Catch this insight by Intellidex on the Krugerrands Custodial Certificates The fund provides a way to own Krugerrands but without the hassle and security risk of the physical coins. Krugerrand CC is suitable for most investors when held in small quantities as a portfolio diversifier. However, it increases risk when held in larger proportions given that it is an investment in a single commodity.
Intellidex insight: One of three listed gold ETFs, the Krugerrand CC’s structure is a bit peculiar, which makes it the cheapest gold ETF by a mile. The fund provides a way to own Krugerrands but without the hassle and security risk of the physical coins.Each ETF instrument represents a certificate for one full ounce Krugerrand. A custodian holds them on your behalf – FirstRand does not physically hold the underlying assets but has entered into an agreement with a custodian who holds the coins and will deliver them upon request by FirstRand. The certificates are then tradeable on the JSE, so in effect, the ETF allows for Krugerrands to be traded in a visible public market. However, the high price of each custodial certificate is an impediment to
common retail investors, a reason why its trading volumes are relatively low.
Technically the fund is physically settled – in other words, at some point in the future, you get your physical Krugerrands (in 2024 according to the fund rules). But in practice, that would never happen as the ETF instruments are meant to be traded for cash. When the fund matures in 2024, we expect it would be rolled over into a new fund with similar terms. However, it is possible for large investors holding over 1,000 certificates to arrange for physical delivery earlier.
The most important attribute of gold as part of your portfolio is its excellent diversification benefits. However, its allocation in the portfolio can be increased tactically if risks and uncertainty in the near-term outlook are high.
The fund does not charge annual management fees. However, it charges a creation fee of up to 15 basis points on all new issues of Krugerrand Custodial Certificates and a redemption fee of up to 15 basis points. So, the creation fee is similar to an upfront storage fee until the fund matures in 2024. This makes the fund the cheapest among the family of gold ETFs.
Fund description: The fund holds Krugerrand gold coins and as such its performance mimics their price.
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Krugerrands Custodial Certificates
Suitability: Krugerrand CC is suitable for most investors when held in small quantities as a portfolio diversifier. However, it increases risk when held in larger proportions given that it is an investment in a single commodity.
Net asset value performance to end-June 2020 (annualised for periods greater than one year)
Fundamentals: Usually, Krugerrands trade at a premium to gold bullion. The difference is attributed to a manufacturing premium, aesthetic appeal and scarcity of Krugerrands compared with gold bullion.
Proponents of gold as an investment vehicle point to its historical safe-haven status and its scarcity as appealing factors, with no single monetary authority having the power to manipulate the supply of gold indefinitely. But its limited industrial use curbs demand. Interestingly, gold’s safe haven status had been increasingly under question but it has performed strongly since the outbreak of Covid-19, reinforcing that status. The yellow metal has is reaching fresh highs even after equities recouped most of their Covid-induced loses, decoupling from its traditional strong negative correlation with equities. This should serve as a warning: investors still have the jitters, justifiably so given the precarious state of most economies in the face of the pandemic.
According to the World Gold Council, 51% of demand in 2018 came from jewellery manufacturing while 42% was bought by central banks or for investment/speculative purposes. Only 8% was bought for industrial use.
Renowned tycoon investor Warren Buffett is a strong critic of gold as an investment, saying: “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
Based on its historical price performance relative to other asset classes, gold is viewed as a risk diversifier to a portfolio containing other asset classes such as equities, bonds and other commodities (see correlation matrix below). Empirical evidence shows that it improves the risk-adjusted return of a diversified portfolio. Traditionally, gold has low correlation with the universe of other asset classes. It tends to do well when uncertainty is high in the market, as is the case now due to Covid19, which is usually when the other asset classes are under pressure.
The following correlation matrix based on 10 years of data to end-June shows that gold is the least correlated with other assets, supporting its strong diversifier attribute.
Correlation matrix: gold versus other asset classes
Note: The lower the correlation the better the diversification benefits. The correlation ranges from -1 (strong negative correlation) to +1 (strong correlation).
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Krugerrands Custodial Certificates
Background: Exchange-traded funds (ETFs)
Exchange-traded funds (ETFs) are passively managed investment funds that track the performance of a basket of pre-determined assets. They are traded the same way as shares and the main difference is that whereas one share gives exposure to one company, an ETF gives exposure to numerous companies in a single transaction. ETFs can be traded through your broker in the same way as shares, say, on the EasyEquities platform. In addition, they qualify for the tax-free savings account, where both capital and income gains accumulate tax free.
Benefits of ETFs
- Gain instant exposure to various underlying shares or bonds in one transaction
- They diversify risk because a single ETF holds various shares
- They are cost-effective
- They are liquid – it is usually easy to find a buyer or seller and they trade just like shares
- High transparency through daily published index constituents
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