What options do investors have?
Global markets have been challenging to navigate over the past few months. A major decline in markets in March, followed by a strong recovery in April and May, has seen investors explore other asset classes to reduce portfolio volatility as uncertainty remains. One such diversification tool is gold. With the rand price of gold reaching record levels in March, investors have been pondering if gold is a good investment currently and how to gain exposure. Gold is a commodity that is favoured in times of extreme volatility. It is seen as a safe haven for investors and its price tends to increase when uncertainty results in diminished returns in other asset classes. As gold is valued in dollar terms, a depreciation in the rand is positive for returns.
20-year gold price in ZAR/oz
Source: Bloomberg
While the above graph makes it seem as though gold only moves in one direction, the reality is that the gold price in rand terms will fall when the rand strengthens or conditions normalise. The price of gold can move sideways for years while the market moves up. Gold should therefore be viewed more as a diversification tool when the underlying commodity has performed very well over a given period and the rand is weak.
20-year gold price in USD/oz. and the USD/ZAR exchange rate
Source: Bloomberg
There are multiple ways to obtain exposure to gold. One can invest in gold mining shares, gold exchange-traded funds (ETFs) and directly through Krugerrands.
Gold prices have reached record highs on the back of global fears about Covid-19. In a report titled "The Fed can't print gold" the Bank of America Corporation raised its 18-month gold price target to $3 000 an ounce - almost 50% above the existing price record. Whether or not this will materialise will remain to be seen with many unpredictable factors still to play out. Gold is not an asset to be considered by investors looking for large returns over night, but rather a place of safety hedging against negative market events and a weaker currency.
