Gold still shines as investment

When the world is in turmoil, investors usually rush to get their hands on gold, and the past 18 months have been no different, as there has been a strong uptick in the gold price over the past 18 months.

The steady increase in the gold price is a sign that there is a premium on gold as an asset class that stores value, said Johan Gouws, head of advisory services at Sasfin Securities.

Investors who invested in gold in rand terms (through an exchange-traded fund, for example) have been richly rewarded over the past 20 years.

From the end of March last year to the end of last month, investment in gold grew by 53%. From the fourth quarter of last year until the end of this year’s first quarter, investment grew by 35%. Over the 20 years to the end of last year, investment grew by 13.3%, said Gouws.

Since the outbreak of the Covid-19 coronavirus pandemic, investors worldwide have turned to gold with fresh enthusiasm because the precious metal is regarded as a safe investment during times of uncertainty.

Herman van Papendorp, head of investment research and asset allocation at Momentum Investments, said gold was seen as a safe-haven investment, especially in high-risk environments, because the metal’s value was not correlated with asset classes such as shares, which drop during times of crisis.

But gold as an asset class also has limitations, and the opportunity costs of investing in it can be high because it does not deliver dividends – like equities do – or interest, as is the case with government bonds.

If shares and property, for example, start to do well, that doesn’t mean that the gold price will also start to increase – in fact, its value may decline.

“For this very reason, one has to emphasise that gold should be part of a diversified portfolio. It’s a good protector against risk, but it’s also not a good idea to just hold gold,” said Van Papendorp.

Read: Pilgrim’s Rest gets set for a new gold boom

Gouws said that, in an environment where lots of companies were suspending their dividend payments, and where the interest on bonds was marginal, the opportunity cost of gold was no longer considered so great, even if it meant forfeiting dividends or interest income.

Another reason people are currently investing in gold is because of the measures that central banks worldwide are implementing to keep economies going during the virus outbreak.

“If you go and look at the effect that stimulus measures are having on the balance sheets of central banks and governments, there is a question mark over how sustainable this financial dispensation is, with governments printing money that is not flowing back to the economy or that is properly backed. Gold is then a good way to store value,” said Gouws.

The question is what the prospects for the gold price in the future will be, especially where gold production – not only in South Africa, but also globally – has been halted as a result of the pandemic.

Traditionally, the price of such an asset class would climb when the supply declined, but it’s not that simple in this climate, said Van Papendorp.

“There is less gold in circulation and the price is usually pushed up when supply declines, but the demand side [as a result of worldwide lockdowns] is also being negatively affected. People who are sitting locked up in their homes, for example, they aren’t going out to buy gold jewellery.”

Although gold is currently trading at about $1 600 (R30 000) an ounce, it’s not certain that its price will keep climbing.

Van Papendorp explains that the dollar-gold price over the past few decades has been driven by real interest rates, such as inflation-linked US government bonds. Real interest rates have been going down since the global economic crisis in 2008/09.

According to Van Papendorp, the current rally on the gold price began in November 2018, when the price was in the region of $1 200 an ounce and real interest rates had just tipped 1%.

“Real interest rates are now at 0.3% and gold is currently trading at about $1 600, but gold actually discounts the environment in which real interest rates are negative and it doesn’t necessarily mean that there is upward potential,” said Van Papendorp.

In short, investors should think twice before scrambling to invest in gold on a large scale. At $1 600 an ounce, gold isn’t actually that inexpensive as an asset class, he emphasised.

“The gold price at its current level is correctly valued.”

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