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The gold price continues to set new records. It’s making some investors nervous: maybe it’s time to bale out? But perhaps not. “The gold price could go higher,” says Steve Land, an expert on the subject who runs the international Franklin Gold and Precious Metals Fund. “While one thing I’ve learned is you can’t predict the gold price, it’s now underpinned by good fundamentals. The driver is the supply and demand balance.”
South African mines are well represented in the fund. As a country, South Africa is third largest at 15% of the fund’s portfolio, higher than the FTSE gold mines index. In the Top 10 holdings AngloGold Ashanti has second place, at 4,91% of the portfolio, followed by Randgold Resources. Impala Platinum fills spot seven in the Top 10.
Investing in gold has a somewhat curious recent history, says Land. “In the Eighties investors were trying to figure gold out. It didn’t back currencies anymore, so what did gold do?” He says new technology provided a new boost for gold. “But now a lot of those mines are near the end of their lives – despite the high gold price.”
Though currencies are still important drivers of the gold price, Land says what’s opened the market up to many new avenues are exchange-traded funds. “It’s cumbersome to buy gold bars but ETFs have changed all that. You still own the gold – and at a lower cost. ETFs are bringing a lot of people into the gold market.” In SA, Absa Capital’s NewGold has proved to be the most popular ETF.
Will gold supply increase? “I think it will with the good price, though we’re seeing a bit of margin compression,” says Land.
Investing in gold is fine for large institutions, but what about individual retail investors? Where should they look for exposure to the gold price?
“There are many sources: ETFs, as we’ve said, gold coins, equity derivatives and gold funds – like ours.” Land says around 25% of his fund’s portfolio is in mines and projects at the pre-production stage. So there’s actually no gold or precious metals being produced there yet. “There is some more risk in those investments but these early stage companies are at a good discount. The market will absorb that extra production when it comes on line.”
Land says retail investors should hold around 10% of an investment portfolio in gold. “The gold price is like nothing else, so it offsets other metals.”
Apart from gold, a South African investor bullish on platinum is Prieur du Plessis, chairman of Plexus Asset Management. Apart from some technical currency reasons, he says the big hit on the platinum price followed the twin disasters in Japan on 11 March. “The Japanese auto industry was hit particularly hard by the earthquake and tsunami that followed. Japan’s production of cars and trucks fell by 535 000 units – or 57,3% – in March compared with March last year. Toyota was scheduled to resume production in the second half of April, but only to 50% of normal production.”
That downed the price of platinum, Du Plessis says, especially if compared against the premium it usually trades at to gold. However, he’s bullish about the longer-term outlook for platinum, with the big question being when the platinum price will start to recover. But he has little doubt the metal’s premium to gold will be restored. “It took approximately 3,5 months after the Kobe disaster in 1995 before the premium started opening up. This time around it may take longer, due to the severity of the disaster.”
But Du Plessis says he’ll be buying platinum to add to his long-term holdings.
South African mines are well represented in the fund. As a country, South Africa is third largest at 15% of the fund’s portfolio, higher than the FTSE gold mines index. In the Top 10 holdings AngloGold Ashanti has second place, at 4,91% of the portfolio, followed by Randgold Resources. Impala Platinum fills spot seven in the Top 10.
Investing in gold has a somewhat curious recent history, says Land. “In the Eighties investors were trying to figure gold out. It didn’t back currencies anymore, so what did gold do?” He says new technology provided a new boost for gold. “But now a lot of those mines are near the end of their lives – despite the high gold price.”
Though currencies are still important drivers of the gold price, Land says what’s opened the market up to many new avenues are exchange-traded funds. “It’s cumbersome to buy gold bars but ETFs have changed all that. You still own the gold – and at a lower cost. ETFs are bringing a lot of people into the gold market.” In SA, Absa Capital’s NewGold has proved to be the most popular ETF.
Will gold supply increase? “I think it will with the good price, though we’re seeing a bit of margin compression,” says Land.
Investing in gold is fine for large institutions, but what about individual retail investors? Where should they look for exposure to the gold price?
“There are many sources: ETFs, as we’ve said, gold coins, equity derivatives and gold funds – like ours.” Land says around 25% of his fund’s portfolio is in mines and projects at the pre-production stage. So there’s actually no gold or precious metals being produced there yet. “There is some more risk in those investments but these early stage companies are at a good discount. The market will absorb that extra production when it comes on line.”
Land says retail investors should hold around 10% of an investment portfolio in gold. “The gold price is like nothing else, so it offsets other metals.”
Apart from gold, a South African investor bullish on platinum is Prieur du Plessis, chairman of Plexus Asset Management. Apart from some technical currency reasons, he says the big hit on the platinum price followed the twin disasters in Japan on 11 March. “The Japanese auto industry was hit particularly hard by the earthquake and tsunami that followed. Japan’s production of cars and trucks fell by 535 000 units – or 57,3% – in March compared with March last year. Toyota was scheduled to resume production in the second half of April, but only to 50% of normal production.”
That downed the price of platinum, Du Plessis says, especially if compared against the premium it usually trades at to gold. However, he’s bullish about the longer-term outlook for platinum, with the big question being when the platinum price will start to recover. But he has little doubt the metal’s premium to gold will be restored. “It took approximately 3,5 months after the Kobe disaster in 1995 before the premium started opening up. This time around it may take longer, due to the severity of the disaster.”
But Du Plessis says he’ll be buying platinum to add to his long-term holdings.
