Gold is shining, but keep your investment balance
Investors all over the world are struggling with market uncertainty in the wake of the Covid-19 crash. The gold price fell along with everything else in March, but the precious metal has bounced back dramatically: as of this week, it's up more than 20% this year in dollar terms, and five of the six best-performing shares on the JSE for the first half of 2020 have been gold stocks.
Many of my clients have been watching the gold price with raised eyebrows - at least 10 of them have contacted me to ask if it is a good time to invest in gold. And if it is, what's the best way to do it?
Before I can answer those questions, it's important to understand what's happening on a global level.
Unlike many investments, which are often linked to abstract financial instruments shrouded in jargon, investing in gold is easy to understand.
Gold is a tangible commodity - you can literally touch it - and it has real value, with high demand and limited supply.
One of my clients asked, "But what about cash - surely it's the same?"
It's not. In fact, cash is the exact opposite of gold because it's easy for governments to simply create more, thereby reducing its inherent value.
To stem the collapse in the wake of Covid-19, the South African Reserve Bank has joined other central banks around the world in slashing interest rates and engaging in "quantitative easing" - a fancy economic term that basically means printing more money.
This might work to encourage borrowing and stimulate spending, but it spells disaster for a cash investment like a money market account, where the growth of that investment is directly linked to the repurchase (repo) rate.
The price of essential goods and services such as food and electricity will rise faster than your cash investment will grow, which means that you'll lose money in the long term.
Diversify to manage risk
This year is not the first time that the gold price has spiked.
Investors tend to flee to tangible asset classes in times of turmoil. In the three years following the financial crisis of 2008, for example, the gold price went from about $800 an ounce to a peak of $1,921.
(On Wednesday this week the gold price was $1,880.50/oz following a bout of profit taking after it reached a record $2,026/oz the previous week.)
But even though gold might be a good hedge against uncertainty, and against market distortions caused by quantitative easing and reduced interest rates, don't spend all your investment capital buying gold shares.
The gold price is still volatile - whether it will continue trending upwards is anyone's guess.
So, what's the answer? I've said it before and I'll say it again: diversification is the only way to manage risk.
A well-balanced portfolio should include all asset classes: equity, property, bonds, cash for emergencies, and yes - a little bit of gold.
How much? It depends, but you could aim for an allocation of as much as 10%.
How to invest in gold
If you want to own actual gold, the easiest way to do so is to buy one or more Krugerrands directly from the South African Mint or through a retail trader in gold coins. Just please don't store your Krugerrands in the drawer next to your bed.
Other, more complex investments include gold fund unit trusts, collective investment structures that hold shares in listed gold mining companies locally and abroad; gold-backed exchange traded funds, which track the gold price and allow you to profit without having to own the physical asset; and gold derivatives such as gold forwards, futures and options.
There's no "right way" to invest in gold - each option has its merits and pitfalls. Likewise, one option might suit a certain investor's personality and portfolio better than another option.
To help you make a decision that dovetails with your investment goals, and to structure your portfolio so that gold is just one part of a well-diversified mix of asset classes, get in touch with a qualified financial planner.
Yes, they are able to explain exactly how gold futures work!
• Swart is a director of Autus Private Clients and 2019 financial planner of the year
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