Gold as a diversification tool
Physical commodities are used by investors to spread portfolio risk, as certain commodities do not move in tandem with the equity market. One such commodity is gold. Gold is often turned to in times of market uncertainty by investors looking to protect themselves from unfavourable market movements.
The chart below shows the performance of gold in rand terms over a 15-year period. Interesting to note is how gold performed when the JSE pulled back in the early stages of the pandemic. Investors with exposure to the precious metal would have been able to balance their returns and may have been shielded against larger losses during that period.
15-year gold price in R/oz. versus the JSE All Share Index (total return)
Looking back at 2008, when the global financial crisis hit, gold was negatively correlated to market performance - meaning that when markets went down the gold price increased. This is because investors pulled their funds from equities and invested in gold, increasing the demand for the yellow metal and thus pushing up the price. Investors that had exposure to gold during this time had a hedge in place to protect them from some of the downside the market experienced.
During an adverse market event, diversification plays a pivotal role in sheltering investors from major losses. In a bull market, diversification can be overlooked by investors as prices are increasing. However, during market downturns, any weakness in a diversification strategy is magnified. Diversification means investing in assets that do not move in the same direction. Gold does not move with the market and at times of market stress usually moves in the opposite direction, making it a very useful tool when looking to spread risk in a portfolio. Looking at past data only confirms how crises resulted in gold price increases.
There are multiple ways to obtain exposure to gold. One can invest in gold mining shares, gold exchange-traded funds or directly through Krugerrands.
What is a Krugerrand?
The Krugerrand is a South African gold coin. Krugerrands were first minted in 1967 to help market South African gold. The coins have legal tender status in South Africa but are not intended to be used as currency. New Krugerrands are issued by the South African Reserve Bank (SARB). Krugerrands are essentially an ounce of gold and can be directly translated to the global price of gold in rand terms. Krugerrands can be purchased through FNB and investors' coins will be stored safely at Rand Refinery. Further to this, if your coins are stored with Rand Refinery, FNB guarantees to buy back your Krugerrands at any time, making this an extremely liquid asset that can easily be converted to cash.
In conclusion
The incorporation of physical commodities like gold in a portfolio can assist in balancing risk. Investors looking to potentially shield their investments from future market events may want to consider including a diversification tool like gold in their investment portfolio. Krugerrands can be purchased and sold via FNB online banking or the app.
