Don’t sell your Krugerrands yet

The gold price has more than doubled in rand terms since the middle of 2021, increasing from R25 000 per ounce to nearly R60 000. The drivers behind this strong rise? The strong increase in the international gold price from $1 800 per ounce to above $3 100 currently, while the rand weakened from a best of R13.35 per dollar in June 2021 to worse than R18.30.

The temptation to sell those gleaming Krugerrands hidden in the bottom of the piano has also increased. A coin bought for R27 000 a few years ago will fetch more than R60 000 today, but it might be better to hang on longer.

Analysts are expecting the gold price to go much higher.

Only a year ago, bulls who predicted a gold price of $3 000 were laughed at – yet the gold price hit a new record of $3 135 per ounce this week. Gold has increased by nearly 20% since the beginning of the year.

Gold price predictions have been increasing and $3 500 per ounce is suddenly feasible.

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Wait for an ‘extreme tail’ scenario?

Goldman Sachs noted in a recent research report that gold could increase to $4 500 per ounce within 12 months, given “a hypothetical extreme tail scenario”.

Bank of America increased its average gold price estimate for 2025 to above $3 100 per ounce, compared to a previous estimate of an average price of $2 750 per ounce for the year.

The other side of the coin is that the rand is bound to stay vulnerable given SA’s low economic growth and high political and diplomatic tensions with US.

An ‘extreme tail scenario’ of gold at $4 500 per ounce and an exchange rate of R20 per dollar will translate to a price of R90 000 for a Krugerrand.

Dane Viljoen, founder and chief officer of Troygold, says the Krugerrand is SA’s proxy for physical bullion and the most cost-efficient gold bullion investment that a retail investor can make.

“It is priced in rand, but the value is determined by the dollar gold price due to its gold content being one ounce of fine gold.

“The Krugerrand, or gold, has returned roughly 18% per annum in rand terms over the past five years, and an impressive nearly 35% over the past year,” he says.

“Historically, gold in rands has returned over 13% per annum over the long term [50 years].”

He adds that a single coin sold for R25 when the Krugerrand was launched in 1967.

Viljoen says gold has performed better than other asset classes. “Gold has returned slightly over 90% the past five years.”

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Drivers

Troygold’s analysis found that the main drivers for gold’s strong increase are predominantly monetary debasement and credit expansion.

“The world’s central banks and governments have injected over $16 trillion of new money into the global economy over the past four years,” says Viljoen.

“Coupled with a macro environment consisting of trade and currency wars, major geopolitical uncertainty and the deteriorating fiscal positions of both the US and SA government balance sheets, meant that gold was doing its job of measuring and pricing the scale of global monetary debasement, and providing protection to investors.”

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Sell … or buy?

On the question of whether investors should bank their gains, Viljoen says Krugerrands “are a physical bullion product” which means they trade “at a numismatic or fabrication premium to the spot price of gold”.

“Krugerrands tend to trade at 6% to 9% above that spot price, which is why the price of a coin breached R60 000 with the spot gold price at around R57 000 per ounce.

“In terms of determining if you should sell at record prices, one needs to do a fundamental analysis of who the buyers are that have been driving this increase, their underlying reasons, and whether or not it will continue, grow or dissipate,” says Viljoen.

“In this case, we’ve seen high demand from central banks and high demand for retail bar and coin markets push up the price because of risk and inflation hedging reasons.

“This demand is sticky and tends to remain robust, versus more speculative demand in exchange-traded fund [ETF] futures.

He adds: “We should see this demand remaining strong. Additionally, the macro environment that has driven these buyers to increase their gold holdings has not changed.

“In fact, with the exception of our own Elon Musk trying to introduce austerity into Uncle Sam’s budget, global governments are ramping up borrowing and spending for all sorts of imperatives like defence spending and social programmes.

“With that in mind, bureaucrats now have strong reasons to keep the printing presses running, so don’t expect inflation to decrease any time soon. Sovereign finances need radical reform and shrinking of the state and its spending habits before we will see gold prices come down.

“The smart money would probably continue to accumulate gold, even above R60 000 per ounce,” says Viljoen.

He also speculates that the gold price could increase to $4 500 per ounce. “We haven’t seen western retail and institutional markets via gold exchange-traded funds increasing much, neither have gold shares increased that much

“It means that real western demand isn’t even in the game yet. Wall Street analysts are predicting gold at $3 500 per ounce by year end. However, if we see gold funds and/or western retail bar and coin demand spike, we could see $4 500 per ounce in 2025.”

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Fear and greed

A Gold Fear and Greed Index calculated by international precious metals retailer JM Bullion predicts that the gold price will continue to increase from the current record prices.

JM Bullion describes the Fear and Greed Index as a tool that measures the emotions driving the market. It is based on the premise that fear and greed are primary drivers of investing decisions.

A high fear index suggests that investors are fearful and pessimistic about the market, while a high greed index suggests that investors are greedy and optimistic.

“When index figures climb above 60, it suggests different degrees of greed.

“A market described as greedy implies that traders hold a positive outlook on future pricing and are purchasing significantly,” it says.

“When the index falls below 40, it signifies different degrees of anxiety, with a lower index indicating a higher level of fear in the market.

“When there is an atmosphere of fear, traders tend to rapidly sell off their gold and are less responsive to lower prices. This can happen as traders attempt to mitigate losses by either being forced to liquidate their assets or by wanting to sell as quickly as possible.”

The index is currently on 88 points, having risen from 80 points a weeks ago. A reading of above 90 indicates extreme greed and reflects massive bullion purchases. (It might indicate fear too, when stressed short sellers start buying to cover positions.)

The index is calculated using data such as physical gold premiums, gold price volatility, social media sentiment around gold, proprietary retail activity for gold and data on internet searches for investing in gold.

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Underlying strength too

Taylor Burnette, an analyst at the World Gold Council, points out that it is not only the gold price reaching a new record high that is impressive, but that the rate of climb shows the underlying strength in the market.

“Gold reached more than 40 new all-time highs in 2024 and 14 more so far this year. Its upward move has been no coincidence, a potential perfect storm is forming for gold.

“The focus isn’t just the number itself, but the pace at which gold has reached it,” says Burnette.

“The jump from $2 500 $3 000 per ounce took just 210 days – a notably faster move that underscores the momentum gold has built over the past two years.”

Looking forward, Burnette expects some consolidation given the strong move – but adds that “there are many reasons to believe that investment demand will continue to be supported by a combination of geopolitical and geoeconomic uncertainty, rising inflation and a weaker US dollar”.

This article was republished from Moneyweb. Read the original here.