The pros and cons of investing in gold

A company in the United Kingdom called TallyMoney is understood to be the first employer in the country to pay their staff in gold rather than pounds and pence to help them stay ahead of inflation.

While South African CEOs may not be toying with the idea of a gold payroll scheme just yet, inflation is real and a looming threat in the country as well.

But this doesn’t stop you from investing in gold yourself. So, should you put your hard-earned savings into gold or even Krugerrands?

How can you invest in gold?

There are several ways to gain exposure to gold. Gold can be purchased in the form of bullion coins (like Krugerrands) or bars, as well as rare and modern numismatic collectables.

Trading in Krugerrands has become simpler over the years. ‘The value of Krugerrands is directly linked to the value of gold, and, in times of uncertainty or inflation, gold is seen a natural investment safe haven and hedge against inflation.

‘We offer investors the option of taking delivery or holding their Krugerrands in the custody of FNB. If clients wish to hold their Krugerrands with FNB, they can buy, sell and manage their Krugerrands on our app or via online banking,’ says Samukelo Zwane, head of product development at FNB Wealth and Investments.

The pros of investing in gold

Zwane explains: ‘They are simple to understand; the price of a Krugerrand is directly linked to the price of gold. The transactional costs of the coin are quoted separately from the actual coin, thus ensuring that investors are aware of the value of the coin and the costs separately – unlike investing in a gold mining company, whereby the value of the company is not only influenced by gold but by investor sentiment on the ability of the company to create value for its shareholders.

‘Krugerrands are portable, making it easy to transport them from one place to another. They are available in one ounce and fractions of an ounce, making it easier for investors to bite off what they can chew. It is easy to store Krugerrands – storage facilities are easily accessible, and you can decide to store them on your own. Therefore, the maintenance costs of Krugerrands are low.’

If you need cash urgently and you want to sell your Krugerrands, it’s easy to do this as well. ‘There are a lot of coin shops willing to do the conversion. The price of converting is done at a standard and published market value of gold,’ says Zwane.

The disadvantages of gold

Gold, while lucrative, can be attractive for thieves – particularly if you’re against storing your gold or Krugerrands somewhere safe. You’d also have to insure it, which is an added cost.

Unlike some shares, gold won’t give you an income. It will go up and down in value, but that’s really it. When you’re buying gold, you’re betting on its value going up in the future.

‘Gold does not generate regular yields, therefore it may not be appropriate for investors seeking regular income from an asset class. Even though it is highly liquid, it is likely that you will incur trading costs whenever you redeem Krugerrands for cash,’ adds Zwane.

Is it the right time to invest in gold?

Gold has recently seen a significant increase in value due to the Russia-Ukraine conflict. If you buy now, you could still benefit from an upswing, but you may now be too late to enjoy any major increases in value.

It’s important to get the timing right, but that’s not always easy. The best way to invest in gold is to invest in it for the long term.

‘It is always the right time to start. A little gold goes a long way. Dollar-cost averaging and continuous accumulation of gold has been the success story of so many of our clients.

‘One can obsess about price and miss out on future gains; others can sell at the wrong time and lose money – but consistent saving in gold can lead to securing one’s investments for one’s retirement or for loved ones. One of our largest clients started with a single ¼ oz Krugerrand, valued at R3,000 at the time, and now has a collection worth over R20 million,’ says Rael Demby, CEO of the South African Gold Coin Exchange and The Scoin Shop.

Zwane adds: ‘For investors who want to protect the value of their investment over the long term, gold has proven to be the appropriate asset class to do this. You need to strategically understand how to get exposure to Kruggerrands; how to phase in your investment to benefit from time diversification.’

What are the alternatives to gold?

If you’re not keen on investing in gold, there are alternative safe havens to consider. These include cash, other commodities (silver, platinum, etc.), and defensive shares.

‘Some shares are defensive; they can consistently provide dividends and stable earnings despite overall market volatility. Typically, shares with a defensive behaviour have consistent demand for their products at different phases of the business cycle.

‘Companies operating in certain sectors have defensive products resulting in their shares being defensive; these sectors include utilities, consumer goods, healthcare, etc. Therefore, investment in such stocks could be an alternative to investing in Kruggerrands,’ explains Zwane.