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While we will continue to specialise in making available international silver bullion products to the South African silver investor, we have come to an important realisation concerning the place of international gold bullion in one’s precious metals portfolio.
We have always advocated that prudent precious metal investors should have both physical silver and gold in their portfolio. However, I believe that silver is a superior commodity to gold, for a number of reasons (perhaps this may be the topic of a future blog). And since the fundamentals for upward price drivers are more solid for silver than they are for gold, like Mike Maloney, I advocate a ratio of 80/20; that is, 80% silver and 20% gold. This ratio is based on the current gold/silver ratio, which is simply the number of silver ounces it takes to purchase a single ounce of gold. The current gold/silver ratio is around 70/1. (If this ratio drops to 40/1, I will adjust my personal holding to 50% gold, and 50% silver.)
In South Africa, the ideal way of investing in gold bullion is Krugerrands. While there are a number of pros for owning gold in the form of Krugerrands (recognisability, history, ease of acquisition, legal tender status, and so on), the immediate and chief advantage is undoubtedly the price. Simply stated, it is the cheapest available gold bullion product on the South African market. This is due mainly to low production costs by the Rand Refinery, and VAT free status. No other gold product, whether jewellery, numismatic/collectible coins, or gold bullion bars is VAT except. From this perspective, it seems it may be silly to purchase gold in any other form except a Krugerrand, right? Well, not necessarily!
While price considerations are undoubtedly very important, there are other factors that should influence your decision pertaining to what form of gold bullion you should purchase. Stated in the form of a question; what are the advantages of purchasing international bullion coins instead of Krugerrands? There are three that I think are important to be aware of.
The first relates the advantage of taking the gold out of the country in the case of a holiday or emigration. The current regulation, as per the South African Reserve Bank’s website, is as follows: Banks may allow the export of Krugerrand coins or the equivalent in fractional Krugerrand coins up to an amount of R30 000 as gifts by residents to non-residents (www.resbank.co.za). Further, South African residents may not export any Kruger Rand coins from South Africa without the prior approval of SARB (http://www.sars.gov.za). The success rate of the process, or what allowances are permitted seem to vary from case to case.
However, currently, there is no legislation preventing owners taking gold bullion coins issued by other countries (legal tender) out of South Africa. The only rule is that it would have to be below R1 million in value, or, part of the R1 million yearly allowance. As an emigrant, you are allowed to take up to ZAR4 million out of South Africa, or up to ZAR8 million per family unit. In addition to this allowance, you can also take personal goods to the value of as much as ZAR1 million. Travel between South Africa and your new home country is also allowed for, by the discretionary travel allowance, which amounts to ZAR1 million per adult per annum (www.moneytransfersouthafrica.org).
So, in the case of leaving the country, therefore, it seems more practical to own international gold bullion that is easily transferrable and do not require long administrative procedures.
Secondly, international gold bullion coins are the cheapest way to own gold that is easily ‘exportable’. Our international gold bullion coins are currently priced about 17.5% above the standard bullion gold Krugerrand. The cheapest gold coins that may be classified as a collectible/numismatic coin that is not considered to part of the R30,000.00 export restriction, is the proof Krugerrand (minted by the South African Mint). The current price of a 1 oz proof Krugerrand is just over R31,000.00, which is just under 70% above the price of a standard gold bullion Krugerrand. While it is true that I could have chosen another older gold coin that may be cheaper on the secondary market, I chose a new proof Krugerrand in order to compare apples with apples. It seems that it is more financially prudent to diversify into international gold bullion coins, than numismatic/collectible or proof South African coins. This is the case at least from the perspective of paying the lowest premium per oz of gold that is not under the current export restriction.
Thirdly, VAT should not be seen as a deterrent, since both gold Krugerrands and international bullion coins have a market related price within the South African bullion investment market. It is this market related price that is important, not the pricing composition. A Krugerrand is bought VAT free, but when it is sold, VAT is not recovered. Inversely, if an international gold bullion coin is bought with VAT, it is then recovered when it is sold. (For a more detailed explanation of this point, see a previous blog here: https://www.silver-sphere.co.za/vat-not-seen-problem/).
In conclusion, I wanted to state categorically that I am not advocating abandoning purchasing Krugerrands. Rather, it is my personal opinion that it makes a great deal of practical sense to diversify into international gold bullion coins, especially if emigrating or taking gold out of the country is within your future realm of possibilities.