JSE-listed, pure gold investment that delivers a yield (and cheaper than NewGold)
One of my favourite soundbites from my eight Berkshire Hathaway AGMs was chairman Warren Buffett's response to a question about gold. "Well," Buffett said, " if you took all the gold ever mined you could put it into a cube of 67 foot by 67 foot. If you owned it all, you could sit on that cube, hold the bars, fondle them, feel their smoothness and look at your reflection. But you'd generate no return. Your hope is that you can sell it on to someone else at a higher price. Not a great idea in investing." Most of that remains true. Except that since last week, an investment in gold can actually yield a return. South Africa's RMB has introduced a JSE-listed product that delivers a net 50 basis point return after all costs. That's not exactly going to compete with bonds (Abil's excepted) but it does make this the cheapest way for South Africans to own gold. And with the bank promising to make a market with a spread of only 20 basis points, it's a handy alternative to Absa's popular NewGold product. Isn't competition great? – AH
GUGULETHU MFUPHI: RMB has launched their first FirstRand Gold Bond just last week, which has been denominated in Krugerrand. Etienne van Wyk, Commodities Specialist at RMB now joins us for more insight. It's good to have you, Etienne. Just before the ad break, you might have heard me saying Alec is very keen on this and the key thing is that gold can give you a yield. Tell us why or rather, why.
ETIENNE VAN WYK: Well, for the first time, investors can get exposure to the gold price, get protection against the Dollar/Rand exchange rate, be in a position to take physical delivery of their gold, and combined with all of that, gain a yield in the form of 50 basis points per annum interest.
ALEC HOGG: Fifty basis points. You're kidding. That's half a percent.
ETIENNE VAN WYK: Absolutely.
ALEC HOGG: That's not a yield. That's robbery. That's worse than a cheque account. I was getting all excited, thinking 'oh my goodness, I finally have a savings account linked to gold'.
ETIENNE VAN WYK: Well, the fact of the matter is if you compare the 50 basis points to the costs of upholding physical coins (bullion), then you're actually getting quite a substantial pickup.
ALEC HOGG: Compare them for us.
ETIENNE VAN WYK: Sure. If you look at some of the vaulting and custodial services provided to investors in South Africa (specifically in gold), you'll probably pay anything between four-and-a-half and four percent in value per annum, as storage and insurance.
ALEC HOGG: But if I buy NewGold (ETF) , I don't.
ETIENNE VAN WYK: Then you pay 40 basis points.
ALEC HOGG: Forty basis points is a long way from four-and-a-half percent.
ETIENNE VAN WYK: Exactly. Of course, the problem with new gold is that unless you're an authorised dealer, you don't have the ability to take physical delivery of your metal. If you want the ready liquidity of gold, then you'd probably have to pay four percent.
ALEC HOGG: If you want to hold it, as Warren Buffett says 'hold it, touch it, feel it, and cuddle it a little bit', then you have to go with your one. However, if you're quite happy just to ride with the gold price, you can get the NewGold.
ETIENNE VAN WYK: Absolutely. Well, if you compare our product to new gold, then you're basically doing 90 points better and you have the ability to take physical delivery at the end.
ALEC HOGG: So that's the comparison.
ETIENNE VAN WYK: That's the comparison.
ALEC HOGG: The physical delivery: nobody in South Africa (in their right minds) is going to go and pick up a whole pile of Krugerrands, and transport it home, not with our security situation. However, if you're giving it to us for 90 points better, then maybe that half a percent isn't as bad.
GUGULETHU MFUPHI: The kind of investor that might be interested in this: who is it – an Alec or a Gugu?
ALEC HOGG: All these gold bugs….a few of us still remain.
ETIENNE VAN WYK: Well, you have gold bugs and then you have people who just look at gold as a portfolio diversify and as a bit of insurance against [inaudible 02:49] events. It's not necessarily putting all your savings in gold, but having a bit of your portfolio into gold is not necessarily a bad idea and this, then, is a nice vehicle to do that.
ALEC HOGG: How marketable?
ETIENNE VAN WYK: Oh, we make a market on the JSE, indicative spread is 20 points, which is very competitive and we're always on-screen, so it's perfectly marketable.
ALEC HOGG: You say 'on the JSE', so if I go through my stock broking account at Standard Bank, I can buy and sell this security. Where is it listed…in what section?
ETIENNE VAN WYK: That's a very good question because strictly speaking, it's a corporate bond. I know its Krugerrands, but it's listed on the Main Board of the JSE, which means that anybody with a broker account can trade it just as they would trade any other share, so it's fully accessible.
ALEC HOGG: Just explain this now. You're doing everything that the other people couldn't do before. You're taking gold. You're giving a paltry interest rate (but still some interest rate) at 50 basis points – half a percent. How did you get this right?
ETIENNE VAN WYK: Well, the fact of the matter is FirstRand has been in the gold business for 175 years, since its beginning.
ALEC HOGG: FirstRand wasn't around 175 years ago……
ETIENNE VAN WYK: FNB, yes – the greater group. The group has always been involved in physical and precious metals. We traded. We have quite a substantial lending book in metal, so this is just an alternative way in which the bank is funding its metals activity.
GUGULETHU MFUPHI: Well, I think you have Alec's attention already. You didn't give us the secret. He has your attention nonetheless, Alec.
ALEC HOGG: He has my attention and I think he's going to get a lot of other people's attention too, because now, instead of getting the new gold units where you pay – as Etienne was explaining to us – 40 basis points; this way, you get half a percent interest.
GUGULETHU MFUPHI: Exactly. Well, that was Etienne van Wyk. He is a Commodities Specialist at RMB.