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What to know about investing in gold

A Fin24 user wants to know more about investing in gold bullion. He writes:

Is this a good time to invest in gold bullion?

Dr Chris van Wyk of PSG Hermanus Portfolio Management & Stockbroking responds:

Almost invariably investors considering investing in gold shares, Krugerrands or gold exchange traded funds expect severe political, social, financial or economic turbulence - like that currently taking place in Iraq, Syria and Ukraine - to stimulate interest in gold as a store of value.

It is the belief among gold bulls that such turbulence will, in due course, render paper money virtually worthless.

This is because such crises are believed eventually to bring about serious and wide-spread collapse in the financial sector, creating destructive corrections in most investment markets.

Gold is believed to be the eternal and reliable store of value in such circumstances.

Gold shares appear to be the least attractive option, taking into account increasingly difficult mining conditions, unpredictable labour actions and steeply rising costs.

Krugerrands can easily and conveniently be moved between locations and will be accepted in exchange for local currency or in barter transactions whenever and wherever it is offered.

Krugerrands are, therefore, easily exchangeable for currency in many domestic and offshore locations.

This probably places them on a more attractive rating with nervous investors than exchange traded funds, which need to be sold on the exchange where they are traded.

The more such investors divest from what is feared to become “worthless” financial assets, the more the demand for gold - be it Krugerrands or exchange traded funds - is expected to increase.

At the same time physical gold output is on the decline.

The resultant supply and demand imbalance will drive the price up and make your store of value even more precious.

So the argument mostly goes. On most occasions the outcomes are far less predictable.

Clearly, the desire to invest in gold is, therefore, driven as much, or in many instances even more, by emotion than by rational analysis and argument.

If this is the kind of scenario you fear, a holding of gold may well bring emotional comfort, irrespective of the present level of the rand/US dollar exchange rate.

This is particularly as the gold bullion price is at its lowest in a long time.

Bear in mind, though, that there is no dividend return on such gold holdings.

Prominent South African asset managers consider it prudent to include gold in their portfolios.

- Fin24

Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query.

Disclaimer: Fin24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers.

Under the ECT Act and to the fullest extent possible under the applicable law, Fin24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.

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