Maya Fisher-French investigates a reader’s query about the value of his investment in gold coins

Many people, such as Phakiso, a City Press reader who wrote to us this week about his Mandela gold coins, bought gold coins about five years ago on the back of a strong rally in the price of the precious metal.

Towards the end of 2011, when the gold price had reached the heady peaks of nearly $2 000 an ounce, we received letters weekly from readers asking how they could invest in gold. Anyone who has followed the gold price subsequently will know that gold lost its shine and, apart from some short-lived rallies, has failed to return to the 2011 levels and is currently trading below $1 300.

Although Phakiso did indeed buy at the peak of the gold price when priced in dollars, the good news for him is that, in rands, he has still made a good profit.

Although gold is down about 35% in dollars since the end of 2011, it is actually up about 38% in rand value, increasing from about R13 000 an ounce in October 2011 to about R18 000 this year. This is all due to the massive fall in the value of the rand against the dollar over the past five years.

In fact, if Phakiso had bought his gold coins earlier in 2011, before the rand fell from R7.20 to R8.40 to the dollar that year, his returns would have been even higher.

Gold as an investment

Gold as an investment class is a bit of an oddity in that, unlike other traditional investments in shares, property or cash, it does not offer any income return. If you want to value a share in a company, you can create some fundamental value based on the current earnings of the company and the dividends it is expected to pay out in the future.

A property can be valued on the rental that it generates, while cash provides a return in line with prevailing interest rates.

Gold generates no income, nor does it have any intrinsic value in terms of a use in manufacturing, such as platinum does. Yes, gold is used in jewellery, but the demand for jewellery is not the kind of major driver of price to the extent that platinum’s price is in the production of cars’ catalytic converters.

The other problem with gold coins specifically is that not only do they not generate an income, they also have significant holding costs. If you are keeping them at home, you need to insure them or you can pay a bank to keep them for you.

The only real value to be found in gold is that people place a value on it, and that value is around sentiment – primarily a fear of the future.

Between 2009 and 2011, when the gold price rose from $800 to nearly $2 000 in just two years, it was on the back of a global financial meltdown. If the financial crisis had continued and money became practically worthless, then gold as a currency of exchange would have become very valuable in dollar terms.

For this reason, gold is also a hedge against inflation. If a country is faced with hyperinflation, then your cash sitting in the bank will become worthless in terms of buying power, but gold retains its value, as it is priced in dollars.

This is one of the reasons gold has performed well for South African investors, as it is a great rand hedge. Because gold is priced in dollars, when the rand falls, so the price of gold rises in rand terms.

Gold is a good hedge against financial chaos and currency devaluation, but is this enough of a reason to invest in gold?

Investment expert Simon Brown doesn’t believe so. He argues that, over any longer period, gold in dollars has been a weak investment.

“For South Africans, their gold investments have been protected from the weaker rand, but there are smarter ways to gain from the weaker rand,” says Brown, who recommends rather investing in companies that have operations abroad and earn a significant amount of their earnings offshore.

Brown uses British American Tobacco as an example of a pure rand hedge stock, which is up more than 200% in the past five years.

Even if you just bought an index tracker that tracked the Top 40 companies listed on the JSE, most of those companies obtain more than 50% of their revenue from offshore operations.

So it is interesting to note that, while the gold price has increased by 35% over the past five years, the South African stock market has increased by 85% over that period and would also have paid an income in the form of dividends.

So a R13 000 investment in 2011 (the price of a 1-ounce gold coin) that returned the average of the JSE over the past five years would be worth about R24 050.

Brown is also quite dismissive of the “end of the world” scenario, arguing that if you truly believe the world is coming to an end, then “water and pumpkin seeds would be far more useful”.

However, Carin Meyer, the CEO of FNB Share Investing, argues that gold acts as a good insurance policy.

“Gold has historically been known to act as catastrophe insurance in times of market uncertainty. This is primarily because the yellow metal does not derive its value from the financial system.

“As a means of portfolio diversification, gold is able to create a shield against volatility. Gold is also a liquid asset in that it is recognised globally as a means of exchange in many countries.”

Perhaps the best way to look at gold is not as an investment, but as an insurance on your investments.

It should not make up a significant portion of your investment portfolio, as it does not offer growth potential, but having some gold exposure provides insurance against extreme market fallout and a significantly weaker rand.