South African investors who have invested in gold funds, whether through physical gold or gold shares, have reaped substantial returns in recent years. The gold price has risen by 55% since the beginning of 2019, from around $1,300 per ounce to over $2,000 per ounce by the middle of 2020. Since then, it has fluctuated between $1,800 and $2,000 per ounce. However, the World Gold Council reported that there are signs that gold will hold its own now that it has risen above $2,000 once more. ETF purchases and investments in bars and coins increased significantly in March 2023.
When financial markets are uncertain, gold is supposed to serve as a safe haven. It is a proven inflation hedge that outperforms stocks and bonds during periods of high inflation, uncertain economic times, and geopolitical uncertainty, all of which the world is currently experiencing. Gold provides a hedge against a falling currency for South African investors. In comparison to the 55% increase in the dollar gold price since the beginning of 2019, the rand gold price has more than doubled from below R18 000 per ounce to currently above R37 000.
Investing in funds that hold shares in gold mining companies differs from investing in investment instruments backed by physical gold in other ways and caters to different investors. A gold-backed ETF investor would like to see the gold price rise in order to get high returns, whereas a gold fund that invests in gold shares, such as a unit trust, will produce good returns as long as the gold price remains at levels where gold mines can make decent profits. A rise in the price of gold will be an added bonus.
According to Dean Hack of Absa Corporate and Investment Banking, the first in South Africa to launch a product offering institutional and retail investors direct investment in gold bullion, the NewGold ETF, investors benefit from a gold ETF when the underlying price of gold rises because the ETF is fully backed by the underlying security, in this case, gold. “A gold fund is an equities portfolio that holds shares in gold mining companies.” “While the price of these shares [and thus the fund’s value] can rise or fall due to a variety of factors, the gold price is certainly one, but by no means the only, determinate of share price performance,” Hack says.
However, there are some additional costs associated with investing in gold, such as safe storage. Unlike stocks and bonds, gold does not generate income in the form of dividends or interest, and the return is determined solely by an increase in the gold price.
Due to the recent banking industry crisis, gold ETF net inflows increased by $1.9 billion in March, equivalent to 32 tonnes of new investment. Global gold ETF total assets under management increased by 10% to $220 billion by the end of March, aided by both inflows and gold price appreciation. The amount of gold held increased by 32 tonnes to 3,444 tonnes.
Over-the-counter purchases of gold coins and bars have recovered, while investment positioning in the futures market has mirrored the improved demand for exposure to gold and other precious metals. When compared to the first quarter of 2022, new investment in smaller bars and coins increased by 5% to 302 tonnes in the March quarter. Demand from central banks increased similarly and significantly during the quarter ending in March. “Official sector institutions remained keen and committed buyers of gold, adding 228 tonnes to their gold reserves between January and March,” the World Gold Council reports, lamenting that demand from the jewellery sector has been disappointing due to the worsening economic environment.
