Gold is considered to be a “safe-haven” investment across the world. Not so long ago, countries around the world used to have the “gold standard” for currencies, which meant that their currencies were backed by gold held by the government’s central banks.
Gold itself used to function as a currency for centuries until it became too expensive and the supply of gold became limited, so other alternatives entered the market. For a long time, international trade happened through an exchange of gold.
Even today, gold is considered as a liquid asset, which means that it can be easily converted to cash when needed. In times of uncertainty, investors turn to gold, since it is seen as a safe investment which won’t lose its value.
For example, the price of gold has significantly risen since the start of the COVID-19 pandemic and the resultant chaos in the global economy, which saw world’s financial markets going through high volatility and turmoil in most sectors.
Gold has a global appeal, and its price is a function of the global economy. Instead of holding your wealth in currency which is subject to losing its value due to inflation, many people prefer to buy and keep gold since its value remains stable in the long-term and rises with the market demand.
This article will discuss the various ways in which you can invest in gold, the factors you need to consider before investing in gold.
Six Ways to Invest in Gold in South Africa
1) Physical Gold
The most common way by which people invest in gold is to buy physical gold. This often takes the form of jewelry. Another way to invest in physical gold is to buy pure gold coins or gold bullion. The South African government’s official mint (South African Mint) produces four ranges of gold coins that you can buy. These are the Krugerrands, Natura, Protea, and Rhino coins.
The South African Reserve Bank considers Krugerrands, Natura, Protea coins as being legal tender.
There are private mints that also make gold coins such as Rand Refinery and Gold Reef City Mint, however, it is advisable that you only purchase gold coins made by the government mint.
Always ensure that you are buying these gold coins from dealers who are authorized by the South African mint. This ensures that the gold that you buy is completely original and pure. Since there are lots of counterfeit coins available in the market, investors need to be especially careful when buying gold physically.
The same is true when you buy gold in the form of jewelry. Only buy jewelry from dealers whom you trust or those that have a long history of selling jewelry in the market.
When holding physical gold, you also need to figure out a safe way to store it. You may consider buying a safe for your home or depositing the gold in a bank’s safe custody or vault.
2) Gold Certificates
If you’re worried about securely storing your gold, you can also consider buying gold certificates offered by different South African investment banks. When you purchase a gold certificate, gold is kept in your name with the bank. The bank charges you an upfront fee for the storage of that gold.
When you buy a gold certificate, the value of your investment will change according to the prevailing market rate for gold.
You can also use such certificates to trade on the Johannesburg Stock Exchange in the ETF sector. Many private investors and institutions buy and sell gold through the exchange to take advantage of price movements. One such example is Krugerrand Custodial Certificates by Rand Merchant Bank which is listed on JSE ETF index.
3) Gold Shares on JSE
Rather than investing directly in gold, many investors also choose to buy shares in gold mining companies. Gold mining companies profit more when the price of gold rises.
Hence, if you want to invest in gold, then you can indirectly do so by buying the shares of gold mining companies. This is a much cheaper way to invest in gold since you can buy quite a few shares without investing too much money.
The gold mining index on the Johannesburg Stock Exchange is called the J150. This index comprises all the best performing gold mining stocks in South Africa.
4) Gold ETFs on JSE
There are several Exchange-Traded Funds that are linked to gold. The value and performance of these ETFs is directly linked to the performance of gold. This is another way you can indirectly invest in gold.
ETFs are slightly more complicated financial instruments, so you may want to do background research on how ETFs function and how they make their money and the risks that are involved.
Examples of Gold ETFs on JSE include: ETFGLD (AfricaGold ETF), GLD (NewGold ETF), KCCGLD (Krugerrand Custodial Certificate) etc.
5) Gold Futures and Options
For sophisticated investors, investing in gold futures and options is another way to make money through price fluctuations in gold or to hedge the risk from these movements.
When investing in futures and options (F&O), you are basically participating in the international market for gold. You can use futures and options as a way to protect your money from inflation.
The futures and options market is often used for speculative bids to profit from the short-term fluctuation in gold.
JSE offers Gold Futures & Options Contracts which can be traded through their authorised derivative members.
Investing through F&O requires you have to knowledge of the derivative instruments, leverage/margin and it carries risk associated with the financial market.
6) Gold as a CFD Instrument
You can also participate in the gold market through CFDs. CFDs, or Contracts for Difference, are complex financial instruments offered by CFD brokers that are linked to the price of commodities like gold, oil; they are similar to futures and options but you don’t actually own the commodity when you trade them.
CFDs are backed by brokers while futures and options are delivered by the exchange. In CFDs, brokers act as the counterparty to your transactions and charge spread on each transaction.
CFDs carry a higher risk than other options listed above, and are meant for more sophisticated investors and traders. You need to understand the risks associated, leverage, how brokers charge commission and fees like roll over fees etc. before you invest through CFDs.
In South Africa, CFD and Forex brokers have to be licensed by FSCA to offer these instruments.
You must do proper research on the risks, concepts like margin trading, fees associated with CFD instruments, before investing in CFDs as these are highly risky and complex trading instruments. You need to prove your financial experience and adequacy before you can trade CFDs.
What should you consider before investing in gold?
As an investor looking to invest in gold, you must consider which option suits your experience level and risk appetite.
Generally buying physically or through Gold Certificates requires low or no experience and carries lesser risk, and anyone can invest in gold through this medium.
While other Gold Investing options require you to have knowledge of capital markets and the complex financial instruments, like investing in Gold Shares, Futures & Options, ETFs and CFDs. Plus, these instruments are subject to market risks and trading fees and commissions.
If you are considering buying gold physically, you need to also take care of storage and security of the physical asset you own as it needs to be stored in a safe place where it can’t be stolen.
There are many factors that affect gold price like demand and supply, inflation, interest rates etc. You need to watch out for these factors and check when it is the best time to invest. It is not wise to invest in gold when rates are at their highest. You need to check historical prices of gold.
You must also consider diversifying your investments, rather than solely relying on one asset like gold.
It is advised you fully understand the risks and the costs involved before you decide to invest. If required, you must also take advice from a licensed financial advisor before investing.
