Krugerrands still a ‘safe-haven’ bet, even as world wakes up to Bitcoin, cryptos

JOHANNESBURG — Gold has stood the test of time to become regarded as one of the world’s safest forms of investment. And the Krugerrand, earlier this year, turned 50 – an indicator of its strength and popularity. Of course, the world is also switching on to a new kind of investment: cryptocurrencies. The likes of Bitcoin take on the asset-like features of gold insofar there is only a limited supply. But of course, Bitcoin differs from gold in its potential to become a truly global, digital currency. It leaves me wondering then: How will Krugerrands fair in this brave new world? Will society still be talking about both gold and cryptos in hundreds of years to come? – Gareth van Zyl

By David Melvill*

Krugerrands are a wonderful investment and the best way to own gold! Gold has been man’s trusted store of wealth for six thousand years, due to its intrinsic value.

This year, on 3rd July, the minting of Krugerrands celebrated their 50th year of existence. Some 40 000 coins were struck that first year. Today more than 61 million Krugerrands are in circulation; collectively they are worth more than R1 trillion at today’s prices.

A half ounce, 22 carat Krugerrand gold coin sits on display at the Sharps Pixley Ltd gold showroom, in this arranged photograph in London, U.K. Photographer: Simon Dawson/Bloomberg
Why did Krugerrands come into existence?

For many years South Africa was the world’s leading gold producer. In fact, between 1970 and 1980 SA produced 90% of the world’s gold. At its pinnacle in the year of 1970, our gold mines produced a 1 000 tons of gold. (Sadly, today we barely produce 150 tons and are only ranked the 7th biggest gold producer in the world).

SA decided to market their gold through the investment medium of a 1 ounce gold coin product. A small amount of copper (8%) is added to make it harder and durable. It is 22 carat gold. The then Minister of Finance, Dr Nico Diederichs, gave permission for the minting thereof. Each citizen was only allowed to acquire one of the 40 000 Krugerrands struck.

While other countries: Canada, Australia, China, US and UK have followed suit, Krugerrands remains the most popular coin in circulation. They are more than all the other coins combined.

What gave rise to South Africa minting Krugerrands?

Gold was fixed at $35 an ounce until 1971. There was no inflation, as the world’s Central Banks could only print money if they had the equivalent amount of gold in their vaults to back it. In 1967, when SA started striking Krugerrands for the first time, a raw ounce of gold was R27. Yes, the rand was stronger than the dollar. A Krugerrand cost R31, today it is R18 000.

Read also: How #Pravingate caused the Krugerrand price to jump an extra R1000

When President Nixon took the US off the Gold Standard in 1971, he closed the ‘gold window’ whereby countries could swop their dollars for gold. This led to all countries subsequently coming off the Gold Standard. This had the effect that mistrust arose towards unstable world currencies.

As a direct result it gave rise to a magnificent run in the price of gold. It rallied over the nine years from $35 to $850 an ounce. That is a return of 29% per annum. It was a wonderful time for South Africa, it was the country’s largest trading asset. It brought in 25% of the country’s foreign exchange and the gross domestic product.

Who started Krugerrands?

The Rand Refinery provided all the gold, and the blank gold coins required. Then the SA Mint “struck it.” That means, they placed the head of Paul Kruger and the Springbok emblem on either side of the coin, as well as the splines on the edge of the coin.

Most importantly, the SA Reserve Bank, offers a guarantee buy back of the coin at the spot price of gold on the day. There are no exit fees on disinvesting the coin.

Warning: a word of caution. Do not get caught up in buying proof Krugerrands or Nelson Mandela medallions. You want to buy coins for their gold content only and not their numismatic value (their rarity or condition).

Why should one invest in Krugerrands?
  • Gold, firstly is the purest form of money. It has been with man since his existence.
  • Did you know gold is first mentioned in the Bible in the account of creation? Genesis 2:11- 12, it states that, “Where the four rivers came together in the Garden of Eden … the gold was good.” God gave his approval and blessing for gold.
  • Gold is regarded as legal tender, therefore there is no vat applicable, as there is if you purchase a gold bar.
  • It is a good diversifier to any portfolio and very portable.
  • Gold is countercyclical to all other asset classes. (I.e., if a share portfolio goes down in value because of market conditions, gold will usually go in the opposite direction).
  • It keeps its value. Therefore it is regarded as a “safe-haven” or a preserver of wealth.
  • Gold is durable and protects one’s purchasing power against inflation.
  • It acts as a hedge against a weakening rand and it is easy to daily determine its value.
  • Gold is the antithesis of the FIAT money system (the printing of paper money, where there is nothing backing it). Gold is difficult and costly to mine.
  • It is a liquid investment, i.e., it is easily tradable in the form of hard cash and accepted internationally.
  • Gold has a safe-haven status – it offers protection against a stock market crash, a bond market imploding, and or, a bubble in the property sector.
  • Gold therefore is a unique form of “insurance.”
How does one invest in Krugerrands?

Krugerrands can be purchased over the counter at coin shops, or directly from the Rand Refinery, through an investment company that purchase them at wholesale prices on your behalf.

The investment company will also manage your investment: ensuring they are vaulted, insured and audited annually. This is the safest and most cost effective way.

When should one invest in Krugerrands?

There are two considerations, viz., the dollar price of gold and the rand exchange value, in which we measure them in SA. Ideally one wants to invest in Krugerrands when the dollar price of gold is low. Krugerrands reached their peak in Sept. 2011 @ $1 920, after the Global Financial Crisis. Over the next five years they went through a big corrective phase pulling back to $1 050.

Since then gold has been climbing gradually and is now hovering around $1 300. That is a still a long way off its peak, therefore a good time to be buying Krugerrands.

A worker places gold coins on display at Hatton Garden Metals precious metal dealers in London. REUTERS/Neil Hall/File Photo

As we measure Krugerrand’s performance in rand, we want to purchase Krugerrands when the rand is relatively strong. Similarly, it is a good time, as not to long ago the rand was at R17 to the dollar. Today the rand is stronger, it is around R14 to the dollar. Therefore these two factors are in your favour. Consequently, it is a prudent time to start to acquire a few Krugerrands.

The above 15 year chart is for an oz. of gold priced in rands. Present value R17 947

How should one go about investing in Krugerrands?

Suggestion: Ideally, one should aim to make an investment in gold between 5 – 10% of your total assets.  

Call to action: You may wish to start building your own vital Krugerrand gold collection – it is so easy. Acquiring Krugerrands may form part of a savings program for your portfolio. Gold ownership gives a saver a feeling like no other investment does.

  • David Melvill is a financial advisor at the Financial Hub.
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