A Fin24 user wants to know if it is wise to increase his investment in Krugerrands. He writes:
Should I bond my house to have more capital to invest? I pay 7% on my bond but have made 12% on my Krugerrands.
With the rand weakening, maybe now is the time to invest heavily. Your thoughts?Francois Retief, senior manager legal services at Sanlam, responds:
Investing in Krugerrands must be regarded as a high-risk investment. It becomes speculative as well when you want to borrow money to finance such an investment.
As a general rule, one should never borrow money to finance one’s investments. The only possible exception is where property investors/speculators invest in rented property and are able to deduct expenses such as interest on money borrowed against rental income.
Krugerrands must be seen as an investment in bullion which tracks the gold price.
The price of Krugerrands is mainly determined by the supply and demand of bullion which may be affected by inter alia political turmoil, disruption or potential disruption of gold production (eg strikes at mines), speculators and the rand/dollar exchange rate.
The gold price (and therefore Krugerrands, whose value it is closely linked to) can fluctuate wildly over the short term.
It is impossible for any person to correctly predict the future price of bullion and therefore also the price of Krugerrands.
An important factor to consider is the tax implications of borrowing money to invest in Krugerrands.
In all probability the South African Revenue Service will be able to allege that such an investor is a speculator and you will therefore be classified as a dealer, resulting in profits being taxed as income.
This may result in a substantial reduction of your return. If by any chance the profits are not taxed as income, capital gains tax will be payable.
I therefore do not believe your suggested plan of action is necessarily the best investment option.
If you want to invest aggressively, there are many other options available which can produce good returns over time.
You can discuss these with a financial adviser specialising in investments.
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