Gold: Safe haven when stocks disappoint

NOT sure of where to invest your money? Buy gold. The yellow metal has been on the move so far this year as the world economic outlook turned from promising to gloomy, again.

Gold is considered a safe harbour during the turbulent times and has an added advantage that it is not directly related to any country’s economy, or politics. The renewed concerns of another episode of global economic decline, which were made worse by the surfacing of debt problems in the euro zone this year, have seen investors selling out of stocks and other risky assets and opting to invest the proceeds in gold.
Bullion prices have gone up by 11, 9% on the spot market to US$1234, 5 per troy ounce, roughly US$39, 70 per gramme from December 31 2009 to June 29 2010. By comparison, the stocks were in the red with the Dow Jones Industrial Average losing 3, 9% while the FTSE 100 was down 9, 2% during the same period. Closer to home, the JSE All Share index retreated by 3,5%. Local investors were not spared, losing 14,3% of their investments.

But why gold? It is difficult to logically explain why anyone should even want to invest in it in the first place. Renowned investor Warren Buffet sees gold as a strange commodity that is “dug out of the ground in Africa, or someplace”. He continued: “…we melt it down, dig another hole, bury it again and pay people to stand around guarding it”. He thinks that gold has no utility and has value only because people believe it is valuable.

Be that as it may, demand for gold continues to increase with some market pundits projecting the price to reach US$1500 per ounce in a few years time.

There is no question that gold’s price-run is purely speculative. Speculation is usually motivated by the hope for profit as investors expect the price to rise above what they paid on purchase. Recent interest, it seems, is motivated more by the desire to preserve value. As long as the outlook on the global economy remains uncertain, more investors will turn to gold. Worries over the volatility of major currencies such as the US dollar and the euro are also pushing some governments to buy gold as reserves. Recently, India’s central bank bought 200 metric tonnes of the metal from the International Monetary Fund to boost its reserves. The supply of gold is always constrained and this helps it to hold its value in depressed times and to push up when demand is high. There can never be enough gold to meet demand.
What investment choices are available to prospective gold investors? In developed markets, prospective gold investors have the option of buying listed mining counters, the physical bullion or investing in exchange traded funds (ETFs).
Investors can get an exposure through purchase of listed gold mining counters. The ZSE has two gold mining counters, namely Falgold and Rio Zim. Rio Zim has the potential to produce 1 600kg per year if it can get funding to invest in mine development and plant refurbishment. It produced only 450kg in 2008. Falgold produced 1 088kg in 2000 but production has since declined to 124kg in 2008 because of adverse economic policies, lack of capital and erratic power supply. Investing in either one of these two could allow investors to profit from the uplift in gold prices.

However, it is not possible to fully benefit because the duo is currently operating at suboptimal levels. In the case of Rio Zim, the impact of rising gold prices could be diluted by the poor performance of other commodities it mines. Falgold mines gold only.

Investors who like to own bullion directly can invest in gold coins or gold bars. This is the traditional way citizens would use to store value when they did not trust their government politically or economically. Then, ordinary people would hold large amounts of gold in jewellery. Now even sophisticated investors hold physical gold not as jewellery but in bars and gold derivatives. The drawback is that physical possession of gold does not yield any income. But where all currencies are in decline it will at least enable the investor to preserve real capital. Unfortunately, locally the options to invest in tangible gold or its derivatives are not available.

ETFs are investment funds which trade on stock exchanges just like common stocks. They typically invest in assets such as stocks and gold.

The closest example in the local market is the unit trust funds with the difference being that the latter are not traded on the Zimbabwe Stock Exchange. Unit trust funds trade on the over-the-counter market where investors go directly to dealers to buy or sell the units.
Typically, the local unit trust funds hold listed equities, fixed income securities and a bit of property although the legislation allows them to include other commodities such as gold. Firming prices present a good opportunity for the introduction of gold-linked unit trust funds. For investors having part of their portfolios in gold could serve as a hedge against further economic losses.  If there is no way of buying it then perhaps buy gold jewellery.


Ranga Makwata