In the 33rd article in our Scrapbook series, Alide Dasnois looks at Krugerrand gold coins
WHAT IS A KRUGERRAND?
If you have always had a secret yearning to own gold, Krugerrands might be just the investment for you.
Krugerrands are the only legal way, other than jewellery or medals, for South Africans to own gold. Unlike investors in other countries, South Africans are not allowed to own gold bars or other forms of unwrought gold, nor can they search for gold in the ground.
Krugerrands are gold coins which contain one ounce, half an ounce, a quarter of an ounce or one tenth of an ounce of pure gold (24 carat). The gold is mixed with a small amount of copper to make it more durable so the coin weighs slightly more than the weight of its gold content.
The head of Paul Kruger, president of the South African Republic at the turn of the century, appears on one side of the coin and the springbok on the other.
The coins are struck by the South African Mint, which also produces South Africa's other coins and bank notes.
PROOF COINS AND OTHER COINS
The first one ounce Krugerrand was struck in 1967 as a limited edition (proof) coin, aimed at collectors. Then in 1970, in a bid to make gold more accessible to investors, the Chamber of Mines, which represents the mining industry, arranged for the Mint to mass-produce a second type of Krugerrand.
Since then more than 46 million ounces of gold have been sold in Krugerrands. The mass-produced coin was an instant hit in the troubled 1970s, when high inflation and political turmoil sent investors scurrying into the safe haven of gold.
Sales peaked in the late 1970s as the price of gold soared, with six million ounces being sold in 1978.
The higher gold price meant that many people could no longer afford to buy Krugerrands and to meet demand for gold from smaller investors the authorities agreed to strike the smaller half-ounce, quarter-ounce and one tenth-ounce coins in 1980.
A limited number of proof coins are still produced and sold by the Mint each year. Proof coins look just like other Krugerrands except that the proof coin is shinier and the designs on each side are lighter in colour because the production process is slightly different.
LEGAL TENDER
Krugerrands, like the coins and banknotes you use every day, are "legal tender". This means that they are part of the country's currency and you are entitled to use them anywhere you like.
In theory, if you want to pay with a Krugerrand next time you buy groceries or shoes, the supermarket or shoe shop is obliged to accept it. But in practice of course this does not happen and people who buy Krugerrands use them as a store of value rather than as a means of payment.
WHO SHOULD INVEST
Anyone who is optimistic about the gold price and who thinks that gold is an appropriate asset to hold as protection against inflation or the erosion of the value of other assets.
PRICE
If you buy a Krugerrand, you should know that the future of your investment depends mostly on decisions made by a handful of men in London.
Though South Africa is the world's biggest gold producer by a long way, South Africa's mines do not control the world price of gold.
Gold prices are quoted on markets across the world but most markets take their cue from London, where two gold "fixings" are held daily during the week, one in the morning and one in the afternoon.
At these "fixings" a small group of powerful gold traders meets and each, having studied movements on the markets, estimates the price at which demand will meet supply for the day.
The "fixing" price is the average of all their estimates. Tradition has it that each trader sits at a table with a small British flag in front of him and once he has decided on a price, he puts the flag on its side. Once all the flags are on their sides, the "fixing" can be completed and the price per ounce of gold broadcast across the world.
Though the fixing is in London, the price is set in US dollars like the price of most commodities on international markets.
This means that demand for Krugerrands in South Africa depends partly on the rand-dollar exchange rate: the lower the rand slips against the dollar, the higher the price of gold in rands and the more expensive the Krugerrand becomes in rands.
TRADING IN KRUGERRANDS
New Krugerrands are put on the market by the Rand Refinery, a gold refining company owned by the gold mines.
By law, not more than 6 000 ounces can be marketed each week and in current conditions of low demand, weeks go by without any new coins hitting the market.
Dealers or banks must tender for supplies of coins every Friday and the Rand Refinery will not accept tenders which are not at least three percent higher than the prevailing gold price at the London fixings that day.
Once the coins are on the market, price depends on supply and demand. In 1970 Krugerrands sold for R27. In December 1996, the Krugerrand was selling for R1 820.
At the moment Krugerrand prices are about R1 800 for the one ounce coin, R920 for the half-ounce, R470 for the quarter-ounce and R190 for the one-tenth ounce.
HOW TO BUY A KRUGERRAND
You can buy a Krugerrand through banks or coin dealers which have been approved by the Reserve Bank. (You can get a list from the Rand Refinery or the Reserve Bank.)
You can negotiate the price with the dealer or bank. No tax is payable on profits from Krugerrand sales.
RISKS
The risk of investing in Krugerrands is that you will lose money if the price falls.
Over time the price has risen but there have been sharp fluctuations in line with gold prices.
If you had bought in March 1990 you would have paid about R1 200 for the one ounce coin; today you could sell it at a profit for about R1 800 but if for some reason you had been forced to sell in March 1991, you would have been paid only about R980. Only invest money you will not need urgently.