Despite its dwindled significance in South Africa’s economy, gold has remained a useful investment alternative with significant returns recorded in periods, especially in times of increased uncertainty, notes Old Mutual in a report.
In 1980, the metal accounted for 16% the country’s GDP, but by 2017, that number had declined to 2%.
Gold has been part of the global financial system for centuries, having been adopted as a peg for currencies such as the UK pound since 1717. The end of the Bretton Woods system of fixed exchange rates in 1971 saw the move to broadly floating exchange rates.
Gold’s value has been seen as a hedge against inflation and protection against economic turmoil. The investment case cited against gold is that the metal has virtually no fundamental intrinsic value and does not produce cash flows, Old Mutual’s Long Term Perspectives 2018 report said.
“South African investors, in particular, have a long history of investing in gold, no doubt influenced by the historical importance of gold in the South African economy,” it said.
Investors who find the ability to own physical gold appealing have been able to invest in Krugerrand coins since 1967.
The financial services firm said that it added gold to the MacroSolutions Balanced Index at a 2.5% weight, and it has delivered a return of 14% a year since 1967.
A large component of this return however, has been driven by currency weakness as the annual US dollar return has been 7.3% a year.
Old Mutual pointed out that the gold price has gone from R25/oz to R15 982/oz, while in dollars it has gone from US$36/oz to US$1 291/oz.
Real returns: +4.2% a year since 1967
Nominal returns: +13.6% a year since 1967
Highest annual return: +122% (1979)
Lowest annual return: -19% (1997)
Gold’s role in a diversified portfolio
Old Mutual said that historically, the price of gold has a very low correlation to the various mainstream asset classes. “The tendency for gold to move independently from other markets helps to smooth out the overall volatility of a diversified investment portfolio.”
From 2004, gold became even easier to access, especially for retirement funds, via the popular NewGold Exchange Traded Fund (ETF). Some R15.8 billion of this ETF had been issued by the end of 2017, it said.
Weaker dollar relieves pressure off gold
Some reversion from elevated levels towards the long-term trend, together with a recovery in the value of the US dollar, had seen an erosion of the dollar gold price over recent years, the report said.
“2017 saw the US dollar topping out and experiencing some weakness through much of the year. Commodity prices generally firmed and the gold price moved higher in line with this trend.
“However, combining this with strength in the rand towards the end of 2017 resulted in gold’s rand return for local investors being fairly muted for the year.”
From a valuation perspective, the price of gold remains fairly elevated in real terms compared with its long-term history, the report said. “It is accordingly difficult to motivate good returns for this asset class over the next few years off this relatively high base.”
“Having said that, a major reason for holding gold in a portfolio is to diversify risk and it is easier to argue that the level of uncertainty on, inter alia, the political front both locally and globally has increased.
“There will almost inevitably be times when holding gold will be beneficial to investment portfolios over the coming years,” Old Mutual said.
“Gold should be an important part of a diversified investment portfolio because its price increases in response to events that cause the value of paper investments, such as stocks and bonds, to decline,” said Old Mutual’s Denzil Burger.
“There’s a finite amount of gold and silver in the world, so their value tends to keep up with inflation.”