Fast little loans
This article was first published in the first-quarter 2012 edition of Personal Finance magazine.
If you would like to benefit from movements in the rand gold price without worrying about whether you are paying a fair premium for the collectability value of a coin or medallion, there are a number of options available:
* Gold bars; and
* NewGold exchange traded fund (ETF).
There are two types of Krugerrands: bullion coins and proofs. Bullion coins are the ones in which you would be interested for investment purposes. Proof Krugerrands, which are aimed at collectors, look slightly different, are highly polished and far scarcer. There is no VAT payable on either.
Proof Krugerrands are issued once a year, and the price is set at a substantial premium to bullion coins. However, it is normal practice that if you resell your proof Krugerrand, a dealer will pay only the price of a bullion Krugerrand.
"There is a misconception about proof Kruger-rands," Glenn Schoeman, the chief executive of Gold Reef City Mint and the chairman of the South African Association of Numismatic Dealers, says.
"When trading on the market, proof Krugerrands are just worth their gold value. From the investor's point of view, they are not such a good idea," Schoeman says.
Like the proof coins, bullion Krugerrands are issued by the South African Mint. They are stored and distributed by Rand Refinery, a private company owned by some of South Africa's biggest miners, including Anglogold Ashanti and Gold Fields.
The price at which Rand Refinery sells Krugerrands is higher than the prevailing rand gold price, because of the cost of making the coins. But the Rand Refinery price will still fluctuate with the daily movements in the rand gold price.
For sales of between one and 49 one-ounce coins, Rand Refinery charges a mark-up, or commission, of five percent on the rand price of gold. For sales of 50 or more coins, the premium is 3.5 percent.
The mark-up covers the process of making the coins, which Schoeman describes as "very intricate and very expensive".
As a private individual, you cannot buy Krugerrands directly from Rand Refinery, but knowing the quoted price will help you to determine what premium you are paying when you buy from a dealer or stockbroker.
You can find out the current Rand Refinery price by going to its website at www.randrefinery.com and clicking on "Customer zone" and then "Retail sales pricing". Under the table named "Retail sales pricing – this week", click on the day's "retail first pricing" for the early morning quote, or "retail second pricing" for the afternoon quote.
You can expect to pay a mark-up of roughly 2.2 percent on top of the Rand Refinery price when buying a one-ounce Krugerrand from a private dealer, Schoeman says.
"We at Gold Reef City Mint base our costs on what Rand Refinery charges. We work on 2.2 percent, which is normal for the sector. On a mark-up of 2.5 percent, we wouldn't get the deal from the buyer.
"Selling Krugerrands is not a lucrative business. There is no money in it for the dealer," he says.
The mark-up on smaller Krugerrands increases as the size decreases. Schoeman says the mark-up on a half-ounce coin is about eight percent and on a quarter-ounce coin it is about 10 percent. You can expect to pay about 12 percent more than the Rand Refinery price on the 10th-of-an-ounce coin. "Like any investment, the bigger it is, the less you pay."
If you were in the market to sell a one-ounce Krugerrand, Schoeman says you could expect to be offered the spot gold price or a few percent below that level. "The market establishes a benchmark day by day. The price would depend on how many a dealer has in stock. If I needed a Krugerrand on a particular day, then I would offer more," he says.
First National Bank (FNB) buys coins directly from Rand Refinery and you, in turn, can buy them through FNB's online share trading. The bank has two levels of trading available through its Share Investing platform:
* Share Builder, which allows you to buy and sell from a pre-selected basket of blue-chip shares and ETFs. This basket now includes Krugerrands.
* Share Investor gives you access to the full range of shares listed on the Johannesburg Stock Exchange (JSE), as well as Krugerrands.
"If you were to buy Krugerrands on our Share Builder or Share Investor account, they will not attract a transaction fee or VAT," Elaine de Montille, the head of marketing FNB Share Investing, says.
There is a transaction fee of two percent when you buy and sell shares, but it does not apply when you buy Krugerrands, she explains.
"The full price of the coin is exactly what we quote to the client when they log in to online banking. So if the price of the coin is, for example, R10 000, that is the full amount that the customer will pay to buy a Krugerrand through us," De Montille says.
"Each Krugerrand is quoted at a price provided by RMB. We do not charge brokerage or commission, but we do have a small flat margin built into the FNB price for the coin. This price changes every two minutes and is dependent on what happens in the market."
De Montille says the fee is not a set rand amount or a percentage. She would not provide an indication of how much higher you could expect the FNB price to be above the Rand Refinery price or the spot gold price.
The Share Builder facility will cost you a monthly fee of R17, and the Share Investor monthly fee is R45 for South African residents and R75 for non-residents and emigrants.
Note that there is a spread between the bid and offer price, just as there is with other outlets. On December 5 at 12.30pm, FNB was selling a one-ounce Krugerrand at R14 624 and buying back the coins at R14 323. The difference was R301, about two percent of the selling price.
"This spread is subject to change depending on price volatility, taking into account converting rands to dollars when we buy and sell the coins," FNB says.
You can find out more about buying online at www.fnb.co.za/share-investing/index.html
For almost 100 years, from 1911, South Africans were not allowed to be in possession of minted gold bars. The Precious Metal Act of 2005 changed all that, but we had to wait until the regulations under the Act were passed in 2008 before trade in the bars became legal.
This was done in 2008 and in that year Metal Concentrators (MetCon) and Gold Reef City Mint received permission to produce and sell minted bullion bars to South Africans. The bars are available in 10-gram, 50-gram and 100-gram sizes.
They are available from the Gold Reef City Mint in Germiston or can be ordered and couriered from there, Schoeman says.
"Our maximum commission fee is six percent on the 100-gram bar," he says. "We will also store free of charge for clients."
You can find out more about Gold Reef City Mint at www.grc.co.za
Gold bars can also be ordered from MetCon via its website (www.metcon.co.za) and, once paid for, the bars will be sent to you by courier.
Unlike Krugerrands, you have to pay VAT on your gold bar.
Bernard Stern, the chief executive of Metcon, says the bars are a 24-carat product tradable anywhere in the world. "It is exactly the same gold we would supply to a manufacturing jeweller," he says.
"If you buy a 100-gram gold bar and are able to claim back the VAT, it would be cheaper than buying the equivalent amount of gold in Krugerrands."
This is because the price you pay for a 100-gram bar would be a maximum of six percent above the spot price of gold in rands.
"For a 50-gram bar, we charge seven percent above the rand gold price, and for a 10-gram we charge 10 percent," Stern says.
MetCon will buy back gold bars, although there has not been much call for this in the current bull market, Stern says.
"We haven't bought that many bars back, because people haven't been selling at the moment."
MetCon will typically buy back at the ruling spot gold price less two percent.
Exchange traded fund
The downside of holding physical gold is that you need to store it safely and/or insure it. You can remove the concern by investing in an ETF that invests only in the yellow metal.
The NewGold ETF is listed on the JSE but NewGold is not a share - it is a debenture, albeit one that does not pay a dividend.
Vladimir Nedeljkovic, the head of hybrid products at Absa Capital, which is the originator of the product, explains that a debenture is an acknowledgement of debt.
"In the case of NewGold, each gold bullion debenture is, in essence, a loan ... a debenture holder lends an amount to NewGold Issuer, which in turn undertakes to repay the amount equivalent to the reference quantity of gold bullion on demand from the debenture holder," Nedeljkovic says.
However, for qualifying investors – those with a permit to hold gold and who own a sufficient quantity of NewGold securities - a holding in NewGold can be exchanged for physical gold bullion, he says.
Each NewGold security is backed by about a hundredth of an ounce of gold. The gold is held on behalf of investors in a depository in the United Kingdom.
The gold used to be held by Rand Refinery, but, as the popularity of the NewGold ETF increased, the facilities became too small, and since 2009 the gold has been held by Brinks Limited.
Nedeljkovic says the ETF's assets (the gold holdings) are ring-fenced in a special purpose vehicle called NewGold Issuer, so there is no credit risk associated with holding NewGold securities.
"Even in the event of Absa's default, the structure of the ETF would remain untouched," he says.
NewGold Issuer charges an annual management fee of 0.4 percent of the value of your investment.
The debentures can be obtained through a JSE member stockbroker, including internet stockbroking services. The costs you would incur "are just the normal costs associated with trading a security on the stock exchange through a stockbroker. The stock-brokerage fee is negotiable, and different stockbrokers have different pricing structures," Nedeljkovic says.
"The securities transfer fee of 0.25 percent does not apply to NewGold and is not payable. Other levies are payable, as per any other security."
Alternatively, you could buy the debentures through:
* etfSA.co.za or
* Absa Investment Management Services (AIMS), a linked-investment services provider (Lisp).
Mike Brown, the chief executive of etfSA.co.za, says a web-based platform called etfSA Investor Scheme gives investors the opportunity to transact in all the ETFs listed on the JSE, including NewGold.
etfSA Investor Scheme is administered by Automated Outsourcing Services, another Lisp.
Both AIMS and etfSA Investor Scheme give you the opportunity to invest through either monthly amounts or lump sums. The minimum investments are:
* etfSA Investor Scheme: R300 a month or a lump sum of R1 000; and
* AIMS's NewGold investment plan: R500 a month or a lump sum of R1 000.
Brown says etfSA Investor Scheme charges no upfront fees, but you will pay a transaction fee of 0.1 percent when buying and selling.
Financial adviser commissions could apply if you used a financial adviser, but you could access the platform directly if you want to avoid adviser fees.
The annual administration costs, excluding VAT, are:
* R0 to R100 000: 0.8 percent;
* R100 000 to R250 000: 0.75 percent;
* R250 000 to R1 million: 0.7 percent;
* R1 million to R3 million: 0.5 percent; and
* R3 million or more: 0.45 percent.
On top of this, JSE and Strate fees are payable, but these are minimal, Brown says, because they are shared among all investors.
Under the AIMS investment plan, there was an annual administration fee of 0.8 percent and a 0.3-percent initial fee on lump sums at the time of writing. But Nedeljkovic says the AIMS fees governing the NewGold ETF are being brought in line with most other Absa ETFs. If the fee structure has not been changed by the time you are reading this, it will be soon to:
Initial administration fees
* Lump sum investment:
Amounts below R50 000: R500
R50 001 to R250 000: 0.85 percent
Next R250 000: 0.65 percent
More than R500 000: no initial fee
* Recurring payment:
First R1 000: 2.25 percent
Next R4 000: 1.5 percent
Above R5 000: 0.5 percent
Annual administration fee
(Applies to lump sum and recurring investments)
First R250 000: 0.75 percent
Next R500 000: 0.5 percent
Above R750 000: 0.25 percent So there you have it. You can buy gold directly from a dealer or over the internet. What you cannot do yet is buy it from a vending machine in South Africa. News at the beginning of 2011 that Cape Town would be home to South Africa's first gold coin ATM has proved to be premature.
Joe Dreixler, the director of marketing at Ex Oriente Lux, the company that places "Gold to go" vending machines all over the world, told Personal Finance that negotiations were continuing and he could not say for certain when, or if, South Africa would get one.