Investing in gold in South Africa
When investing in gold, South Africa plays an important role in the global supply of the precious metal. South Africa was previously the world’s leading producer of gold, mining over 1 000 tons in 1970. Today, South Africa mines just over 120 tons per annum, as the world’s 9th largest producer.
South Africa currently has over 80 registered mining projects in various stages of development, and a number of active mining houses, juniors, mid-tiers and majors. Mines in South Africa are critical assets in increasing mining stock value.
With gold likely to remain a strong performer through 2025 and beyond, especially in light of increasing stock market risks, gold as an investment option is returning to the spotlight. With a variety of gold investment avenues available, investors can build an effective portfolio to meet their investment objectives.
What drives up the price of gold?
Like any investment or financial asset, there are advantages and disadvantages of investing in gold. Like any commodity, gold is subject to supply and demand pressures, which cause the price to fluctuate, depending on a wide range of global factors.
Greater investment demand for gold is driven by its safe haven properties: a safe bet in times of economic and political uncertainty. As stock market risk increases, investors flock to safe haven investments like gold, spurring demand that then drives the commodity price up. This is why the price of gold often moves in opposition to volatility in markets or economies.
Investing in gold
There are different ways of investing in gold, depending on your investment objectives:
Physical gold (jewellery; gold bullion and bars; and coins)
- Gold certificates
- Gold ETFs (exchange-traded funds)
- Gold mining stocks
- Gold mutual funds
- Gold futures contracts
- Gold royalty companies
There are many advantages of investing in gold. Gold investments can be used to hedge against inflation; for growth or income; or to diversify an investment portfolio. Each investment avenue has its own risk and return profiles, liquidity characteristics and fees; there is no one-size-fits-all or single best way to invest in gold.
Physical gold is easy to acquire and an effective guard against inflation, yet needs to be stored in a secure environment and doesn’t provide the same ROI as gold mining stock. Gold equity investments typically hold greater appeal for growth investors than income investors.
Is gold stock a good investment?
The benefits of investing in gold mining stock include maximised exposure to growth potential of the underlying company. Increases in the prices of gold are often levered in gold stock prices even small increases often having a disproportional impact on the price of gold stock as cash flows increase disproportionally with an incremental increase in the price of gold. The same degree of leverage is not available to investors in physical gold.
In addition, whereas physical investments in gold are only exposed to increases in the price of gold, miners can expand their businesses over time by finding new deposit or acquiring other gold producers, with investors benefitting from the increased production, resulting in potential capital appreciation in excess of that of a physical gold investment.
Another important point to consider is how diversified you want your investment in metals to be. As gold-bearing ore often contains various other elements, miners will often mine gold in conjunction with other minerals. This can be both good and bad depending on your investment strategy and goals. A diversified metals portfolio can shield your investments against a potential downturn of a particular commodity, however dilutes your exposure to gold.
Depletion of gold reserves in South Africa
Statistics South Africa (Stats SA) said in its Environmental Economic Accounts Compendium 2013 output levels show SA will exhaust its proven platinum reserves in 239 years, coal in 118 years, and gold in 33 years.
A closer look at the rapidly decreasing importance of gold mining in SA shows gold production has come down by 57% for the period between 2003 and 2013.
The number of employees in the industry has been reduced by a third within the same period. According to the June 2016 Quarterly Employment Statistics (QES) survey; the mining industry’s employment levels continued to decline in the second quarter. The report stated that this is the eighth consecutive decline since the fourth quarter of 2014.
The historical backbone of the South African economy, the gold mining industry will see a sharp decline in production in 2019/2020 and reserves will be exhausted by 2033, according to the Minerals Council.
As mining depths increase and conditions become more challenging, there is an urgent need to modernise the industry. “Through mechanisation and 24/7 operations, annual output could be sustained to at least 2025 and beyond,” the Minerals Council Facts and Figures 2018 report stated.
Top 4 Brokers
