Gold coins

Gold coins

One of my clients presented me with an advert for “South Africa’s Randiest Hedge” which was carried in the Sunday Times on 13th March this year. It is an advert for gold coins and goes on to proclaim the virtues of investing in gold, especially if one is “feeling switched off by current financial offerings”. The basis of the advert is the fantastic return of 1550% over the past 20 years (1992 to 2012). Who would not be interested in something like that?

1550% over 20 years sounds incredible, until you do the maths. It equates to a compound annual return of 13.8%. If one looks at the graph, however, for the first 10 years at least, the return was close to 0% pa. It is only in the past 10 years that the “randiest hedge” has really performed and during this period, the return has been around 25% pa. Not bad indeed (so long as you did not bail during the first 10 years and miss the past 10).

What about the claim about being South Africa’s Randiest Hedge, is there anything else that has done as well over the period? A quick look at the ALSI shows that it returned 17.02% pa over the same 20 year period. If you had invested in the ALSI then your final value would have been 2937% higher. There are few equity unit trusts that have been around that long, but the best fund over that period is the Investec Equity Fund which delivered 18.48% pa. if you had invested in that fund over the 20 year period then the final value would have been 3917% – much more than double that of the “randiest hedge”. In fact, 11 of the 12 equity unit trusts that have been around that long would have delivered better returns than the gold coin investment over the 20 year period. For the record, the estimated CPI over the same time was around 6.4% – so they have all comfortably out-performed this figure.

I have no idea what a “randiest hedge” is and I am also not out to knock gold as an investment but if you are going to buy gold then you need to know the following:

  • It is very difficult to value gold – there is no cash-flow, dividend or pe ratio.
  • It is a very emotional “investment” and is often seen as a “safe-haven” when inflation is a concern or when things are looking volatile on the markets.
  • The value of gold is largely sentiment driven -fear and greed are large drivers of the value of all assets and gold is as much (if not more) subject to these two emotions as any other investment.
  • It is not a sure thing and you have no guarantee that you can sell it (it will depend on demand, just like any other investment).
  • The long term return on Kruger Rands is around 15.5% pa (1970 – 2012). Over the same time the JSE has returned just over 17% pa – your final Kruger Rand value on R100 invested would have been around R55000 while the return from the JSE would have been around R103000.
  • This highlights the significant effects of compounding – just 2% more per year over a 40 year term will effectively mean more than double the final value.
  • While gold may add diversification to your portfolio, there are significant periods where it has not provided any growth at all – 1992-2002 is a case in point. Can you (and will you) sit these out?
  • If you are buying gold because you think it is the end of things as we know them, then you are better off buying physical gold coins or bars than investing in gold (coins) via some internet based platform. It wont help to own gold via a platform if the system collapses (not sure that it will help to own coins either but maybe that’s because I don’t own any, yet!).