In South Africa, mining companies come with major management, labour and cost inflation concerns, and for people simply wanting to reference the commodity price without the political complexity there are alternatives to equities.
The irony of South Africa is that we have many of the valuable commodities investors want in their portfolio, but mined by companies they don’t want. South African companies are bedevilled with labour and productivity problems.
The alternative is holding physical gold, platinum or maize in any one of three product categories that invest only in the commodity you want: exchange traded products issued on the JSE; commodity futures listed on Safex (SA Futures Exchange); and warrants.
Various investment banks offer these products. Standard Bank, for instance, has brought out a suite of exchange traded notes (ETNs) including a selection which track the value of various commodity futures such as gold, silver, platinum and the palladium group metals, as well as one that tracks a basket of commodities.
Direct investment
Absa’s New Gold exchange traded future (ETF) is the oldest and has the largest market capitalisation. ETFs are fully collateralised (they represent a direct investment in underlying securities that make up a pre-determined index) whereas ETNs are products where you effectively lend money to a bank, so the risk is not the commodity but the financial strength of the issuer, and the performance of the product is linked to an underlying security, basket of securities, or index.
The ETN ‘promise’ is dependent on the financial strength of its issuer (guarantor) to have the money available when you want to sell your investment, and the bank is the market maker of its ETNs.
RMB commodities trader, Simone Blasé says: “The popularity of gold as an investment asset has taken off in recent times especially in light of the global financial crisis, the Eurozone debt crisis, and rising global uncertainty.
“Investors who seek to invest in gold purely to benefit from price movements typically utilise gold futures and ETFs to invest in gold, as well as the stock of gold mining companies. On the other hand, investors who seek to own gold to protect and preserve their wealth typically invest in physical gold, which they can possess and control.
“However, if the investor is investing in gold in a currency other than dollars, the exchange rate effect can distort the price performance of gold. The investor will not experience the dollar performance of gold because his domestic currency has either amplified or dampened the gains.
The currency impact affects South African investors as they are only allowed to invest in gold in rands – this will inhibit their ability to experience returns from gold as recorded globally in dollars,” says Blasé.
Charles Leishman, Standard Bank chief dealer: Commodities, says: “The beauty of ETNs is that if you have a view on a commodity you can buy into it directly, just as you could a normal share. This enables you to invest directly in the commodity without all the complications of management and high input costs that come with purchasing a South African mining company.“
Standard Bank also makes markets in futures relating to gold, silver, platinum, copper and WTI oil. While ETNs and ETFs are aimed at the retail investor, futures require far larger investment.
Investing in futures
Futures are more risky because you may have to pay in ‘margin’ if the value falls away from your contract price. They are therefore for the more sophisticated retail client who wants to be more actively involved in trading and keeps a constant eye on the contract value.
Standard Bank also offers warrants on oil, gold and platinum. There is less risk to these as one simply pays a premium with no margin call.
“Private investors tend to look at these three products as complicated or risky. In fact, they are no more complex than buying an ordinary stock,” adds Leishman.
RMB has pioneered two gold investment products for the South African market: Quanto futures on gold, listed on Safex, and Krugerrand purchase, trading and storage, available through FNB’s Share Investing platform.
Quanto futures are rand-denominated commodity investment products that deliver the same return as a pure dollar-denominated commodity investment. Therefore, investors will be immune to the effect of USD/ZAR exchange rate fluctuations, allowing them to invest and derive a payoff purely from the dollar price performance of the underlying commodity.
This means through this vehicle investors have the ability to gain a pure gold price exposure without any contamination of the exchange rate. The futures are listed on Safex and therefore give rise to no credit risk.