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Want to invest in gold? Here's how to get started

Jan 27 2020 06:01
Phumi Ramalepe

Gold started the year approaching a seven-year high amid US-Iran tensions, following an impressive performance in 2019. 

But there's more than one way to invest in the yellow metal: either by buying it in its physical form, or investing in shares linked to gold. Fin24 asked the experts how to get started.

All that glitters

In its physical form, the asset includes medallions such as bullion coins and the Mandela Medallion.

Here, one would invest in both the bullion value and the value of the coin itself. This type of investment largely trades at the bullion value plus profit - which relies on the collectability of the coins.  

Another alternative is the Krugerrand. With the Krugerrrand, the gold price in dollars and the dollar/ rand exchange rate need to be taken into account. If the rand depreciates and the gold price remains steady, investors still make money, as it hedges against both rand and dollar inflation.

Getting a share

There is also the option to invest in gold shares.

In this case, investors need to be aware of more than just the gold price. Potential investors should consider factors such as the exchange rate, as well as the operations/ management of the mines, as these play a huge role in the profitability of the company concerned.

One type of investment is not necessarily better than the other. However, according to independent investment advisor David Melvill, “The higher the risk the higher the return.

“But conversely, the greatest risk could also lead to the greatest loss, especially if you have a short-term investment horizon. Krugerrands (gold) since 31st December 1999 has delivered a 12.7% per annum return. This is a good guideline for gold bars and the gold ETF too,” says Mevill.  

Insurance against collapse

Although gold does not always generate an income, it is considered a 'safe haven' for investors, particularly in times of turmoil. 

Melvill says one reason why gold is considered a key investment is that it is "insurance against market collapse", and has the potential to protect against possible rand depreciation.

When the world saw an economic meltdown in 2008, the gold price soared - and it hit what was then an all-time record on September 5, 2011, amid concerns that the United States would default on debts.   

Eggs in one basket

The strength of the gold price surpasses that of inflation and hyperinflation as the commodity retains its value even if a country’s currency loses its buying power, says Melvill.

"In these most uncertain times, both economically and politically, gold is your best insurance. As real money, it is one of the best ways to ensure that your money does not lose its purchasing power – it offers superb protection against inflation," he explains.

For South African investors, putting money into gold guarantees even bigger benefits when the rand weaken against the dollar. Given that it is priced in dollars, when the rand weakens, the price of gold increases in rand terms.

However, cautions Melvill, it is not advisable to invest in gold alone. According to him, it is advisable to have exposure to all four assets classes, namely fixed interest assets, property, equities and hard assets.

“For a long time I have said you should have 5 – 10% exposure to gold. You should never put all your eggs in one basket,” he says.

wealth  |  investment  |  gold
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