The gold price does seem to mirror the physical attributes of the metal, it does not lose its lustre nor does it tarnish.
It retains its shine almost perpetually. Its physical attributes mirror its attributes as an investment as well.
The case for investing in gold
The problem with most if not all investors who think about adding gold to their portfolio is that it does not directly conform to the most common valuation methodologies used for equities or bonds.
Gold patently does not generate a coupon or dividend and therefore, typical models that a based on discounted cash flows, expected earnings or book to value ratios, struggle to provide an appropriate assessment of gold’s underlying value.
This is according to the World Gold Council which has developed a framework to help investors understand the valuation of gold. The Gold Valuation Framework (GVF) posits that the price performance of gold can be explained by the interaction of four key drivers. The framework goes on to specify these key drivers which are:
Economic expansion: periods of growth tend to be supportive of jewellery (a sector that accounts for 46% of gold demand), technology, and long-term savings.
Risk and uncertainty: market downturns tend to boost investment demand for gold as a haven.
Opportunity cost: the price of competing assets, especially bonds (through interest rates) and currencies, influences investor attitudes towards gold.
Momentum: in terms of capital flows, position and price trends can boost or dampen gold’s performance.
Gold is a strategic asset because it benefits from diverse sources of demand as an investment, a reserve asset (Central Banks account for 17% of gold demand), jewellery and technology components. A combination of these factors has resulted in it holding its value well over time.
Investing in gold, therefore, can enhance an investor’s portfolio in four ways enhanced returns, portfolio diversification, liquidity, and enhanced portfolio performance. Inflation, supply chain concerns, and geopolitical uncertainty currently obtaining in the world lend themselves well to a high and or increasing gold price.
Bloomberg in conjunction with the World Gold Council conducted research into the impact on investor portfolio returns of the addition of gold-backed or gold-related investments in a portfolio. Their analysis showed that adding between 4% and 15% in gold to a hypothetical portfolio over the last 10 years depending on the composition and region would have increased risk-adjusted returns.
Gold is increasing in relevance because institutional and retail investors alike have embraced alternatives to traditional investments such as equities and bonds in pursuit of diversification and higher risk-adjusted returns. Gold allocations have been the recipient of this shift in investor preferences.
As a result, investors are increasingly recognizing gold as a mainstream investment demand for gold has grown by an average of 10% per year since 2002 and the gold price has increased almost sevenfold over the same period. From 31 December 2001 to 31 December 2021. Gold is a clear complement to equities, bonds, and broad-based portfolios.
As a store of wealth, hedge against systemic risk, currency depreciation, and inflation, gold has historically improved portfolio risk-adjusted returns and provided the liquidity to meet liabilities in times of market stress.
How can investors add exposure to gold in their portfolios?
What is clear is that gold is an appropriate addition to investor portfolios given its financial merits and the current volatility in the world. There are several ways an investor can participate in the gold market. Central banks buy and hold actual gold bullion in their vaults. This purchase and storage of gold constitutes part of the reserves and underscores the value of their currency.
Historically the value of a country’s money was inextricably linked to the volume and value of the gold that country’s central bank held in its reserves. This monetary system was referred to as the gold standard. United States President Richard Nixon then took the US dollar off the gold standard and economics scholars like to then say money then ceased to be money and then became fiat currency which was not backed by gold but was backed by the full faith and credit of its issuer which is the government.
Fiat currency unlike gold-backed money suffers from the vagaries of inflation. Fiat currencies can be easily manipulated in terms of supply and interest rates by the mere stroke of a pen.
Investing in gold, therefore, offers investors the opportunity to transform and translate their investments in fiat currency into money. The first option for investors is to purchase and sell gold futures. When a person tunes into the news during the business bulletin when the anchors talk about the gold price and show it on the screen those prices are always the prices of futures.
So, if the price of gold is said to be US$1,959.29, this is the price of gold futures. A futures contract is an agreement to buy or sell a specified quantity of a commodity or in this context gold at a specified future date and for a specified price agreed today.
Investors can participate directly in the gold market through buying and selling of futures and other gold-related derivatives. Secondly, investors can participate in the gold market by investing in a gold market exchange-traded fund which is an investment vehicle that pools together funds from various investors and then deploys those funds into gold-related investments.
The exchange-traded fund is managed on behalf of its investors by an asset or fund management company.
Conversely, investors can gain exposure to this precious metal by investing in companies that mine it. There are plenty of high-quality gold mining companies that have rewarded their investors over the last 2 years and are set to reward them even more going forward.
The most significant examples that come to mind are Caledonia Mining Corporation which operates a single asset the Blanket mine in Zimbabwe and yet has created a US$ 100 million operation. The company is listed on the NYSE and the foreign exchange denominated Victoria Falls Stock Exchange in Zimbabwe. The company is one of the high paying in terms of dividends.
Another gold mining company minting profits and giving joy to its shareholders is Gold Fields Limited. It has a diverse portfolio of mines spread across Africa and the world. It operates a single mine in South Africa its iconic and former crown jewel South Deep. The rest of its operations comprise brownfield mines and exploration projects.
INVESTMENT CASE ANGLO GOLD ASHANTI PROFILE
Anglo Gold Ashanti Limited is the third-largest gold producer in the world and the largest in Africa. It employs 36,952 as of 2020. The company is listed on Johannesburg, New York, Australia, and Ghana stock exchanges.
It has a market capitalization of US$ 9.14 billion. Anglo Gold is domiciled in South Africa and is an independent global gold mining company with a diverse and high-quality portfolio of operations, projects, and exploration activities across nine countries on four continents.
Anglo Gold Ashanti works across the full spectrum of the mining value chain and carefully considers the impact of its activities on the communities where it operates and the environment. The gold miner operates 10 active mines across four continents and has 4 exploration projects.
Ironically and very interestingly for a company that is domiciled in South Africa, Anglo Gold Ashanti Limited has neither a mine nor an exploration project in that country. This fact is very telling of how big mining companies view the investment climate in the southern African nation. The same can be said about Goldfields Limited which was profiled in this publication in February.
Goldfields has a vast array of gold mining operations strewn across the world and yet only operates one mine in South Africa, the iconic South Deep. This is as much an oxymoron as it is an irony. This is because gold is the metal that built South Africa as we know it. South Africa as we know it would not exist if the gold deposits in the Witwatersrand had not been discovered centuries ago.
It, therefore, does not bode or augur well for a country with the kind of mineral resources it has for big business to vote with its feet through capital flight. Anglo Gold Ashanti only operates its head office in South Africa. In Africa the company has the following operations:
In Ghana Obuasi and Iduapriem. The other operations are in Tanzania, Guinea, and the DRC. In Australia, it operates the Tropicana and Sunrise Dam mines. In South America, Anglo Gold Ashanti has a diverse portfolio of operations across Argentina, Brazil, and Columbia.
The bulk of its mining portfolio is concentrated in South America. In North America, it is an exploration project in the Nevada region and has an office in Denver Colorado. From all these operations Anglo Gold Ashanti produced a total of 3.047 million ounces of gold in 2021.
As with all major corporations, the company places great emphasis on its mandate to create value for its shareholders and other stakeholders by practising responsible business. The company was formed in 1998 through the consolidation of the gold interests of Anglo-American Corporation of South Africa and its associated companies into a single focused and independent gold company.
It was originally known then as Anglo Gold Limited however, through several business combinations it was transformed to become Anglo Gold Ashanti when it acquired Ashanti Gold Fields.