Global markets have been challenging to navigate over the past year and have seen investors explore other asset classes to reduce portfolio volatility as uncertainty remains. One such diversification tool is gold; with the rand price of gold reaching record levels in 2020, investors have been pondering if gold is a good investment currently and how to gain exposure.
Why invest in gold?
Gold is a commodity that is favoured in times of extreme volatility. It is seen as a safe haven for investors and its price tends to increase when uncertainty results in diminished returns in other asset classes. As gold is valued in dollar terms, a depreciation in the rand is positive for returns.
While the above graph makes it seem as though gold only moves in one direction, the reality is that the gold price in rand terms will fall when the rand strengthens, or conditions normalise. The price of gold can move sideways for years while the market moves up. Gold should therefore be viewed more as a diversification tool when the underlying commodity has performed very well over a given period and the rand is weak.
20 year gold price in USD/oz. and the USD/ZAR exchange rate
There are multiple ways to obtain exposure to gold. One can invest in gold mining shares, gold exchange-traded funds (ETFs) and directly through Krugerrands.
Gold performed extremely well in 2020 and can assist in balancing risk in a portfolio. Exposure to gold during the fall in markets at the beginning of last year would have seen investors softening the blow of the market pull back due to favourable gold returns. Gold is not an asset to be considered by investors looking for large returns over night, but rather a place of safety hedging against negative market events and a weaker currency.