Tracey says: My father-in-law has been reading a book called After Shock and it predicts another stock-market crash soon, making gold a safe investment with significant growth potential.
Maya replies: The reason we are seeing the gold price trading above $1 200 per ounce is because of its status as a “store of value”.
Many people refer to it as an alternative currency, and certainly when the US dollar came under pressure, the gold price soared.
The problem for South Africans, however, is that we have to take our currency into consideration as well — a strong rand lowers the returns from gold, which is priced in US dollars.
The price of gold in rand terms has actually depreciated in value over the last few years. The price of a Krugerrand is a good example.
At the beginning of March 2009, Krugerrands were trading at around R10 299 and the gold price was trading at $940. Krugerrands are now trading at about R9 000, despite a gold price of about $1 200. That is a 13% negative return despite a 28% increase in the price of gold. The difference in the price movements is the rand/dollar exchange rate.
So a decision to invest in gold is also a view on the rand.
The rand’s strength has partly been due to the weak performance of developed economy currencies and a move by global investors to invest in emerging economies. However, many pundits expect to see the rand weaken from these levels.
If we were to see a further market crash, there would be a flight to safety and the rand would most likely weaken significantly as it did in 2008 — so a gold play in that scenario would possibly pay off. Just remember, investing in gold is as much about the rand as the metal.
Whether or not we will see another market crash is an impossible question to answer and reminds us of why there is a stock market in the first place — it is largely just a betting ground for peoples’ views, and some will be right and others wrong. Having a diversified portfolio that includes gold but is not only invested in gold, would be a sound strategy.