ETF best investment option in SA

[] — BUYING gold worth R6,000 with an initial deposit of just R525 is probably the best speculative and even investment option available on South Africa’s financial markets.

With the gold price rising so strongly – currently heading for $1,000/oz – speculative investors just can’t afford to remain outside this market.

And the best way to do it is with Safex’s single stock futures on Newgold (JSE code: GLD), created and underwritten by Absa.

The problem is just that the gold shares of producers such as AngloGold Ashanti, Gold Fields and Harmony are now simply too expensive for any possible profit they could show and the cash dividend that could be declared compared with the current gold price.

For example, unlike the situation with platinum shares – where prices have risen much faster than the underlying platinum price over the past three years – gold shares are underperforming compared with the gold price.

Investors worldwide have had enough of the poor showings by gold producers. Costs always rise faster than predicted. The grade of ore mined always varies, usually downward, from that predicted. As is currently the case with Harmony and AngloGold, mine managements keep buying gold forward at a poor price.

There are mine accidents that hamper production, governments constantly want to intervene in mineral rights – as in Zimbabwe – and there are numerous other excuses that make gold producers a poor investment relative to the underlying gold price.

Sarel Snyman, of Thebe Securities, says of only two investments: buy Satrix 40 if you want to invest in ordinary shares and buy single stock futures in Newgold if you like gold. That’s all.

Absa created its Newgold debentures in 2004 and (briefly) they work as follows.

Each listed Newgold share (code GLD) represents 1/100th of an ounce of gold.
Gold was recently trading at $888/oz and R6,87 was needed to buy one US dollar.

The intrinsic value of Newgold was therefore R61 at the time of writing and was at that stage trading at R60,70. It’s totally honest in accounting terms, and what you pay for is exactly what you get – namely, 1/100th of an ounce of gold.

Years ago, before the existence of Newgold, many investors bought Krugerrands and held that physical gold. It was also a good investment and free of all the excuses devised by gold producers.

However, with the dematerialisation of share certificates and the creation of Strate it became very difficult to keep Krugerrands safely at a relatively low cost. It also increased the trading costs of the coins.
Newgold is just a piece of paper, but Absa does hold the underlying gold in safe keeping and it’s just as safe as gold itself.

Investors will recall that at the time of the previous run on the gold price nearly 30 years’ ago there were still around 20 listed gold mines. Some, such as the old East Driefontein, were highly profitable; others, such as Village, just survived from day-to-day and were known as marginal mines. When the gold price increased the share prices of marginal mines always rose faster than those of the rich mines, and vice versa.

All that’s now lost for investors, but single stock futures on Newgold in fact offer an opportunity to build your own marginal or rich gold mine just as you like. The Safex rules currently require prospective investors to deposit an initial margin of just R525 at their brokers in order to buy the minimum contract of 100 GLDs at R61 each, or a total market value of R6 100.

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If the price of gold – and therefore the price of the GLDs – were to rise investors need not do anything. However, if the price of gold falls they’ll have to deposit more money with the broker to make up the daily loss.

To be safe and to mine your own rich mine requires a simple tactic. Rather than depositing only R525 with your broker it makes sense right from the start to deposit R2,000 for each contract with a value of R6,100.

The broker will then debit your account with the loss on a daily basis if the gold price falls and credit it if it rises. Nothing and nobody will bother you with so-called margin calls.

However, if you’re the kind of investor who liked in the past to invest in marginal mines such as Village, you can obtain the maximum gearing benefit by simply depositing the minimum of R525 and buying a contract of 100 Newgolds.

If the gold price falls, you’re in for it. But if the gold price rises further to $1,050 you make a profit of R1,145 and you get your initial margin of R525 back.

Not a bad return

Buy a single stock futures contract on Newgold and forget all about Harmony’s problems if you’re really a gold bull who wants to take part in the current gold rush.