Gold as an investment vehicle
Gold! Something with no use that is valuable! Yes, this metal has for thousands of years – even from the time of Sauron when he crafted his Master Ring!
Gold forms part of the ‘cash and equivalent’ asset class. This means that gold could be exchanged easily and quickly to cold hard cash. Cash and equivalents tend to follow the principle of low risk and low returns.
It is absolutely ideal if you want to just keep the value of your money – when your country’s currency spirals out of control. As an example, when Zimbabwe’s economy had hyperinflation, it would be better to invest in gold – as you would pay the same amount of gold for bread (for the next few months at least). If you had to do this with Zim$, this would increase minute by minute!
What is this gold you speak of?
Gold and precious metals
Of all the precious metals, gold is the most well known. Other metals might be worth more, but it doesn’t have the house brand name. Though this article is about gold, it’s worth noting that there are other precious metals of value. Some of there, including platinum, have by times in recent history been more expensive than gold. These prices are only for indication priced per fine ounce – I stole them off the internet on 2019/08/04.
|Precious Metal||Spot Price|
If you want to invest in gold, you would need to speak the golden language – and know what to ask for. Here are some words to help you navigate your way around the streams of glitter:
- Fineness: This is often measured in carats – 24 carats (shortened to ct) means it’s pure gold. 9 ct means there are other metals and dirty things in there – it’s not pure gold! The calculation is as follows:
- 24-carat gold is equal to 995 parts per thousand.
- Premium: The main price of gold is decided in London. If the price that traders pay is more than this price, this difference is called the premium. This is often the case in Asia when gold is shipped from London – and they cannot fulfil orders quick enough.
- Troy ounce: this is the standard measurement of precious metals.
1 kg = 32.1507466 troy ounces.
- Spot price: This is the price that something can be bought or sold for at this moment in time.
Types of gold investment strategies
Take note when investing in gold ETFs/Funds
Many ETFs/Funds trade in gold futures and shorts – this means that they speculate on the price of gold, which can be risky. Make sure you know what you are investing in.
Rather pay a little bit more and know that you are getting the quality that they are promising. For example, some fly-by-night people say they sell 24ct gold, yet this could be fake.
There are a few different strategies that one can follow when investing in gold. I will also discuss some indirect ways of investing – these might make your investing safer and more diversified:
- Buy physical gold – Many places buy and sell gold these days, including jewellers, specialist coin shops and pawn shops. Investment options here include:
- Investing in gold jewellery
- Investing in antique gold jewellery
- Investing in rare coins
- Investing in Krugerrands, Gold Eagle (USA) and Canadian Maple Leaf.
- Gold ETFs / funds – You can invest in an index fund that tracks gold. Many funds have vaults where the gold is stored safely, whereas others speculate if the gold price will go up or down.
- Investing in mining company shares – you could buy the shares of gold producers through a brokerage firm. This means that you are directly exposed to the gold price through your investment. You are also exposed to the company’s performance and any issues that they might be having
- Gold-backed cryptocurrencies – I DO NOT RECOMMEND THIS. Some cryptocurrencies are backed by gold (according to their online websites). You would, in this case, have double trouble exposure both to the volatility of the cryptocurrency and to the price of gold. For more info on cryptocurrencies, check my post out here.
The pros and cons
As with all asset classes, gold has some interesting pros and cons.
- Liquidity! If you’ve ever wanted to get rid of your asset to get money, this is the thing! It internationally exchangeable with ease
- Tangibility: You will have something physical in your hand to show for your money – and can more the asset or give it away.
- Gold tends to store its value well – even in the case of hyperinflation and bad economic times, historically, it’s price adjusts accordingly
- It’s so stable, it’s almost non-profit making.
- Most gold investments do not offer above-inflation returns.
- Mining company shares (the ones that produce gold) are often very volatile
- Hard to store: It’s sometimes hard to find a safe place to store your gold – your children might discover it and throw it in a vending machine!
- Physical gold oftentimes require R 1000 + for first-time investors
Quick tax overview
This article is by no means tax advice
Please speak to your tax advisor for your specific needs and analysis
For this section, I would like to give a special thank you to Andre Bothma (Twitter here) for his help and contribution.
Top tip on buying Krugerrands
Remember that golden Krugerrands are seen as money – you cannot pay 14% VAT on money, but they do come at a premium price for this convenience. If you invest in silver Krugerrands, you will pay VAT.
What is your intent on buying gold?
You can have one of two reasons for buying gold: buy to invest or buy to trade. These are taxed differently.
Intention to buy and hold (Capital)
If your intention is to buy and hold, If this spans over years, that can be classified as capital intention – and you will be eligible fo pay capital gains tax only.
The first R 40 000 is free from CGT.
From your capital gain (your profits), you get taxed on 40% of that money on your normal day-to-day tax rate.
If you bought R 100 000 worth of gold in 2013 and sold it for R 500 000 in 2019, and you are in the 25% tax bracket, the calculation will look like this:
R 500 000 – R 100 000
= R 400 000 Capital gain
R 400 000 – R 40 000 (minus annual exclusion)
= R 360 000
R 360 000 x (40/100) (only 40% is taxable)
= R 144 000
R 360 000 x (25/100) (25% tax bracket)
= R 36 000 to pay to SARS
Intention to trade / buy and sell often (Revenue)
If your intention is to buy and sell often to make a profit, you will be taxed on your normal income tax rate.
If you are earning more money than you could hope or dream for, you will be in the 45 % tax bracket.
You bought R 450 000 in 2019. You sold it for R 500 000 in 2019. You are in the 25 % tax bracket.
R 500 000 – R 450 000
= R 50 000 (Profit)
R 50 000 x (25/100)
= R 12 500 to pay to SARS (from the 25% tax bracket)
Ways to invest
Gold is really easy to invest in.
Check if the company is a member of one of the associations below. If they are not, make sure that they are trusted. Check out reviews online before buying gold from them.
The South African Association of Numismatic Dealers (SAAND)
The Jewellery Association of South Africa (JASA)
National Numismatic Society
SA Numismatic Society
Here are a few options on places to buy gold:
- Jewellery shops – Here you will find jewellery (chains, rings and earrings). These charges a premium for the craftsmanship and often VAT on top of their price.
- Specialist coin and gold dealers – As the name suggests, these people are specialists in rare and collectable coins and other gold valuables, including medals. Make sure you buy from a trusted company and know what it’s worth before you buy.
- Pawnshops and gold exchanges – try and avoid these. Too many people have been cheated.
You might ask me where I personally buy my gold and coins from? Though I am by no means affiliated with these, I buy from one of two places: Randcoin in Johannesburg or straight form the SA Mint in Midrand, Gauteng. The latter allows you to not pay VAT or commissions and fees, as you are buying it straight from the source. Their coins are all new and well priced.
No. The answer is no.
Shares in mining companies and ETFs
You can buy shares in mining companies and gold ETFs from a good, FSB registered broker. I recommend using EasyEquities, as you don’t pay the huge fees many brokers and money managers will charge – and are transparent about their fees.
If you feel comfortable with the fees, you can use a financial advisor – make sure you know the full fee structure and impact on your investments.
Make sure you diversify.
Make sure you have something liquid and something immovable.
Invest in the things you know – learn and grow to become better than yesterday.