For decades, gold has been regarded as a safe haven for investors in times of crisis and uncertainty. The coronavirus pandemic is no exception, as investors have retreated to this traditional store of wealth. The pandemic, together with other negative factors, pushed gold through the R1m per kilogram price level for the first time ever in April this year.
Gold’s popularity during times of uncertainty became evident when the South African stock market recently saw its biggest quarterly decline ever, while gold mining shares avoided the negative trend. The JSE ended March 23% lower year-on-year, in conjunction with a very weak rand.
Why is gold jumping?
When it comes to interacting with financial markets, the amount of risk which you take on determines the potential for your reward. It’s clear that the current economic environment has made it much more difficult to find this balance between risk and reward.
The Covid-19 pandemic looks set to cause a global recession – something we haven’t seen, and couldn’t have predicted, since the 2008 global financial crisis. In the context of a global recession, fearful investors have started to turn to gold as other financial markets have performed poorly. The increasing demand for the metal, together with a weakening rand, has doubled the price of gold in our local currency.
Why do we love gold?
Our fascination with gold dates back as far as 40,000 B.C. Gold’s usability as a monetary unit can be traced back to 700 B.C. when gold coins were created. Today, many investors regard gold as both an inflation and currency hedge*.
Paper money loses value as more of it is printed while gold can be an inflation hedge because its supply is relatively constant. The threat of cash losing value became a reality recently when the Fed* started printing money and interest rates started falling. From a local point of view, if we were to be caught in a global recession, the rand will further weaken and favour the rand-denominated gold price.
When is the right time to invest?
Should you seek safe haven in an investment like gold, you should act before the crisis and not in the middle of the storm. Gaining exposure to the gold price doesn’t require an investor to buy standard gold bars the size of the palm of your hand, which can cost you a small fortune.
You can choose to invest in Krugerrands, shares of gold mining companies or a gold-backed Exchange Traded Funds (ETF*), which tracks the gold price in rands. These alternative investment options are all available to purchase through a broker.
Remember to always consult an investment professional if you are uncertain about what you are investing in. You should always understand the risk that you are taking on before entering into any investment.
🔤 Word of the Week*
hedge – in a financial context, to hedge against something means to reduce the risk of unfavourable price movements.
Fed – refers to the Federal Reserve System which is the central bank of the United States.
Exchange-traded Funds – an investment which holds multiple assets and trades on a listed stock exchange.