What do I need to know about investing in gold?

Of all the minerals that humans dig out of the ground, gold holds the greatest allure for investors.

You can invest in gold directly, by buying the physical metal in some form, or indirectly through financial instruments such as shares or investment funds. This article considers how South Africans can invest in gold directly.

How is gold weighed and valued?

The price of gold is stated in US dollars per troy ounce. One troy ounce equals 31.1g and is 9.7 percent heavier than a regular (avoirdupois) ounce, which equals 28.35g.

The purity of gold is measured in carats. The maximum of 24 carats denotes pure gold; 22 carats denotes 91.7% gold, mixed with metals such as silver and copper; 18 carats denotes 75% gold; and 9 carats denotes 37.5% gold.

Both the weight and the purity of a gold item must be taken into account when determining what the item is worth.

In what forms can I own gold?

It is an offence to possess unwrought gold unless you are the holder of a refining licence or authorised by the South African Reserve Bank (SARB) to deal in gold. There are two ways of owning gold in its wrought (crafted) state:

1.  Gold bullion

This is physical gold of high purity (normally 22 carat), which has been moulded into bars, ingots or coins. Dealers authorised by the SARB can sell you gold coins and miniature certified gold bars made for the consumer market.

South Africa has a gold investment coin, the Krugerrand, which is minted by the South African Mint and recognised as legal tender by the SARB.  The South African Mint is a subsidiary of the SARB.

Launched in 1967, the modern Krugerrand introduced the concept of a bullion coin linked to the daily gold price. Available in five denominations (containing two ounces, one ounce, half an ounce, a quarter of an ounce, and a tenth of an ounce of gold), it is recognised and traded worldwide. Krugerrands are also available in silver and platinum.

A few things to bear in mind if buying an investment coin or bar:

• You should buy from a dealer accredited by the South African Mint. A list of accredited dealers is available on its website.
  
  
• Although Krugerrands are easily tradable through dealers, other types of coins, including commemorative medallions, may be more difficult to sell.
  
  
• The price of the coin fluctuates in line with the international gold price. However, there is a difference between the buying and selling prices of the coins, known as the spread, which can be more than five percent. This includes the cost of minting the coin and the dealer’s commission.
  
  
• Accredited gold coin dealers are regarded as high-value goods dealers and are thus “accountable institutions” under the recently expanded definitions in the Financial Intelligence Centre Act. This means, among other things, that you will have to provide proof of address and identity when transacting.
  
  
• Gold Krugerrands are zero-rated for VAT. However, unlike gold jewellery, which is regarded as a personal item by the South African Revenue Service (SARS), the coins are subject to capital gains tax, which is triggered when you sell the coin.
  
  
• If you keep them at home, gold coins are at risk of being stolen. Banks and bigger dealers offer secure storage facilities for investors. You therefore need to factor in storage or insurance costs in your investment calculations.
  
  
• Exchange control approval from the SARB is required to take Krugerrands with a value of more than R30 000 out of South Africa. You will also need to declare the coins in your possession to SARS.
  
  

2.  Gold jewellery

Although fine gold jewellery fetches high prices at jewellers and may be highly desirable as a personal item, it is unreliable as an investment. This is because the value of the item lies more in its design and craftsmanship than in the spot price of the gold from which it is made.

Jewellers will typically price a piece of jewellery at multiple times the value of its gold content. This makes it difficult to value when you want to sell it. You may battle to find a buyer and, if you do, you may not get the price you were hoping for.

For this reason, gold jewellery is generally regarded as falling into the category of alternative asset classes that includes art and antiques.

Note that getting an item valued by a qualified valuer for insurance purposes will give you a higher value than you are likely to get if you sell the item. This is because a valuer will base the insurance value on what it will cost to replace at a retail outlet, as well as factoring in possible fluctuations in the gold price and currency exchange rates.