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Investing in gold has long been considered a safe haven for investors during times of extreme volatility and uncertainty. As global markets continue to present challenges, many investors are exploring alternative asset classes. This is to reduce portfolio volatility and protect their wealth. Gold garnered attention with record rand prices in 2020, making it a notable asset class. In this article, we’ll explore gold’s benefits, ways to invest in South Africa, and advantages of buying Krugerrands.
Why Invest in Gold?
Investors often favour gold as a diversification tool during times of market turbulence. It is seen as a safe haven that tends to perform well when other asset classes experience diminished returns. Gold attracts investors due to its inverse relationship with the currency’s strength in which it’s valued. In the case of South Africa, a depreciation in the rand can lead to increased returns for gold investors.
However, factors such as the rand’s strength and market conditions can also impact gold prices. While the long-term trend of gold prices may appear upward, there can be periods of sideways movement or even decline. Therefore, it is crucial to view gold as a diversification tool rather than a guaranteed source of high returns.
Ways to Obtain Exposure to Gold
There are several avenues available for investors in South Africa to gain exposure to gold, each with its own advantages and considerations. Let’s explore three popular options: investing in gold mining shares, gold exchange-traded funds (ETFs), and purchasing Krugerrands.
Investing in Gold Mining Shares
Investing in gold mining shares on the Johannesburg Stock Exchange (JSE) is one way to gain exposure to the gold price. When the price of gold rises, the profitability of gold mining companies generally increases, which can positively impact their share prices. However, it’s important to consider other factors that may affect the performance of these companies, such as operational risks, strikes, and poor capital allocation.
There are numerous gold mining companies available for investment, both locally and globally. Conducting thorough research and consulting with financial advisors can help investors identify the most promising opportunities in this sector.
Gold Exchange-Traded Funds (ETFs)
Gold ETFs offer a convenient and cost-effective way to gain exposure to the price of gold. These funds typically track the price of gold in a specific currency, allowing investors to participate in the performance of gold without the need to physically own and store the precious metal.
In South Africa, the Absa New Gold ETF is listed on the JSE and tracks the rand price of gold. Investors indirectly own a portion of the physical gold held by the fund by investing in this ETF. This provides a level of security and liquidity, as investors can easily buy or sell shares of the ETF on the exchange.
Purchasing Krugerrands
Krugerrands, South African gold coins, present another avenue for investors to gain exposure to gold. These coins were first minted in 1967 as a means of marketing South African gold. While Krugerrands have legal tender status in South Africa, they are primarily considered a valuable asset rather than a currency.
The value of a Krugerrand is directly linked to the global price of gold, making it a reliable tool for tracking and investing in gold. Investors can purchase Krugerrands through reputable institutions like FNB, and the coins can be safely stored at Rand Refinery. One of the advantages of investing in Krugerrands is their high liquidity. FNB guarantees to buy back Krugerrands at any time, making them easily convertible to cash.
The Role of Gold in Portfolio Diversification
Gold’s performance in 2020 demonstrated its potential as a risk-balancing asset in a portfolio. During the market downturn at the beginning of the year, investors who had exposure to gold experienced more favourable returns compared to those solely invested in traditional asset classes. However, it’s important to note that gold is not a short-term investment for quick and substantial returns. Instead, it serves as a hedge against negative market events and a weaker currency, providing stability and diversification over the long term.
Key Takeaway
In uncertain times, diversifying investment portfolios becomes crucial for risk management. Investing in gold in South Africa is a viable strategy for investors seeking to reduce volatility and safeguard their wealth. Whether through investing in gold mining shares, gold ETFs, or purchasing Krugerrands, there are various avenues available for gaining exposure to this precious metal.
As with any investment, it is important to conduct thorough research, consult with financial advisors, and consider one’s personal financial goals and risk tolerance. By carefully considering the advantages and considerations of each investment option, investors can make informed decisions and potentially benefit from the long-term stability and diversification that gold offers.
So, if you are looking to diversify your investment portfolio and protect your wealth during uncertain times, consider exploring the opportunities of investing in gold in South Africa.