Guide to Investing in South African Gold ETFs

• One of the convenient instruments for shielding investment portfolios from market uncertainties is South African gold exchange-traded funds (ETFs).
• South African Gold ETFs represent a distinctive investment vehicle designed to provide investors with exposure to the gold market without the complexities of owning physical gold.
• These ETFs are created to mirror the movements in the price of gold, typically denominated in the South African rand.

Embarking on the realm of gold investment often stands as a pivotal shield for portfolios during periods of financial fluctuations and market uncertainties. One of the convenient instruments for such a purpose is South African gold exchange-traded funds (ETFs).

In this article, we delve into the prospects of investing in gold in South Africa, discussing potential benefits, risks, and the necessary steps to initiate engagement in this exciting market segment.

Understanding South African Gold ETFs

South African Gold Exchange-Traded Funds (ETFs) represent a distinctive investment vehicle designed to provide investors with exposure to the gold market without the complexities of owning physical gold. These ETFs operate on the premise of tracking the performance of gold bullion, often held in vaults or through derivative instruments.

Purpose of South African Gold ETFs

These ETFs are created to mirror the movements in the price of gold, typically denominated in the South African rand. The primary aim is to offer investors an accessible and cost-effective way to invest in gold without physically buying, storing, or insuring the precious metal.

What are Gold ETFs?

Gold Exchange-Traded Funds (ETFs) are investment funds traded on stock exchanges, representing a way for investors to gain exposure to the price movements of gold without physically owning the metal.

These funds track the price of gold and are backed by either physical gold bullion or financial instruments linked to the gold price. Each share of a Gold ETF typically represents a fraction of an ounce of gold, allowing investors to participate in the gold market without the complexities of owning, storing, or insuring physical gold.

These ETFs are traded like individual stocks, providing liquidity and ease of access for investors to buy or sell shares during market hours. Gold ETFs offer a convenient and cost-effective way to diversify investment portfolios and potentially benefit from gold’s historical role as a hedge against market volatility and economic uncertainty.

How South African Gold ETFs Work

South African Gold Exchange-Traded Funds (ETFs) function similarly to other gold-backed ETFs but are specifically tied to the South African gold market. Here’s a detailed breakdown of their mechanisms and operations:

1. Asset Backing and Structure

• Gold Holdings: South African Gold ETFs are backed by physical gold bullion held in secure vaults or through derivative instruments linked to the price of gold in South African rand.
• Creation and Redemption: Authorized Participants (APs) create or redeem ETF shares by delivering or receiving the required quantity of gold or cash. This creation/redemption process ensures the fund’s share price remains closely aligned with the underlying value of gold.

2. Tracking Gold Price in South African Rand

• Benchmark Index: These ETFs track a specific benchmark index that reflects the performance of gold prices in South African rand. This index serves as a reference point for the ETF’s performance.
• Currency Exposure: As these ETFs are denominated in South African rand, investors are exposed not only to changes in the price of gold but also to fluctuations in the rand’s value against other currencies. This currency risk can impact the ETF’s returns for foreign investors.

3. Trading and Market Operations

• Listing and Trading: South African Gold ETFs are listed and traded on stock exchanges, offering investors the ability to buy and sell shares throughout trading hours. This provides liquidity and ease of access to the gold market.
• Transparency and Reporting: These ETFs typically disclose their gold holdings regularly, providing transparency to investors about the quantity and value of gold backing the fund.

4. Expense Ratios and Management

• Expense Structure: The ETF incurs expenses related to management, custody, and operational costs, which are covered by the fund’s assets. Investors bear a proportionate share of these costs through the expense ratio, typically ranging from 0.25 per cent to 0.75 per cent.

5. Market Dynamics and Performance

• Price Correlation: The performance of South African Gold ETFs closely mirrors the movements in the price of gold in South African rand, reflecting changes in international gold prices as well as any currency fluctuations.
• Investor Participation: Institutional and retail investors alike participate in these ETFs to gain exposure to the South African gold market without the need for physical ownership or direct trading in the commodity markets.

Benefits of Investing in South African Gold ETFs

Portfolio Diversification

Investing in South African Gold ETFs presents an opportunity for portfolio diversification. Gold has historically shown a low correlation with other assets like stocks and bonds. For instance, during the 2008 financial crisis, while many assets plummeted, gold prices surged, showcasing its potential as a hedge against market volatility. Allocating about 5-10 per cent of a portfolio to gold or gold-related assets can aid in reducing overall portfolio risk due to its relatively independent nature.

Inflation Hedge

Gold ETFs can serve as an effective hedge against inflation. Over time, gold has preserved its purchasing power. For example, from 1971 to 1980, amid high inflation rates, the price of gold surged from around $35 per ounce to over $800 per ounce. This illustrates its potential to maintain value during inflationary periods, safeguarding investors’ purchasing power.

Liquidity and Accessibility 

South African Gold ETFs offer liquidity and ease of access. ETFs trade on major exchanges, providing investors with the ability to buy and sell shares quickly. For instance, the NewGold ETF, which tracks the South African gold price, is traded on the Johannesburg Stock Exchange (JSE), ensuring easy access for both local and international investors.

Risks and Considerations 

Market Volatility 

Gold ETFs are subject to market volatility. In times of economic uncertainty or geopolitical tensions, gold prices can experience fluctuations. For instance, in March 2020, amidst the COVID-19 pandemic, gold initially dropped but rebounded quickly, reflecting investors’ flight to safety. Such volatility can impact short-term returns and necessitates a long-term investment outlook.

Currency Risk 

Investing in South African Gold ETFs introduces currency risk. For international investors, fluctuations in the South African rand can impact returns. If the rand weakens against the investor’s home currency, it could reduce the returns from the ETF, even if the gold price remains stable. For instance, a weakening rand might decrease returns when converted back to US dollars or euros.

Regulatory and Political Risks 

Political and regulatory factors in South Africa can affect Gold ETF performance. Changes in mining regulations, government policies, or political instability can influence gold production or export, impacting ETF returns. For example, labor strikes or shifts in mining laws can disrupt production, affecting the supply and potentially the price of gold.

Read also: New Trends in Gold-Backed Financing

How to Invest in South African Gold ETFs 

Choosing the Right ETF

When selecting a Gold ETF, consider specific metrics:

• Expense Ratios: For instance, the NewGold ETF on the Johannesburg Stock Exchange (JSE) has an expense ratio of approximately 0.4 per cent, making it cost-effective for investors.
• Tracking Method: NewGold is a physically-backed ETF, meaning it holds physical gold bullion, offering direct exposure to the gold price movement.
• Liquidity: The Satrix Gold ETF, another South African option, boasts high liquidity, with average daily trading volumes exceeding thousands of shares, ensuring ease of buying or selling positions.
• Issuer Reputation: Assess the issuer’s track record; for instance, Absa, the issuer of NewGold, is a reputable financial institution.

Opening a Brokerage Account

Steps to open a brokerage account for South African Gold ETFs:

• Research Brokerage Firms: Firms like EasyEquities, Standard Bank, or Absa Stockbrokers offer access to JSE-listed ETFs.
• Application Process: Complete the online application by providing personal details, identification, and funding information.
• Account Approval: Upon approval (usually within a few days), transfer funds to the account.
• Placing Orders: Utilize the brokerage platform to place orders for Gold ETFs, specifying the desired quantity.

Monitoring and Rebalancing

Managing Gold ETF investments involves:

• Goal Setting: For instance, an investor aiming for portfolio diversification might allocate 10% to Gold ETFs.
• Performance Tracking: Compare the ETF’s performance against benchmarks like the JSE Gold Index or the spot price of gold.
• Rebalancing Strategy: If gold’s percentage in the portfolio exceeds the target due to price movements, rebalance by selling or buying to maintain the desired allocation.

For instance, suppose an investor initially allocated R100,000 in NewGold (ETF expense ratio 0.4 per cent) when gold was at R600 per gram. If gold prices rise to R700 per gram, and the investor wants to maintain a 10 per cent allocation, they might sell part of their holding to rebalance the portfolio.

Conclusion 

Investing in South African Gold ETFs offers diversification, an inflation hedge, and accessibility. Key points to remember include:

• Portfolio Diversification: Gold ETFs provide a hedge against market volatility, historically showing low correlation with traditional assets like stocks and bonds.
• Inflation Hedge: Gold’s ability to preserve purchasing power makes it a potential safeguard against inflationary pressures.
• Accessibility: ETFs like NewGold and Satrix Gold on the Johannesburg Stock Exchange provide liquidity and ease of access to gold investments.

Looking ahead, potential future developments in the South African Gold ETF market may include:

• Technological Innovations: Advancements in fintech and investment platforms may streamline accessibility and trading processes for Gold ETFs.
• Evolving Regulatory Landscape: Changes in regulations could impact mining operations and consequently, the performance of Gold ETFs.
• Market Dynamics: Fluctuations in gold prices influenced by geopolitical tensions, economic conditions, or global events will continue to affect ETF performance.

Investors considering South African Gold ETFs should remain vigilant about market dynamics, regulatory changes, and technological advancements, ensuring their investment strategies align with evolving market conditions.