Download Your guide to investing in gold

Your guide to investing in gold
There are many ways to invest in gold. You can buy gold bullion (gold in its physical form) from
banks, and medallions and Krugerrands from the Scoin shop or other gold investors. You can
alternatively buy shares that are exposed to gold in some way – either linked directly (e.g. a mining
house) or indirectly (e.g. exchange traded fund). Gold is a ‘universal’ currency in that it can be
exchanged or bartered for the currency of the country you are in.
However, not many know the difference between a Krugerrand, gold medallions and investing in
gold shares. Here we run you through the various ways in which you can invest in gold:
Gold medallions
A gold medallion is anything excluding a Krugerrand or a gold bar. It can be an old bullion coin, or
Mandela medallion. When you invest in something like that you invest in two things: you invest in
the bullion value and you invest in the coin or the medallion’s value – the collector’s value.
These coins normally trade at the bullion value, plus a mark-up, which has to do with the
collectability of a coin. The collectability of the medallion is normally a very substantial part of the
total value.
If you look at something like old gold Roman coins, there the bullion value is actually a very small
percentage of the overall value, because people buy the coins more for the historic value than for
the fact that they are made out of gold. The same goes for collectable coins like the Mandela coin.
Therefore, collectable coins or gold medallions do not give investors a very clear bullion view and
thus not a very efficient way of investing in gold. Furthermore, collectable coins are quite difficult to
invest in, particularly if you’re not knowledgeable about the subject matter and don’t know what to
look out for.
People’s tastes and fashions when it comes to coins is so difficult to call, that really when you get
into the collectable coin field, unless you really know what you are doing it’s best to stay clear of it.
Gold medallion coins are also hard to sell. You have to have a collector, or someone interested in the
medallion before it can be sold. This is why investing in medallion coins is a risk, especially if the
investor does not fully understand the collectors market, or the full collector value of the coin. Do
your research before investing in gold medallions.
Krugerrands
If you have a pure bullion view in mind, then Krugerrands are a perfect investment vehicle. When
you buy a Krugerrand you take a view on the gold price in Dollars, and you take a view on the DollarRand exchange rate. So even if the Dollar price of gold doesn’t do anything, but the Rand
depreciates, you still make money. For that reason, it is a very good hedge against inflation – both
local inflation and Dollar inflation.
Krugerrands normally trade at 4% premium to the bullion value, which is a lot less than Mandela
coins which can trade at twice the bullion value. Therefore, a Mandela coin trades at a mark-up of
100%.
©Justmoney 2016
In the case of the Krugerrand, you see what the gold price is today, you know what Dollar-Rand is
today, and in two months’ time the Rand value might depreciate a lot and you know what the value
of your [Krugerrand] is and you can go and sell it. There are no unobservable premiums which make
up the value of the coin.
It’s a lot easier to sell a Krugerrand than it is to cash in a medallion. The South African Reserve Bank
(SARB) is by law, set to act as buyer of last resort for Krugerands. This means that if an investor buys
a Krugerrand from a dealer, for example, and wants to sell the Krugerrand in order to get their Rands
back, they need only go into a SARB branch and exchange the Krugerrand for its cash value.
There are also two types of Krugerrands: they come in bullion and in Proof coins. The difference
between the two, is that Krugerrand Proof coins image and finishings are better than that of a
bullion coin. In addition, the Proof coin will come in a box, and has 220 serrations around the edge,
whereas a bullion coin only has about 180 serrations. This is due to the quality of the mint.
Furthermore, if investors only have gold bullion in mind, then the Krugerrand bullion coin is a better
investment.
Gold shares
When investing in gold shares, investors take a view on the gold price, the exchange rate,
management ability of the mine to efficiently and profitably get its assets, and they look at the
regulatory environment. Therefore, investors in gold shares take a view on a lot more than just gold
prices.
If the gold price goes up then generally mines will want to maximise production. If you hold gold
shares this will mean that you have double exposure [on your paper shares]. In other words, you will
benefit dually if gold prices go up and if mining companies increase their output.
Should you invest in gold?
Ask yourself why you want to invest in gold and whether it’s best for you in the long term. If you are
in any way uncertain about this asset then it’s best to speak to a financial advisor.
While gold is often referred to as a ‘safe’ investment that’s not to say that gold can’t lose value. A
report by the New York Times illustrated that gold has gone through booms and busts before,
including at least two from its peak in 1980, when it traded at $835 (R9180), to its high in 2011.
Gold can be a good investment but generally experts say it should never be solely relied upon.
Diversifying your portfolio (spreading your savings over more than one asset class) is still key.
Glossary of terms
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Gold bullion: The physical form of gold, which comes in either gold bars or in gold coins.
Krugerrand: A South African gold coin with President Kruger on it, first minted in 1976.
Gold medallion: Any gold coin other than a Krugerrand, which has collectors value, e.g. a
Mandela coin.
Gold shares: investing in gold on the JSE.
©Justmoney 2016