Gold comfortably above R1m per kg

Investors who put their money into gold shares and unit trusts and those who bought physical gold – either by buying Krugerrands to hide in the couch or indirectly through an exchange-traded fund (ETF) that holds gold bars – have enjoyed good returns over the last few years.

The gold price increased by some 55% from around $1 300 per ounce at the start of 2019 to breach $2 000 per ounce by the middle of 2020, but fell back and has traded at between $1 800 and $2 000 an ounce since then.

But there are indications that gold will hold its own now after rising above $2 000 again.

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The World Gold Council notes in its recent quarterly Gold Demand Trends report that purchases by ETFs and investment in bars and coins increased quite strongly in March 2023.

In the case of ETFs, March recorded the first net inflow in 10 months into funds holding physical gold.

“The banking crisis fuelled gold ETF inflows in March. March saw gold ETFs net inflows of $1.9 billion, equal to 32 tons of new investment,” says the report.

“Lower bond yields, a weaker dollar and safe-haven buying lifted the gold price in March by 9%, fuelled by the recent banking industry crisis. This was a key contributor to net inflows into physically-backed gold ETFs during March as investors flocked to gold in bulk after 12 March, following the collapse of the Silicon Valley Bank.”

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“Overall, global gold ETF total assets under management rose by 10%, aided by both inflows and the gold price appreciation, to $220bn by the end of March. Gold holdings increased by 32 tons to 3 444 tons.”

The swing in demand by ETFs during March is significant, even if the old saying of a single swallow and warmer days warns against hasty predictions.

“Gold-backed ETFs and similar products account for a significant part of the gold market, with institutional and individual investors using them to implement many of their investment strategies,” say the researchers at the World Gold Council.

“Flows in ETFs often highlight short-term and long-term opinions and desires to holding gold.”

Coins and bars

The organisation says over-the-counter purchases of gold coins and bars also recovered, while investment positioning in the futures market mirrored the improved demand for exposure to gold and other precious metals.

New investment in smaller bars and coins increased by 5% to 302 tons during the March quarter compared to the first quarter of 2022.

Demand from central banks experienced similar and significant growth during the quarter to the end of March. “Official sector institutions remained keen and committed buyers of gold, adding 228 tons to their gold reserves from January and March,” says the World Gold Council, lamenting that demand from the jewellery sector was disappointing due to the worsening economic environment.

Safe haven

That gold is supposed to act as a safe haven when financial markets face uncertainty begs the question whether it is time to look for a safe haven now.

Gold is a proven hedge against inflation and outperforms shares and bonds during periods of high inflation, uncertain economic times and geopolitical uncertainty – all of which the world is experiencing right now.

Rand hedge

For South African investors, an important consideration is that gold also offers a hedge against a depreciating currency.

In fact, those investing rands have been doing much better than the dollar gold price shows.

Compared to the 55% increase in the gold price in dollar terms since the beginning of 2019, the rand gold price has more than doubled from below R18 000 per ounce to above R37 000 currently.

However, because the price of gold typically doesn’t move with market prices, the metal can also be considered a risky investment because it seems to underperform equities over the longer term, but puts in spectacular gains from time to time.

Gold price in rands (per ounce)

Unfortunately, gold does not produce income in the form of dividends or interest. Unlike stocks and bonds, only an increase in the gold price determines the return. And investing in gold sometimes brings additional costs, such as safe storage.

Still, the surges in times of uncertainty make up for the disadvantages.

ETF or gold fund?

Investing in funds that hold shares in gold mining companies, compared to investment instruments backed by physical gold, create other differences and cater for different investors.

Investors in a gold-backed ETF would like to see the gold price surge to get high returns, while a gold fund that invests in gold shares, like a unit trust, will produce good returns as long as the gold price maintains levels at which gold mines can make decent profits. A surge in the gold price will be an added bonus.

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Dean Hack from Absa Corporate and Investment Banking – the first to launch a product in SA to offer institutional and retail investors direct investment in gold bullion, NewGold ETF – says investors benefit in a gold ETF when the underlying price of gold increases as the ETF is fully backed by the underlying security, in this case gold.

“A gold fund holds a portfolio of equities, assuming in this case, shares in gold mining companies. While the price of these shares [and consequently the value of the fund] can increase or decrease on the back of numerous different factors, the gold price is certainly one, but by no means the exclusive determinate of share price performance,” says Hack.

One only has to look at the sharp drop in the Sibanye-Stillwater share price when it was hit by a three-month labour strike in 2022 to appreciate the truth of this statement.

Ongoing electricity disruptions can have a similar effect.

“The benefits of a gold ETF include direct exposure to the commodity, liquidity [to buy/sell the ETF], transparency of fees and bullion holdings, lower cost than investing in equities, benefits of diversifying your portfolio through exposure to gold and often lower investment minimums than investing in physical gold directly,” says Hack.

Without risking a prediction on the gold price, he adds that “market sentiment appears to be positive towards gold’s outlook”.

NewGold continuously tracks the gold spot price and enables investors to invest in a listed instrument in which each security is equivalent to approximately 1/100th ounce of gold, fully backed by holdings of gold bullion with the NewGold custodian, ICBC Standard Bank.

The 1nvest Gold ETF is also backed by physical gold, stored and insured by a custodian vaults. Its fact sheet says that a gold ETF will have recourse to good delivery gold bars. The gold is segregated, individually identified. and allocated in secured vaults.

Most gold ETFs, like 1nvest Gold, would not be allowed to introduce any outside risks into exposure to the gold, such as leasing of the precious metals or hedging by derivatives.

Gold funds offers investors exposure to the fortunes and challenges of the gold market by investing in mining companies. They often achieve higher returns, but higher risk too.

Gold funds benefitted recently, with the gold price sitting above R1 million per kilogram since the middle of 2022.

‘Sensible hedge’

Meryl Pick, portfolio manager of the Old Mutual Gold Fund, notes in her latest fund overview that the gold price increased 9% to $1 980 per ounce in the first quarter of 2023, but that the fund’s largest holding, Gold Fields, increased by 35%. AngloGold Ashanti, the second largest holding, increased by 31%.

“Gold is a sensible hedge against volatility in an environment this rife with uncertainty, and demonstrated that role in the first quarter,” says Pick.

“Further driving the performance of the fund, the rand weakened 5% and therefore the rand gold price climbed 14%.

“Towards the end of the quarter, several regional US bank failures made headlines illustrating how risks in the economy are revealed in a rising interest rate environment.

“Against this backdrop, the European Central Bank and the US Federal Reserve continued to raise interest rates in the ongoing fight against inflation. This rate action further paves the way for soggy global growth, which equates to a bullish environment for gold in the medium term.

“Since Opec+ has demonstrated its intention to support the oil price around current levels, the risk of persistent inflation is growing. As the global growth outlook fades and inflation persists, there is a rising risk of a stagflationary scenario playing out,” says Pick.

She also notes that the fund currently holds no gold ETFs, “in order to maximise leverage to the gold price”.

This article originally appeared on Moneyweb and was republished with permission. Read the original article here.

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