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Have we missed the ‘gold’ boat?

Or is there still time to invest in the precious metal?
Image: Dario Pignatelli/Bloomberg

Gold’s safe-haven appeal is the winning asset amid growing coronavirus fears, an oil-price crash and an equity market correction.

 Gold delivers excellent returns in 2019

Just how well did gold fair in 2019? Gold had a very good year in 2019. In Dollar terms the appreciation was 19% and in Rand terms it was 20%. In Euro terms the appreciation was very dramatic due to the Euro depreciation, it was up an incredible 34%.

Since the start of 21st century, the Dollar Gold price has gone from $290 to $1 527. The Rand Gold has gone from R1 800 to R21 539. The Euro Gold has gone from €289 to €1 366.

Gold has been an excellent monetary asset. These price appreciations converted to compound annualized growth rates are computed to be 8.7% p.a. in USD, 13.3% p.a. in ZAR, and 8.1% p.a. in Euro. Hilton Davies, the MD of SA Bullion says, “We could not have wished for more.”

Gold is in a Full Bull mode, it reached its all-time high in Rand terms today as it clocked up a record R 27 000 for an ounce of gold.

I can hear you say, “I am thrilled for you, but I have surely missed the boat?”

Well, maybe not. The longer term picture of gold has been excellent over virtually any period and in virtually any currency. The long term trend is intact. There is a little volatility, yet it consistently delivers over the long term. Gold is a stable performer that handsomely beats inflation and delivers a dependable return for its investors.

Five reasons worth remembering why you should invest in gold:-

 Gold is the best insurance against market collapse – it’s a safe-haven

  1. It is a store of value
  2. Gold is the best money to own
  3. It offers protection against possible rand depreciation
  4. Gold is an uncorrelated asset – it does the exact opposite of what the other asset classes do

What are the different ways for the consumer to invest in gold?  And what sort of returns could one expect?

 Now that we have laid a good foundation for investing in gold, let’s examine the different ways to maximize an investment in gold.

Please see the table below for the different ways to invest in gold.

Krugerrands (gold) since 31st December 1999 has delivered a 13,3% per annum return. This is a good guideline for gold bars and the gold ETF too.

An investment in the gold miners have been a very poor investment over the last 10 years and have battled to deliver a return that matches inflation over the period.

This has radically changed over the last two years as gold miners have outclassed all other investments.

Why should consumers invest in gold?

It is wise to invest in gold. Everyone should own some gold. It makes up part of a balanced and well diversified portfolio. Strangely enough, I have found you meet two types of people: Those that love gold and those that detest it. There is no grey area.

In these most uncertain times, both economically and geopolitically, gold is your best “insurance.” Remember gold is a commodity just like copper or platinum. Yet, gold’s primary function is money. As real money, it is one of the best ways to insure that your money does not lose its purchasing power – it offers superb protection against inflation and should be compared with cash in the bank.

Is it safe for consumers to rely solely in gold as a form of investment?

As with all good sound advice, you “should never put all your eggs in one basket.” You want to have exposure to all four assets classes. They are viz.

  • Fixed interest – Bonds, money market and savings accounts
  • Property – both domestic and commercial property
  • Equities – listed shares on the stock market or Collective investments (Unit Trusts)
  • Hard assets – such as antiques, art works, vintage cars, and gold and silver

One should try and invest in all four of these asset classes where possible and allocate the amounts of funds according to your ability to take on risk. It is always prudent to diversify. Gold, is sadly a forgotten asset class and does not have a home in many portfolios.

For a long time I have said you should have 5 – 10% exposure to gold. That could be both the physical metal and the gold miners. This advice is no longer construed as contrarian advice, it has become “mainstream.”

Lately, I am throwing caution to the wind and advocate a far higher allocation to gold, of even 10 – 20%. Why do I say that? These are not normal times. Gold is an attractive safe-haven asset and the precious metal is embarking on a secular bull market.

How can you diversify in different mediums of gold?

 

Investment medium

 

Risk classi-

fication

Advantages/ Benefits

Disadvantages/ Dangers

Krugerrands

low

Easy to acquire, vault and trade

Volatility on the gold price and rand fluctuations

Gold bars

low

Low cost to acquire

Subject to Vat

Gold ETF’s

medium

Lowest cost to acquire

Subject to third party risk. Never take possession

Old Mutual Gold Fund

high

Gearing effect

Diversified portfolio of miners

Easy to access

Volatility in mining conditions, such as labour disputes, labour law, and the costs of mining.

Gold shares

high

Gearing effect Able to focus on specific profit making companies

Volatility in mining conditions etc.

A sizeable capital amount is required to open a portfolio.

What is driving the gold price?

The Federal Reserve Bank of the US has embarked on the biggest financial experiment of “printing or digital money.” This is the greatest credit expansion ever, in its endeavor to avoid a recession.

How they will remove this from the system remains a mystery. It has had unintended consequences of creating bubbles in asset classes. Recession has been avoided for now, but the long term results may still yield the greatest depression of all time.

Last week the Federal Reserve Bank had an emergency meeting and surprisingly cut interest rates by 50 basis points. It is clearly concerned that the economy could enter a recession and it wants to avoid this at all costs.

In Europe and Japan the world experiments with negative interest rates in their Treasury Bonds, where your capital is guaranteed to be less than what was initially invested when returned to you after 10 tears. Where in the history of money has the investor been penalized for investing? Never! These are certainly not ordinary times and therefore call for an essential exposure to gold.

The economic fundamentals have not been driving the US equity bull market run for a very long time, despite delivering record returns over the last decade. There is very much a liquidly, momentum and sentiment-driven market — the fundamentals are pretty poor.

The greatest danger to the markets are the huge DEBT levels. Writing in the Financial Times recently, Michael Howell rephrases Bill Clinton’s adviser, James Cargill’s words to explain why many stocks and gold hit new highs. He says, “Fed chair Jay Powell has pumped a further $400bn into the financial sector although his team tries to persuade markets this is not quantitative easing.”

“Western financial systems (are) essentially capital redistribution systems, dominated by these giant pools of money that are used to refinance existing positions, rather than raising new money…. Much of the new debt taken on since 2008 is unlikely to be paid back and “more worryingly, is compounding ever higher … world debt levels now exceed $250 tn, equivalent to a whopping 320% of world gross domestic product – and roughly double the $130 tn pool of global liquidity.”

In South Africa the general equity market has disappointed, tit has drifted largely sideways for the last 3 – 4 years.

The sudden surge in the gold price initially because of the conflict in the Middle East and now recently the fears of the effects of the Coronavirus has seen the gold’s price rise to the upper $1,600s, the highest since March 2013. It is it expensive? I think not.

The above chart of the Gold price over two years, by Liston Meintjes, shows why gold is the best performing money, outclassing all other currencies – it is in full Bull mode. He says, “It is also one of the least followed by the ‘herd’.”

Gold reached its all-time high of $1921 in Sept. 2011, after the Great Financial Crash. It therefore still has at least another $200 plus to go before it gets back to test its previous high level. When that “ceiling” is tested, it could easily break through and turn it into the next support level, as gold makes its way still much much higher.

Nothing goes up in a straight line, it is wise to expect corrections along the way. The trend though is fairly entrenched. And the old adage of “making the trend your friend,” surely applies here.

Gold is the best performing asset class over a 50 year period

The economist, Mike Schussler, pointed out recently in his research that gold is the best performing asset class over a 50 year period. He says, In the long run, all that glitters is gold. The most surprising result is that over the 50-year period, since 1969, gold in rand terms has maintained its value best. 

Gold in dollar terms increased from $35.45 in 1969 to $1 282.4 per ounce in 2018. This represents a 7.6% compounded nominal dollar return. Of course, once translated into rands, the nominal annual returns shoot up to 14.2% compounded for 50 years.”

Once again gold shines and, while one hears little of the yellow metal, as a hedge against inflation it has most certainly done its job well.

We would do well to heed the words of Alan Greenspan, the former Governor of the Federal Reserve Bank, “There are good reasons why central banks hold so much gold, which earns no interest and whose storage is costly. They consider gold the ultimate store of value, and policymakers who ignore its price, do so at their own peril.”  ~ July 1995

This then leads us to the question, should we invest in the physical metal or the gold shares?

How best to Invest in the metal?

It is always safe to buy the metal or bullion as it is often referred to. A purchase of Krugerrands coins is seen as legal tender. There is no income or dividends, it is not meant to do so, one invests purely for the capital appreciation.

There are two options of purchasing Krugerrands. One can purchase over the counter at coin shops and take possession of them. Or literally buy into a company that acts as a manager, they will purchases the Krugerrands at wholesale prices on your behalf and holds them at the Rand Refinery and manage them for you too. This is my preferred way. It offers peace of mind.

Krugerrands are readily tradable as the Reserve Bank guarantees to repurchase them and pay you the spot price of gold. The funds will appear in your bank account within 72 hours. This is attractive as it removes all anxiety about selling them. You do not have the hassle of having to insure your coins, and keep them in a safe place.

Gold bars, are not subject to the manufacturing intricacies costs of coinage, and therefore cheaper to produce. Unfortunately they are subject to vat and you immediately lose 15% of your investment. Therefore I strongly discourage the purchase thereof, unless they are purchased overseas and are exempt from VAT.

You can buy gold on a GOLD Exchange Traded Fund; it is listed on the stock exchange. This is referred to as “paper gold.” It is held by way of a debenture, which means you can never take possession of it. It is the cheapest way to acquire exposure to gold, but not without risks, it is subject to third party risks, as the asset forms part of the bank’s assets.

How best to Invest in the gold miners?

There is only one Collective Scheme investment (Unit Trusts) that offers exposure to the gold market, it is the Old Mutual Gold Fund. It has 70% exposure to the local gold mines and 30% exposure to global mines. It is easy to access by way of a lump sum and or a debit order.

During the course of this last year the fund achieved 100% return. One must bear in mind that it is coming off a very low base.

The above chart of the Gold miners index over two years, by Liston Meintjes shows why gold shares are the best performing sector of the JSE – it is in full Bull mode. It is closely tracking the 10 week moving average (the yellow line). Undergirded by the 40 week moving average (the green line).

For the first time in many years it is prudent to invest in the gold in the ground, that still needs to be mined – the gold miners. The all-in-cost of gold miner is just above $1 000 per ounce. Therefore at these gold prices miners are very profitable. There is a gearing effect. This means the costs remain fixed, but as the gold price rises, the extra price achieved translates into pure profits.

Investing in Gold shares listed on the Stock Exchange can be construed as a lot more speculative, as you are betting on a far higher gold price. There is also huge volatility with the gold miners as they are subjected to many challenges such as: market conditions, labour problems, government legislation, and the cost and availability of steel and electricity.

Conclusion

It is not too late to invest in gold despite its wonderful returns it has delivered. This really serves to remind us that gold is an essential building block of a well balanced portfolio. The value of diversification in an uncorrelated asset such as gold is invaluable and should be part of everyone’s portfolio.

A cautious investor should stick to buying the metal, primarily Krugerrands. An assertive investor that understands the risks of gold mining, will purchase the gold shares. A prudent investor acquires a balance of the two gold mediums.

David Melvill is an independent investment advisor with Financial Hub.

He may be reached at davidm@financialhub.co.za 

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ABSA has an ETF called NewGold. They state appreciation over one year as 39%.

We have missed every commodity boat.

The gold price boat has turned around to the harbour, to the quay at $1350, to come and pick us up. Be ready, for you won’t get another chance.

physical gold!!!! 1ST THE GOLD MARKET IS MANIPULATED (SEE DEUTSCHE BANK FINED OVER GOLD MANIPULATION) So when it is “allowed” to breakout, it will go $2,000 and higher. So you have not missed the gold boat YET. HOWEVER it’s at the dock with the engines running

Who said “Beware The Ides of March?”

Here is a link to a reputable chart for spot gold with an analysis that finds the the starting point of the final uptrend.

https://wavecount.blogspot.com/2020/03/xauusd-spot-gold_17.html

It would seem that the concept of safe haven is returning following the rush for cash to settle margin calls.

End of comments.

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