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Half a century as a store of value

Krugerrands remain a timeless investment for gold bulls.

The renowned Krugerrand – dubbed the world’s first, most successful and widely-traded gold bullion coin – this year celebrates 50 years since its first minting.

It was mainly created to add value to, and create a premium for, SA gold sales. “It’s more than exceeded any expectations that could have been had at the outset,” says Richard Collocott, Rand Refinery’s executive head of marketing and a director of Prestige Bullion, the Rand Refinery and SA Mint joint venture.

Since inception, just less than 53.5 million ounces of gold in Krugerrands have been sold and over $21.5 billion of forex revenue generated.

Of the Krugerrands produced, about 90% have been sold internationally, says The Scoin Shop executive chairman Alan Demby.

“As an example of appreciation, a R10 000 investment in Krugerrand coins in 1967 would today be worth R6 million to R7 million,” he says. A 1967 proof Krugerrand trades for about R40 000 today.

In 2016 Krugerrands were the world’s top-selling gold coin, with $1.3 billion in sales – for the first time since 1980, says Collocott. “We anticipate that we should retain our number one position for 2017 also.” 

The question investors will be asking is, does it still make sense to invest in Krugerrands?

Investment sense

“Effectively, when you’re looking at a Krugerrand you’re looking at gold,” says Dr Ebrahim Patel, commodities strategist at Rand Merchant Bank (RMB).

As the gold price is denominated in dollars, it’s a rand hedge asset. If the rand weakens and the gold price stays the same or doesn’t weaken as much, South Africans benefit in terms of their gold investments. 

“Gold has a multi-millennia-year history of storing value. There’s a lot of political, geopolitical uncertainty coming into play. These are the conditions under which gold is extremely popular, because it’s a hedge against political uncertainty, a safe-haven asset,” he says.

Collocott agrees. “Demand for coins is a function of uncertainty…. The Krugerrand is in essence a pretty good bellwether for the state of the world, because it’s a retail gold product.”

These coins are increasingly in demand – a global phenomenon. “Demand in SA has increased particularly since December 2015’s Nenegate … that’s when we really got a wake-up call in terms of the political risk [and the rand depreciated]. People have been nervous of the protection of their long-term assets,” he says.

There’s also been very strong demand in the Eurozone, on Brexit and French election concerns.

“We anticipate and we have every intention for Krugerrands to remain, if not the top-selling gold coin in the world, in the top-three,” says Collocott. “I don’t see massive global stability over the next five years.”

“Gold’s here to stay,” he forecasts.

Patel also foresees the use of gold coins and other physical gold investments increasing in time, as gold is a global currency and as people become wary of paper currencies.

“The Krugerrand has been widely successful (as a way of getting gold exposure). It’s among the world’s most circulated bullion coins, it’s iconic … very durable. I think we are going to see its use going from strength to strength.”

Gold price in rands per kilogram

 

Buying coins

For people who worry about holding onto physical coins, there are an array of options available.

RMB has introduced Krugerrand Custodial Certificates. This is a security listed on the JSE’s ETF sector, that gives the holder ownership of a uniquely numbered and packaged Krugerrand coin. Unlike a traditional ETF, where the holder has a claim on company-owned gold, the investor holds the gold directly. “It’s in their name; it belongs to them and they can take physical delivery of the underlying coin,” says Patel. Storage fees of about 0.22% / year (of the value), including insurance, apply. The structure has been licensed globally to the World Platinum Investment Council, which will use it as its flagship platinum coin investment structure globally.

Alternatively investors can buy Krugerrands online through FNB Share Investor. 1oz, ½ oz, ¼ oz or 1/10 oz coins can be instantly bought and sold through the online banking platform. The coins are stored securely and if requested, delivered by courier for a delivery charge. The fees are approximately 0.84% per annum.

Many overseas banks are also dealers in gold coins, Krugerrands included. 

Other options for local investors are to buy the coins through The Scoin Shop, the retail division of The South African Gold Coin Exchange. The JSE also offers trading in Krugerrands “through a well-regulated secondary market”, traded in the same way as any listed equity market instrument, with prices quoted on various types (weights) of coin.

History

The first troy ounce, 22-carat gold Krugerrand was minted at the South African Mint on July 3 1967. A world-first, it had no face value on it; rather it was/is ounce-denominated.

A half ounce, 22-carat Krugerrand on display at Sharps Pixley gold showroom, in London. Photographer: Simon Dawson/Bloomberg

“… the price of a Krugerrand is directly related to the ruling gold price on the day. There is a small manufacturing premium that’s added to that…. If the gold price is R20 000 today per ounce, the Krugerrand might be R21 500,” explains Collocott, adding that in the collectables market (eg SA Mint) prices may vary based on factors such as aesthetic appeal, scarcity and rarity.

“The Krugerrand is in fact one of SA’s currencies. It’s issued under the authority of the South African Reserve Bank (Sarb) and approved by the SA government as legal tender.” As such, South Africans can convert between rands and Krugerrands (and have rand hedges), without any additional approval or tax clearance.

Although other gold coins are legal tender, for instance if a US Eagle is taken to the US Federal Reserve to be exchanged, it will only give the face value (eg $25).

“At the outset it was remarkably successful. As competition came in, sales reduced … and then the Krugerrand was quite badly affected by sanctions,” says Collocott. Things got worse after the sanctions were lifted.

Later, people realised “this is a highly-liquid, highly-traded, highly-credible” gold product and demand returned, particularly at the start of the financial crisis. Afterwards Krugerrands moved from strength to strength to its relative market position.”

Quick facts:

  • Best year for Krugerrand sales in ounces: 1979: 4.9 million ounces sold. In dollars, 1981: $1.8 billion.
  • Worst year: 2000: only 10 000 ounces sold; $3 million total revenue.
  • Major contenders: American Eagle, Canadian Maple Leaf, Austrian Philharmonic, Chinese Panda and Australian Nugget.
  • In 1980, ½ oz, ¼ oz and 1/10 oz Krugerrands added.
  • A limited edition 1967 Vintage Proof Krugerrand has been released in honour of the 50th anniversary. The coin costs R59 000 and only 1 967 have been minted, using reproduced dies from the original tooling used for the first Krugerrands.

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Whilst it might “store value” to what extent does it “grow” value?? Not convinced that this is a better investment than a diversified share portfolio!!

Agree, the store of wealth will only come when the exchange rate between US$ and Rand widens, but then again its is only in Rand denominated terms. To my knowledge exchange control still requires you to declare all gold coins taken out of the country by SA residents i.e. it has to be declared as part of travel allowance or business travel allowance and or as gifts. So be wary of slipping a few in your luggage on departure as they can be confiscated if not declared.

technology has changed with time and so has the store of wealth.
gold does not hold the same allure as in days gone by and is only worth anything when sold.
compared to property where one can earn monthly rental and approx 6% or more capital appreciation over time and stocks which pay dividends gold does not impress me.
gold buffs would say property and stocks can go down-
so can gold which has been at 1900$ and is now tanking

Unfortunately, my experience with a gold coin dealer back in the 1980’s was a horror story. My wife and I decided, unwisely, to sell 6 one ounce krugerrands (not proof ones). The dealer’s office in Cape Town was more like a bookie’s place, with fag ends scattered everywhere. The dealer was a scruffy, nondescript guy who hadn’t shaved for a week, and I could smell his armpits through the grille he had installed. He made a ridiculous offer and adopted a take it or leave it attitude. I left it, and got a better price elsewhere.

I can relate to this experience. i have been using SA Bullion ever since my last ‘retail’experience with coin dealers – they’re the lowest cost supplier of KR’s and fully regulated by the FSB and SAR, what’s more – they actually provide perfect liquidity. I’ll never buy gold retail again. A bunch of sharks most of these coin dealers…

Gold is not the investment bargain its made out to be.

Bought my house new in 1979 for R25k. Can sell it now for R3.5M. I’m sure there will be readers who have done far better than this with their own property (or other) investments.

Currently investigating Bitcoin as my next ANC-proof investment. Would be interested to hear other readers thoughts on this.

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