Gold on a hot streak

Gold has been on a record run over the past five years, hitting another all-time high and forcing investors to reconsider their exposure to the precious metal. 

This is feedback from the investment research head at FNB Wealth and Investments, Chantal Marx, who explained why gold has rallied so much and how investors can increase their exposure to it. 

Gold, cash, and certain other instruments are generally regarded as safe-haven assets that tend to protect a portfolio during market stress. 

Risky assets like equities are a portfolio’s growth engine, adding the bulk of returns during good times. However, during crises, those assets can suffer severe drawdowns.

Risky assets are needed to generate growth over the long term. However, limiting drawdowns limits the extent and duration of recovery needed to return to a pre-crisis portfolio value.

When markets are stressed or uncertain, gold generally appreciates in value due to its safe-haven appeal. 

In the recent bull run, this demand has certainly supported the bulls against a backdrop of major geopolitical risks.

Gold is also widely regarded as an inflation “hedge”, meaning its value tends to rise with inflation – thereby protecting its holders from an erosion in purchase power.

The rally in gold prices can be seen in the graph below.

Gold’s safe-haven appeal is only one reason behind its recent rally to all-time highs. Asset managers are extremely active in the gold futures market as inflation is expected to remain higher for longer. 

This is exacerbated by geopolitical tension around the world, with wars in Africa, Europe, and the Middle East. Marx said this has also drawn in large speculators looking to capitalise on short-term bumps in the gold price. 

Another reason for its rally is that central banks heavily increased their gold reserves in 2023 and continued to build reserves in the first few months of 2024. 

This has been a function of rising geopolitical risk and an active effort by some to reduce their dependency on the US dollar following the freezing of Russian central bank assets in 2022.

Notably, China, India, and Singapore have been heavy buyers so far this year.

Finally, gold jewellery consumption, particularly in China post-Covid-19 restrictions, has been strong. 

Gold Exchange Traded Fund (ETF) demand, as well as demand for physical bars and coins, has also been strong in China because of the stock market’s relatively disappointing performance. 

An argument can be made that some of the above drivers could still support the gold price this year. 

Considering ongoing global conflicts and other political and geopolitical dynamics, the safe-haven demand for gold could see asset managers and speculators continue to buy up the metal until the end of the year past the US elections in November. 

Furthermore, the expectation is that central banks globally will continue to purchase gold – although it may be at a slower pace due to the high current price for the metal.

Chantal Marx, Investment Research Head at FNB Wealth & Investments

How to increase exposure

Marx warned investors against trying to time the market by buying equities on the way up and selling them to purchase safe-haven assets on the way down. 

This common mistake will result in investors limiting their long-term returns. Instead, she urged investors to construct a balanced portfolio that can generate good returns over a long period of time while being robust enough to handle times of volatility. 

A more measured approach is to still consider adding gold to your portfolio now and to then take opportunities into potential weakness to increase your exposure over time. 

Typically, gold, or similar safe-haven assets (like cash), will make up 5% to 10% of your investment portfolio.

There are several ways to gain exposure to gold besides physically purchasing bars and coins and storing them yourself –

  • Krugerrands – Krugerrands are minted in South Africa by the South African Mint in conjunction with Rand Refinery. Each Krugerrand contains exactly one troy ounce of pure gold and is often many investors’ first choice of investment when considering getting exposure to gold. Krugerrands are highly liquid in the South African market and are considered legal tender in South Africa, but their true value lies in their gold content. 
  • Gold ETFs on the JSE –  Investors can purchase a gold ETF on the JSE that tracks the spot price of gold. An ETF will physically purchase and store the gold, and the price of the instrument will track the rand spot price of gold bullion. Options include the 1nvest Gold ETF and the ABSA NewGold ETF.
  • Gold-Mining Companies on the JSE – Investors can also gain exposure to gold prices by buying listed gold mining companies. This comes with the added complexities attached to mining, including costs and operational execution. Since the end of February 2022, around the invasion of Ukraine, most listed gold miners have underperformed the rand gold price. Given that these companies will be generating supernormal cash flows at current gold prices, this may offer a good alternative opportunity while gold remains at very high levels.

The graph below compares the performance of JSE-listed major gold mining share prices versus the ZAR gold price (rebased to 100). 


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