Demystifying physical bullion. Here are 5 things you should know.
Investing in physical bullion is a great way to diversify and safeguard your wealth in a non-Rand based asset. Gold and Silver have long been regarded as safe-haven investments, largely immune to recessions and – in South Africa in particular – currency devaluation and inflation.
Even though many people might be aware of the investment potential offered by physical bullion, many remain unfamiliar with the how and why surrounding the acquisition of these commodities. We will address some of these uncertainties here, based on questions we have received from our clients.
Although this newsletter is a bit longer than usual, it contains important information you should know before diversifying your wealth into bullion.
1. What is bullion, how do you buy it, and what determines its price?
Bullion in general refers to physical precious metals – such as Gold, Silver, and Platinum – of high purity, and can be bought as easily as a necklace, ring, or other jewellery. It really is as simple as a phone call, email submission, or website click. Before you buy, however, you should know what you are paying for, and why the price constantly fluctuates.
The value of a particular piece of physical bullion is determined by its content of precious metal, which is in turn dictated by two main factors: its weight and its purity. Bullion’s weight is measured in either grams or Troy Ounces (31.1034768 grams), and a piece of physical bullion can weigh anything from 1 gram to 2 Kilograms. Coins or medallions commonly weigh 1 Troy Ounce.
Bullion’s purity can be expressed in a number of different ways, the two most common being in Karats for Gold, or Millesimal Fineness for other bullion. For example: Gold’s purity generally varies from 9 Karats (375 in millesimal fineness) to 24 Karat (999 fine gold). Silver’s purity varies from 800 (80% pure silver) to 999 (99.9% pure silver), and Platinum’s from 850 (85% pure) to 999 (99,9% pure).
The price of bullion quoted on the radio, television or online is generally for 1 ounce of 999 Gold, Silver or Platinum. Bullion prices are determined by various factors such as economic and political factors, stock market indices, currency exchange rates, and general supply and demand to name but a few.
2. What types of bullion are available?
When people think of bullion, a vision of Gold bricks stacked to the ceiling in a vault might come to mind. The reality, however, is that the Gold bricks often shown in the movies weigh 12.4 Kilograms, and would cost roughly R11 750 000 at the time of writing this newsletter. Aside from prohibition by legal regulations, the price alone dictates that most of the general public will likely never own one of those particular Gold bricks, let alone a stack of them.
With expectation now tempered, let’s discuss what you can realistically expect when buying physical Gold, Silver, and Platinum bullion.
Bullion comes in many forms. The most important fact you should know is that it is illegal to own Gold or Platinum dust or granules without a beneficiation license. Gold and Platinum need to be made into a finished article such as a minted bar, coin, or medallion. Silver can be owned in any form, however it is simply more practical to own a finished product rather than dust or granules.
While it is now legal to own Gold bars in South Africa, there are many caveats and stipulations. Firstly, the amount of bars that any supplier can produce per year is limited, as are the size of the bars they are allowed to produce. The Gold bars they produce and sell can only weigh 10, 50 or 100 grams. Secondly, all Gold bars need to be encased in tamper-resistant packaging, serialized, and accompanied by a certificate confirming its mass. While this might make for a great (albeit expensive) curio or conversation piece, it is simply not practical if you are looking at bullion as an investment.
Silver, on the other hand, carries no such restrictions, and you are free to buy bars of Silver as you see fit. In fact, DCX Bullion offers a range of Silver bars, weighing up to 2 Kilograms.
This means that your best option for investing in Gold and Platinum remains coins or medallions. Currently, our range consists of a 1 Ounce Platinum medallion, and Gold medallions ranging from 1/10th of an ounce, up to 32 Ounces (1 Kilogram).
3. Krugerrands vs. Medallions
By now you might have noticed that the word “medallion” has been mentioned a few times. But what constitutes a medallion, and why would you choose to invest in medallions over Krugerrands? To properly explain the difference, we first need to look at Krugerrands.
Undeniably beautiful and close to the hearts of all South Africans, Krugerrands might not be the best choice if you are looking at investing in Gold bullion. What many people might not know is that Krugerrands carry legal tender status in South Africa. This means that while you own the value of the Gold in the Krugerrand, you do not own the coin itself. The same as the coins and banknotes in your wallet, they remain the property of the government.
This also presents some problems if you were planning on moving them across borders. As a South African citizen, you are not allowed to take them out of the country without prior arrangement with SARS. Even then you are legally only allowed to take R30 000 worth of Krugerrands out of the country, which these days does not even amount to a single 1 Ounce coin.
Another problem lies in a Krugerrand’s desirability. There are many opportunistic sellers who would have you believe that Krugerrands are worth more because of their collectible value, and in some cases hike up the price by up to 145% of the spot price of Gold.
Sadly, when selling your Krugerrands you will soon notice that they are worth no more than the value of the Gold they contain. No matter the date on the Krugerrand, it has no numismatic value beyond its Gold content. Yes, you might be able to sell it at a better price to other collectors, but chances are you will lose money on them if you paid a premium for its perceived collector’s value.
Medallions, on the other hand, offer numerous advantages when compared to Krugerrands. A medallion might look like a coin but carries no legal tender status. They are classified as personal items, the same as jewellery or collector coins. This means that it is free from the restrictions applied to Krugerrands when taking them out of the country and you can take up to R1 million worth of medallions with you when moving across borders as per the SARS personal item allotment.
At this point, it is important to reiterate that a coin or medallion’s value is determined by its bullion content. If you are selling, you will be paid the spot price for Gold whether you are selling a Krugerrand or a medallion.
While we have largely focused on Gold Krugerrands, the same holds true for Silver and Platinum Krugerrands, as well as other renowned coins such as the American Silver Eagle and Canadian Silver Maple Leaf. While lovely to look at, you might pay a premium because of their status yet will only receive spot price when selling them.
4. What are the benefits of investing in physical bullion?
Physical bullion, in some form or another, has been used as a currency for thousands of years. It has been considered as prized possessions century after century, a true testament to its enduring value. Today we realise the worth of Gold, Silver and Platinum more than ever. Their use in electronics and green technology has far surpassed what our forefathers could ever imagine, changing them from simple shiny baubles into essential industrial commodities with everyday practical applications.
The value of physical bullion is not dictated by geographical location, or the value of a local currency. Precious metals are traded all over the world, and as such can be sold to reputable dealers for roughly the same price regardless of which country you are in.
The price of bullion is also defined in US Dollar, the world’s most traded and primary reserve currency. This means that by buying bullion you are effectively moving your money out of more volatile Fiat currencies such as the South African Rand and moving it into a Dollar-based hedge.
Another factor to consider is that the price of Gold has remained the same relative to household goods for thousands of years. A study done by Campbell Harvey from Duke University showed that the value of Gold in the coins used to pay Roman Centurions 2000 years ago was roughly equivalent to the Salary of a modern-day US Army Captain. All of this clearly illustrates why physical bullion is considered an excellent hedge against inflation and currency devaluation.
5. The best is yet to come for Silver and Platinum.
Diversifying your portfolio is important if you are investing in bullion. Some metals might experience a dip, while others could soar. Having a healthy mix of Gold, Silver and Platinum is crucial. However, with the world moving towards carbon neutrality and numerous countries announcing plans for the ban of future sales of internal combustion engine cars, the demand for Silver and Platinum is poised to soar.
Already we can see an increase in the demand for Silver and Platinum in the automotive sector as electric vehicles become more prominent. This trend is set to continue with an increased demand for solar power, wind turbines, and hydrogen fuel cells for long haul freight vehicles. All of these require increased amounts of Silver and Platinum, driving the demand to new heights, with the prices of these commodities sure to follow.
Contact us today if you are interested in diversifying your wealth into bullion, and find out how we can help you build lasting, generational wealth through physical bullion.