The Heart Of Gold

By Rodney Weidemann

While gold has been an investment mainstay for millennia, the metal is known to take on different characteristics at different times of an economic cycle. Despite this, it has been the backbone for many global monetary systems, including the US Gold Standard, until 1971.

According to a 2020 report from Deloitte Western Australia, while modern economies have evolved in many ways, gold has continued to hold its status as one of the most highly sought-after commodities, due to its scarcity.

“It thus continues to be viewed as a liquid asset class the worth of which challenges ‘cold hard cash’ in times of economic disruption and uncertainty,” states the report.

“Unlike other commodities such as oil, grain, or iron ore, once gold has been mined it is not consumed, per se, and as such nearly every ounce of gold ever mined is still within human possession.”

The report adds that the supply/demand forces that drive most commodity markets are not replicated within the gold market – there is no such thing as a glut or oversupply of the precious metal. In fact, in modern times, gold has been viewed as a safe-haven investment and a reliable store of wealth, meaning that its value moves inversely to the general market.

When the economy is thriving and traditional currency is appreciating, gold is less valuable. However, in poor economic conditions or those of uncertainty, investors flock to the safety that a gold investment provides.

The report notes further that “over the past 20 years, gold has risen from US$270/oz to a record in excess of US$2 000/oz, a momentous climb reflective of the importance of the commodity in supporting the modern-day economy”.

It adds that the same asset that was used to support various monetary systems around the globe in the 20th century remains a key element in today’s economic tapestry, with its intrinsic value and ability to weather market declines, rising inflation and depreciation of currency.

“With the considerable economic and financial uncertainty experienced over the past 20 years, in the form of the global financial crisis, political trade wars, the coronavirus pandemic – and now the invasion of Ukraine – the worth of gold is clear. Under a backdrop of uncertainty, with shining stars difficult to observe, history tells us to look for the glitter of gold to light the way,” suggests the report.

New ways to trade

In answer to the question of what makes gold such a sound long-term investment, Dane Viljoen, chief sales officer and co-founder of Troygold, points out that JP Morgan once said that “gold is money; everything else is credit” – and he was right.

“Gold is actually money – which means it is an excellent store of value, as it can transfer value across time – and is something that can always be used as a currency to settle commercial transactions.

“Among this smart money crowd, gold is still globally regarded as the pre-eminent store of value and hedge against both geopolitical risk and the debasement of paper currencies, and it is this debasement of paper currencies that has caused the rise of gold as an investment asset class,” he says.

“This is because while gold’s value remains constant over time, as does the holder’s purchasing power, the fact that paper currencies are printed out of thin air, thereby decreasing the value of each paper unit, means that gold effectively generates a non-cash flow yield, giving it the appearance of an investment.”

In this regard, he continues, it has certainly proven its mettle. In South Africa, based on Old Mutual’s long-term perspectives report, gold has returned 14.1% nominal return, albeit non-cash, against the rand for the first time since 1967, when the Krugerrand bullion coin was released to the SA public. In US dollar terms, gold has returned 500% over the past 20 years – that’s around 25% a year, and 422% in euros over the same time.

“Bonds, shares, paper currencies and insurance products are not property – they are paper credit instruments that provide a given return for a concomitant level of credit risk, of the issuer’s balance sheet.

“On the other hand, gold is an element – one of the 92 naturally occurring elements in our universe, the building blocks of everything. This means it is essentially property that you own, without taking on any counterparty’s credit risk.”

Crypto-gold?

Viljoen notes that as Russian tanks rolled into Ukraine, the rand, US and SA equities were down almost 2% and Bitcoin was down over 5%, yet gold was up over 2%.

“In the two weeks following the invasion, Russian citizens lost 80% of the value of their roubles against the dollar. In addition, Russians with bank cards couldn’t transact online as accounts were frozen. Amid growing fears of banks limiting access to depositors’ funds, there were queues outside ATMs for days as citizens tried to get their hands on cash.

“At the same time this was playing out in Russia, gold holders gained almost 7% on the USD value of their savings, as the price of gold reached an all-time high and the rouble price per ounce doubled,” he adds.

Explaining Troygold’s business, he points out that it is a digital gold non-bank – in other words, while it is not a bank itself, the company partners with banks to provide the financial tools to allow gold to function as money once more, alongside rands, in day-to-day finances.

This means, he says, you can save it, transact with it, pay with it or send it, and you can also borrow against it. This allows gold trading to be similar to a regular banking experience with rands – Troygold, he suggests, replicates the cash experience from banks, but for physical gold Krugerrand savings.

“Retail gold bar and coin demand has averaged 1 100 tonnes a year since 2010, with the 2021 figure at 1 180 tonnes, which is a 30% increase from 2020 and an eight year high – so the demand has remained very strong among retail investors.

“This means that on the whole, gold is a $12-trillion market that we see continuing to grow, particularly as nation states sit with unprecedented amounts of debt, ultra-low interest rates, and historically high interest rates.

“Essentially, they can only default on their debts, or print themselves out of trouble – which is what they’ll do. And the more this occurs, the more smart investors will move to gold for protection,” says Viljoen.