As the world’s major economies are well on their way to recovery from the global economic crisis, the international gold price has started to come down. Aided by a stronger dollar versus a weakened rand, this poses an interesting opportunity for South Africans who seek to invest, experts say.
It seems a lifetime ago since the world plunged into what analysts consider the worst financial crisis since the Great Depression of the 1930s. Particularly the years between 2007 and 2009 were tough: financial institutions around the world collapsed, banks had to be bailed out, stock exchanges plummeted to all time lows, and as both investors and consumers kept their wallets closed, one after the other country was pushed into recession.
South Africa was no exception in that regard. Whilst our financial institutions remained more or less intact, recession nevertheless knocked on our doors in May 2009. As result of the problems in their own backyard, Europe and the United States – two of South Africa’s main trade partners – were forced to cut down on their imports.
Whilst the Rainbow Nation and the rest of the world battled with the economic downturn, the value of gold rapidly increased. “This is often the case in times of financial unrest and economic insecurity,” says Bernard Stern, founder and CEO of Metal Concentrators (Metcon). Founded in 1989, the company is currently South Africa’s largest independent precious metal refinery. “Gold has always been one of the popular options to store value and generate returns on investment when the going gets tough. It is an investor’s safe haven.”
Stern’s statements resonate in various statistics on 2007-2010 gold price developments. In the first nine months of 2007, the value of this precious metal – which is typically calculated in American dollars – rose by 22% to $750 per ounce. Over the whole of 2009, which is widely regarded as the high-tide of the global economic crisis, the price jumped by 24%. This upwards trend continued until last year, after which the price of gold started to drop. Currently gold stands at around $1250 per ounce, which is well above the 2006 levels.
There are various factors that fuelled the devaluation of the world’s most popular precious metal, Stern says: “These include a stronger dollar and more security on the international stock markets. Then there was the referendum in Switzerland on 30 November, during which citizens overwhelmingly rejected a plan for the Swiss National Bank to hold at least 20% of its 520-billion franc balance sheet in gold.”
This would have required the purchase of 1.500 metric tons of gold over five years, says Stern. “This higher demand would have pushed up the price. Being in the gold business, I keep a close eye on what the experts say. In the event that interest rates in the United States increase the gold price is likely to decline. I do not believe that it would decline below $1100 per ounce. After that, it will stabilize for a while. It will not crash.”
He notes that, in the meantime the rand has lost and is set to lose value against the dollar. “This makes gold an interesting investment opportunity for South Africans. Over the past year, the rand has depreciated against the American currency, and it will continue to do so in the foreseeable future. This means that the dollar is expected be yielding more and more rands as we go along,” he says.
What is important to realise is that the rand-dollar exchange rate is set to drop at a faster rate than the value of gold. “Buying gold in South Africa with rands acts as a hedge against rand-dollar depreciation,” Stern says, referring to some of the statistics that are widely available.
Over the past seven years, the price of gold went from $434 to $1.141 per ounce, a jump of 162%. In rands however, gold grew from R2.300 to R12.836 per ounce. This is an increase of 381%. Stern: “For South Africans the depreciation of the rand to the dollar is a good thing when one wants to invest in gold. It is a very useful hedge against Rand Depreciation.”
When buying gold, South Africans can opt for Kruger Rands or gold minted bullion bars, of which the latter come in various different sizes. Stern recommends buying bars.
“Bullion bars are 99.99% pure gold, or 24 carat, as opposed to Kruger Rands, which are 91.67% pure gold (22 carats),” he says. “I would recommend buying 100-gram minted bars, which are the largest minted bars available to the South African Public.”