Gauteng Business News

Send  Share  RSS  Twitter  29 Jan 2010

FINANCE: Investing for Control Freaks


Recent Gauteng Business News

In the wake of the global financial crisis, investors the world over have become control freaks. That’s because they no longer trusted placing their hard-earned money in investment vehicles over which they had no control, Alan Demby, executive chairman of the South African Gold Coin Exchange, said in Johannesburg yesterday.

“Control of one kind or another has always been an issue, with smart investors favouring shares in companies operating in business activities familiar to the investor; or in real estate located in areas with which the investor can readily identify.”

However, he said, failures not only of business entities but of long-trusted banking and financial institutions had removed all but a very few comfort areas by which investors had for so long placed great store. Financial intermediaries themselves had to contend with their own trust issues after their principals had imploded.

“They are now scouring the investment landscape for the ultimate in safety, along with an adequate rate of return, be that in the form of dividends, interest or capital appreciation.”

He conceded that in their quest for security they might have overreacted, having grown excessively fearful of traditional investment avenues.

“Be that as it may, it is an approach that has seen a rapidly growing number of conservative people – and some not so conservative – turning to gold coins as the nirvana of security blankets.

“Adding much lustre to the attraction of this investment medium is the highly impressive price appreciation achieved over the past couple of years. Gold has, in fact, tripled in value in the past 10 years. It’s not for nothing that gold is regarded as a tangible or hard asset, or real store of value.”

His personal preference was Krugerrands (KRs) and collectable gold coins, rather than gold shares.

“You don’t need to be a brain surgeon to appreciate why gold shares should be eliminated from your shopping list. With certain politicians threatening nationalisation, if such a threat is to materialise, the price paid for the mines would be a fraction of their true worth, while state control of the mines is a kiss of certain death.

“If anything, nationalisation will surely result in less gold being mined. Lower levels of supply would translate into an upward spiral in the gold price, in the process enhancing the benefits accruing to holders of physical gold. He who has the gold makes the rules.

“Even without nationalisation the mining risks are huge, among them problems like ongoing labour disputes and underground accidents.

“Investors in gold bars and KRs totally avoid mining risk. In addition, they acquire an asset that is internationally marketable and that requires little care, other than an occasional dusting off. KRs incur no annual fees, no management fees, no bonuses and other hidden costs.”

But, he cautioned, there was a significant and critical difference between a gold bar and a KR.

“Since the former is not legal tender it attracts VAT; KRs, as official legal tender, do not. Why, therefore, pay 14% more than you need to in order to acquire peace of mind? And when you wish to sell, you may even get less than the gold price if the buyer is not satisfied with the item. There is an established two-way KR market that is very liquid and transparent, so why re-invent the wheel?”

He maintained that collectible gold coins could be highly rewarding investments, since the buyer simultaneously escaped the nationalisation bogey, and leveraged the gold price as well as a (variable) rarity factor.

“But before buying, check the mintages and, ideally, consult an expert.”

Demby recommended holding at least 15% of one’s investible assets in gold, with two thirds of that 15% comprising KRs and the balance collectable coins.

“KRs give you a ride with the gold price and exchange rate, as well as liquidity, while collectibles offer you stability and a long term store of value.

“Given the 2008-09 financial fiasco, taking control of your own investments and future has never been more crucial. Become a control freak when it comes down to your money and investments. If you don’t take control of your money and wealth, who will?”

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