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UNIT TRUSTS:RMB Balanced Fun... A spurt of growth upon retiremen... Has Wall Street succumbed to "mad bull" ... Betting on a bottle of the best bubbl... Taking on the role of trustee ... |
Has the glitter gone out of gold forever?
Does the current low bullion price present a buying opportunity, or should you sell your shares and Krugerrands, asks LUCIENNE FILD
Gold has been held in high regard by mankind since the earliest times and the use of gold as a medium of exchange dates back thousands of years. It has proved to be especially valuable during hard times. In the two world wars, when currencies were worthless, families escaped starvation because they had gold with which to secure food. Still today some investors keep a part of their wealth in gold, either through shares, unit trust funds or Krugerrands.
But does the present low gold price represent a buying opportunity, or should investors steer clear of this asset - the fate of which rests largely with the buy and sell policies of the world's central banks and, to a lesser degree, on the shopping whims of jewellery lovers in the Far East? Mark Madeyski, gold analyst for stockbroking company O'Flaherty, Sundelson & Company, is negative about gold shares. The gold industry is facing hard times - caused by low grades of gold, high production costs and high wage demands. The scenario is made worse by the weak gold price. Madeyski's opinion is that gold shares are only good as a trading opportunity, but not as a long-term hold. On whether investors who already own gold shares should sell, Madeyski's advice is: "If you have held out this long, you might as well hold longer. I would wait for the next upswing."
Avgold financial director David Kovarsky advises investors to do their homework before investing in gold shares. Investors must be clear on whether they are looking for share growth or for dividend income, because the drop in the gold price has caused the dividend income on gold shares to decrease. He advises investors to look carefully at a mine's ability to lower its operational costs and to provide production growth.
There are only two gold unit trust funds, one run by Standard Bank and the other by Old Mutual. Herman van Velze, portfolio manager of the Standard Bank gold fund, concedes that gold has not been a good investment in the past 10 years. He blames this on "the inability of the industry to reinvest surplus cash and grow the business like an industrial company". Van Velze says now is the time to buy because the gold price is at a 12-year low. "In the past 10 years gold experienced a drastic drop three times and every time the recovery was fast and furious."
Georges Lequime, portfolio manager of the Old Mutual gold fund, says for a speculator gold shares make for a good trading opportunity over the short term, but warns investors to stay away from gold as a long-term investment.
JM Fölscher Stockbrokers director Izan de Bruin says he is not very excited about gold prospects over the short to medium term. He believes gold will remain under pressure for quite a while. Buying Krugerrands is the other option if you are keen to invest in gold. Krugerrands are not affected by problems in the gold mining industry - their value depends solely on the bullion price. The value of a Krugerrand also does not depend on the world economy - if the stock market crashes the price of the Krugerrand probably will not. However, Madeyski says there are major disadvantages in investing in Krugerrands. You get no income return on the capital you invest, it costs money to store the Krugerrands, and the profit you make when selling Krugerrands will more than likely be taxed. "Krugerrands are an insurance, but not a great investment," says Madeyski. Investec Trading head Eric Wood says in the past Krugerrands were seen as a hedge against a devaluing rand and also against the possibility of anarchy breaking out, which could render the currency worthless. Wood points out that demand for Krugerrands has declined following SA's move to a democracy. He says SA residents also used Krugerrands as a way to diversify their investments before exchange control regulations were relaxed on July 1. Wood says under the present circumstances it makes no sense to invest in Krugerrands because they renders "terrible returns". If you already own them, Wood's advice is to sell and deposit the money in a bank account or invest in equities. South African Gold Coin Exchange chairman Alan Demby, on the other hand, says while there has been a setback in the bullion price in dollar terms, gold and Krugerrands have shown their mettle in rand terms. Demby's view is that gold is still your best insurance policy against urgent cash calls. "It is better to be a seller of gold than to be a distressed seller of your property or shares, or to have to surrender your insurance policy. You will at least get a market-related price."
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