Gandy Gandidzanwa & Itai Mukadira
While it was clear it would not be long before we answered to the calls to share our insights on gold coins investing, we never anticipated that the calls would be that loud, spontaneous, and reverberating. Ultimately, we could not help but skip the queue on this one.
But first, a spoiler alert.
This is by no means a piece on macro-economics or monetary policy. We make no attempt at all here to express an opinion on the effectiveness of the gold coins on inflation, the exchange rate, interest rates, or short-term GDP growth and employment levels. Instead, we focus on the coins as an investment instrument and not as a monetary policy tool. While macro-economics and investments are related, they are not one and the same thing.
The last two years have been quite an interesting short stretch in the long history of the pension fund industry. We have probably witnessed by far the widest expansion of the investment universe for the industry than we have ever witnessed before. REITs were introduced for the first time, and so were ETFs. The VFEX was brought to life, and so did the FINSEC platform gain visibility. Offshore investments became allowable, and so did certain projects under the Prescribed Assets Status regime. Private equity and infrastructure received a breadth of new life as light was shone on them under the PA status regime. The investment guidelines were, overall, relaxed, and so was consciousness further emphasized on ESG investing. And now, gold coins.
Internationally, gold coins and gold coin investing is nothing new. There are well established coins that have existed over many decades, including South Africa’s “Krugerrand”, Australia’s “Australian Kangaroo”, the United States’ “American Eagle”, Canada’s “Maple Leaf”, and Austria’s “Vienna Philharmonic”. Seems like all are named with a deep sense of pride of one’s national heritage. Our “Mosi-Oa-Tunya” certainly makes the grade.
Gold, The Precious Metal
Of the four main precious metals, gold, silver, platinum and palladium, gold ranks as by far the most precious one. Its lustrous and metallic qualities, its scarcity and difficulty of extraction makes it command a secure position as the most valuable precious metal.
There is only about 200 000 tonnes of gold that have ever been mined, with just over two thirds of that having been mined after 1950. That might sound like a lot, but it certainly isn’t – the metal is just ultra-heavy. For instance, if all of that was to be stacked together it would only form a cube of twenty-one metres long in each of the three dimensions, and would easily all fit into a small six story building. What is even of more interest is that it is estimated that only 50 000 tonnes is all that is left underground. With these sorts of figures, and an ever-growing global population, its scarcity will certainly get worse. Its preciousness and status as a symbol of wealth will only but be elevated higher. Demand-supply dynamics mean that its price can be expected to continue to rise in the long run – giving good steady returns over the long term.
Gold has a number of other interesting investment characteristics too. It is a highly liquid investment with a global appeal and a price that is determined at the world markets. Price discovery at platforms of such scales is probably as fairest as they come. This is because any arbitrage opportunities are likely to be quickly competed away. There are also minimal chances of any one particular participant easily manipulating the prices to achieve a certain nefarious outcome. Similarly, the chances of the market moving against any one particular investor trying to execute an honest trade are quite minimal as well.
That our own gold coins are backed by such a robust system and that they are exposed to that level of scrutiny is a great source of comfort. That not only can they be traded locally but globally as well means investors holding them are holding an international asset. Gold is gold – and a troy ounce of gold of the same purity is the same regardless of its country of origin. It will fetch the same on the global markets. Besides, this will not be the first time anyway that our gold will be hitting the world markets – we are already a gold exporting country and never in our history have we heard of our gold being treated as substandard simply because it is from this part of the world.
The RBZ’s guarantee that it stands ready to buy back any of the coins also seals it for us in terms of future marketability of the coins. There are very few other investments where an investor buys it well-assured that there will be a readily available buyer, at a fairly determined global price, should they want to disinvest from the position at any time in the future. That liquidity will be very handy for many pension funds that have been desperately seeking investments that are liquid enough to meet their treasury requirements while providing a strong hedge against runaway inflation at the same time.
The coins are also coming in the right denominations for institutional investors – one-ounce coins, as opposed to several-kg bars. An ounce is small change for pension funds sitting on hundreds of millions of dollars.
Of course, for total market completeness, one would prefer that retail investors be able to participate in the gold coins market too. At around US$1 800, the coins are out of reach for many. All hope is not lost though – and the solution is on two fronts. First, the RBZ has hinted it is looking into minting smaller denominations. More specifically, in its latest Mid-Term Monetary Policy Statement, the RBZ provided further details that the smaller-unit coins, to be issued in mid-November this year, will be of denominations of a tenth, a quarter, and half an ounce. We are, however, more interested in the prospects of the financial services industry seeing this for the opportunity that it is. Here is an opportunity for the industry to further develop the local capital markets. Well-structured gold unit trusts would certainly be appealing to retail investors with much smaller savings yearning to also partake in the “gold rush”. Both the challenges of indivisibility and the 180-day lock-in period can be addressed by carefully constructing a gold unit trust with the right mix of the gold coins and some stable currency, US$ or otherwise. Even some smaller pension funds would also probably find exposure to the gold unit trusts more attractive than direct ownership of the coins. This is because holding actual gold comes with some additional administrative burdens related to storage, insurance, and security.
“Diversification is the only free lunch in investments”, we are forever reminded – and gold comes with it in abundance. Gold is such an effective diversifier with a low-to-negative correlation with many other asset classes.
Unlike with most other investment instruments, there is very little active portfolio management required on a gold portfolio, thus minimising the costs of managing the portfolio. That, at a time when the regulator is pushing hard on downward fee revisions for the industry, makes it even more appealing.
The observed price of gold continues to grow steadily when measured over long periods of time. Even over the short term, it is by far less volatile than many other asset classes that are traded daily. Certainly, yet another quality that makes it very attractive to investors.
That it is an inflation hedge has long been stressed on already. It has maintained its purchasing power over decades and centuries. With its low correlation with other asset classes, it is the place to be when the world economy is enduring the agony of inflation and market disorder.
Precious Metal Yes, Precious Investment Too?
While it could be both a precious metal and an attractive investment, is gold also outrightly a “precious” investment too?
Maybe a starting point, albeit an extreme one in the minds of some, is a quote from Warren Buffet on gold, “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” Unlike other metals or commodities, Buffet goes on to say, “Gold is an unproductive asset that will never produce anything, but that is purchased in the buyer’s hope that someone else — who also knows that the asset will be forever unproductive — will pay more for them in the future”.
Well, quite a loaded one from the man regarded as the greatest investor of all time. But, there could be an element of truth in his utterances, and we need to uncover it.
Storer or Grower of Value
Trustees need to be very clear of why they need to be looking at, and considering, the gold coins investment option. When done right, portfolio construction is a meticulous process of stacking up different investments, each serving a clear purpose, towards meeting the overall objectives of the investor. Each investment is incorporated into the portfolio to specifically contribute towards forming and shaping key characteristics of the portfolio without which the portfolio would not be able to meet the investor’s risk-return objectives.
Gold is a storer of value, an inflation hedge, and a diversifier – no doubt about that. Its advocates do not though claim that it is a significant grower of value too – so maybe we can take it that it is not. In fact, it is not, and that is very important when it comes to solving the equation of how much of it should pension funds hold.
As mentioned earlier, the dominance of gold as a storer of value is most acutely demonstrated during times when markets are rough and the world appears to be coming to an end. This places it in the same league as safe-haven currencies – most dominant ones globally being the US$ itself, the Japanese yen, and the Swiss franc. It is a more preferred option especially in a low interest rate environment as the opportunity costs of holding it to the hard currencies diminishes significantly as it is non-income yielding itself. During such times, with investors in the “flight-to-safety mode”, it gets into high demand. Not surprising then that it hit its all-time high of US$2 075 per ounce on August 7th, 2020, right as we were in the middle of a global pandemic and at a time of zero to near-zero interest rates in the developed markets. Over the period leading to its peak, it certainly was amongst the best performing asset classes.
However, that stellar outperformance rarely lasts. As markets normalize and economies stabilise, the attractiveness of gold fades away, and with it goes its outperformance.
That tells us gold investing has a time and place. If anyone could time the markets, empirical evidence shows that the most appropriate time to gain exposure to gold would be twelve to eighteen months before financial markets turmoil, holding it through the turbulences, and then selling it twelve to eighteen months after the turmoil. Unfortunately, no one can time the market, and all that trustees can do is to maintain a well thought-through strategic allocation.
Furthermore, gold is, admittedly, an overall good inflation hedge whatever stripes with which the inflation comes – demand-pull, cost-push, or built-in. It though struggles on the aspect of growing significant real value. That attribute has pushed some to view gold exposure more as an insurance solution and less of an investment solution – you do not buy it to profit or grow rich, instead, you buy it for financial security.
To Allocate, Or Not To?
With all that has been said – the next question is two-fold, should a pension fund seek any exposure to the gold coins at all, and if so, how much. The real answer depends on the individual circumstances of each pension fund but based on what we know and the environment we find ourselves in, we believe the answer would be a yes for most pension funds at this point in time.
The more challenging part of the question is though the “how much” part. First there are the IPEC investment guidelines to abide by. The coins come with a Prescribed Assets Status. So, on that basis alone a pension fund could invest up to 40% in the coins. Building on top of that, it could be argued that the IPEC guidelines allow for an additional exposure of 15% under the Unquoted Equities/Alternative Investments asset class – giving a total of 55% allowable allocation to the gold coins. That would be quite huge, but certainly seems not in line with the spirit in which the guidelines were crafted. It is also specifically provided for in the qualifying clauses of the guidelines that, “The limit on unquoted equities applies even to those financial instruments with Prescribed Assets Status”. It will be interesting to see how IPEC will interpret this when presented with an investment policy statement that makes an allocation to the gold coins that is by far more than what the regulator considers prudent and in the spirit of the guidelines.
Once the provisions of the IPEC guidelines have been met, there is no one size-fits-all solution to the question of how much to allocate to the coins. Trustees need to seek proper guidance from their investment consultants in crafting sound, solid, and well-thought-out investment strategies that incorporate gold coins in the right proportions.
Conclusion
As trustees review their investment policy statements, we expect gold coins investing to be an important part of their conversations. The ultimate allocation will of course depend on each individual fund’s circumstances, including consideration of the assets the fund currently holds and their correlation with gold. Our view is that, for a non-income generating and capital-preservation-type of asset that it is, a low-to-mid-level allocation, within the single-digit range, would be the most ideal allocation for most funds.