few days in August 2011 when gold exceeded $2 000 per ounce. The decline in the rand over the same period has seen the rand gold price increase to a record of nearly R24 000 per ounce compared to just over R7 000 at the beginning of 2010.
The world’s most popular gold coin, the Krugerrand, has obviously mirrored this increase.
It also raises the question whether it is still worthwhile to buy a few coins after the strong rally of the last few months.
Steve Hatton, media liaison officer of Investgold, says there has been a noticeable increase in people asking about gold and silver coins, as well as investment opportunities in small gold and silver bars.
“It is difficult to determine if this is due to higher precious metal prices and expectations of continued strength in the market, or due to the weakening in the rand and political uncertainty in SA,” he says, adding that physical gold also serves as a hedge against volatility in the stock market and prices of cryptocurrencies. “Whatever the reason, we have seen an increase in sales over the last few months.”
Hatton says Investgold sells up to 5 000 coins per week.
He refused to be drawn on the outlook for the gold price over the next year or two, bar saying that prospects look promising due to global uncertainty. “I hear more talk about gold going to $2 000 per ounce than before.
“But the main reason people are looking at gold and silver coins is because local investors are effectively buying protection against a further depreciation of the rand.”
Hatton points out that physical gold is a source of comfort in times of political uncertainty.
Figures from stockbroker IG indicate that most of its retail clients expect the gold price to continue to increase. Senior analyst Shaun Murison mentioned in a recent research report on the prospects for gold that IG clients are mostly bullish on the short-term outlook for gold, with 72% of those with exposure to gold holding long positions.
The trading platform makes provision for short positions as well, giving the 28% of clients who expect the gold price to fall from current highs the opportunity to trade their views as well.
Murison says there are enough reasons for the increase in the gold price during the last few months. Gold increased 25% in dollar terms since August last year due to perceptions that the US Federal Reserve will maintain it dovish stance, perhaps lowering rates more aggressively than originally anticipated, he says.
“The prospect of lower rates has seen bond yields falling and gold, which generally has an inverse correlation to US bond yields, rising. Lower bond rates usually sees a weakening in the dollar – that is also good for gold.”
Predicting the gold price
Nobody argues that predicting the gold price is so difficult as to be near impossible. It is noteworthy that none of the executives of the large SA gold mines that announced their results during the last few weeks wanted to chance a prediction.
Luckily the World Gold Council is paid to do just that. The organisation published its mid-year review for gold a few weeks ago under the rather sensational title of ‘Heightened risks meets easy money’.
“The first half of 2019 proved quite eventful for financial markets,” states the review. “Stocks retraced the losses of the last quarter of 2018 by the end of April 2019, only to fall back again in May.
“At the same time, central banks across the globe have signalled a more accommodative stance bringing global bond yields to multi-year lows, and in some countries to all-time lows. Investors looked to balance high stock prices with an increasingly uncertain environment, leading to a surge in the gold price.”
Rallies and pullbacks
World Gold Council analysts believe financial market uncertainty and accommodative monetary policy will likely support gold over the next six to 12 months, but that investors should be prepared for rallies and pullbacks.
The council notes that investors seem to have been more bullish thus far in 2019. This is evidenced by the positive inflows into gold-backed exchange-traded funds (EFTs) and higher net long positions in futures and commodity markets. “In addition, central banks reported net purchases of approximately 247 tons of gold (equivalent to $10 billion) in the year to date,” says the report.
Of interest is that the council noted that the gold price is currently lower than it was in the period during which central banks were tightening monetary policy. It should be much higher during periods of lower interest rates.
“Historically, gold yields return more than twice their long-term average during periods of negative real interest rates – like the one we are likely to see later this year,” concludes the World Gold Council.
Conditions are conducive
The gold price generally benefits from low interest rates and a weak currency, whatever currency it is measured in. Both these conditions are present.
Currently, interest rates are falling to such low levels in most countries that it is cause for concern globally, while prospects for the US dollar remain uncertain due to the ongoing trade war between the US and China. Local investors can add the additional weakening of the rand to the dollar.
In short, people will be willing to buy more gold coins – and pay higher prices – when the interest rate is only 2% rather than when it is 6%, even if gold coins earn zero interest. Global uncertainty, as well as local risks with regard to the economy, state finances and politics, might entice more SA investors to look at gold coins.
Krugerrand’s continued popularity
It is interesting that the Krugerrand is still the most popular gold coin in the world, when talking about coins available in one ounce or fractions of ounces.
More Turkish gold coins than Krugerrands have been minted and sold since minting started in Turkey more than 2 500 years ago. However, these coins are not very popular outside of Turkey and the Middle East as they are not minted in standard troy ounce sizes.
It is perhaps even more interesting that gold coins have become increasingly popular in Turkey over the last ten years, due to the instability of the Turkish economy and currency.
Gold has been entrenched in Turkey to such an extent that banks offer cheque accounts backed by bullion, gold coins and gold jewellery.
The Krugerrand is still the most popular among modern coins since its production started in 1967, with estimates that 20% of all gold coins in the world feature former president Paul Kruger’s face and a little Springbok. That equates to some 60 million Krugerrands hidden in safes and cupboards around the world and being actively traded.
There is no consensus among investors on the need – or desire – to hold gold coins or any physical precious metal as an investment.
Financial advisors are quick to point out that gold coins pay no interest or dividends, while coin lovers are equally quick to counter that little commission and no ongoing management fees are payable either.