Krugerrand gold rush in South Africa

Demand for Krugerrands in South Africa continues to grow as the relatively liquid market makes it an easy way to diversify investment portfolios or benefit from a rising gold price. 

Gold has been on an exceptional run in recent years. The price for an ounce of gold in US dollars has soared this year and almost doubled in the past five years. 

There is much discussion about what has driven this price rise, with many pointing to rising global uncertainty following the Russian invasion of Ukraine and fears of a regional war in the Middle East. 

Typically, global uncertainty drives investors to flock to safe-haven assets, of which precious metals are a premier example.

However, another significant factor is the consistent buying of gold from central banks worldwide. 

While this is partly driven by the need for stable reserves and gold’s role as a safe-haven asset, some analysts have also pointed to deeper reasons. 

UBS Global Wealth Management’s Ekaterina Lehmann and Michael Bolliger pointed out that this rally has evolved without traditional support from exchange-traded fund (ETF) buying and declining real interest rates.

Lehmann and Bolliger said the rally could be attributed to fears of higher-for-longer inflation and investors trying to diversify away from dollar-denominated assets due to a rapidly growing US debt burden.

A major factor that is overlooked is fear of sanctions from the US, which has recently weaponised the dollar’s role as the world’s reserve currency to cut countries out of the global financial system effectively. 

A clear example of this has been Russia, leading to fears from other developing countries, particularly China, of the same happening to them. 

As a result, central banks in Russia, China, and India have been buying up gold aggressively to minimise their reliance on the dollar as a reserve currency. 

For example, the People’s Bank of China (PBoC), has acquired 225 tonnes of gold – the largest annual increase in its history.

This has also been interpreted as a play by the Chinese central bank to protect the value of its local currency as the economy slows and its assets become less attractive. 

A more recent driver of gold prices has been the decline in global inflation and a subsequent easing of monetary policy by cutting interest rates. 

With central banks adopting more accommodative monetary policies, the cost of holding non-yielding assets like gold decreases, making it more attractive to investors. 

FNB Wealth and Investments CEO Bheki Mkhize told Daily Investor that the rise in gold prices has correspondingly increased demand for its Krugerrand offering. 

On FNB’s platform, clients can buy and sell Krugerrands as an investment vehicle, offering diversification and the opportunity to hold real gold. 

“Demand is still high, and it is growing, as it is typical human behaviour that once the value of an asset goes up, so does interest in owning it,” Mkhize said. 

He also explained that it is a relatively easy investment to understand and, with the option of holding the asset physically, a very tangible one. 

This makes it attractive to investors as it is simple to understand why the asset is valuable and track its performance. 

While it remains a niche product from FNB Wealth and Investments, demand for it is growing, Mkhize said. 

In June this year, FNB said it had assisted with the delivery of 2,200 Krugerrands to South Africans through purchases on its trading platform. 

“FNB currently holds over R1 billion worth of coins in its portfolio on behalf of its clients,” the head of share investing at FNB Wealth and Investments, Sebastian Pillay, said.

The coins are still considered legal tender in South Africa, but their real value lies in their gold content. 

“Krugerrands are linked to the international value of gold, which means that the investment is protected from local currency volatility and devaluation.”

However, Pillay said some people still just buy Krugerrands for sentimental reasons. 

What makes Krugerrands particularly attractive is its liquidity. They give investors a safe haven of gold and the ability to trade it frequently. 

Many South Africans are selling their Krugerrands to take advantage of the record-high gold price.