With gold trading above US$4,100 an ounce and South African investors seeing increasingly large rand values attached to a single 1oz Krugerrand, attention is understandably focused on how much further the gold price can run.
But for buyers of physical gold, another number deserves equal scrutiny: the gap between what they pay for a coin and what they can sell it for.
For South Africans, the equation has an additional moving part: the rand. Because gold is priced internationally in dollars, changes in both the bullion price and the exchange rate feed into the local rand price of a Krugerrand.
That gap between the purchase and resale price is one of the most overlooked aspects of physical gold ownership.
It is the price at which your Krugerrand can be sold again.
For anyone buying physical gold, that can be every bit as important as the price paid to acquire it.
The number investors often overlook
A Krugerrand does not trade at the spot gold price.
Its price reflects the underlying value of the gold, together with the premium charged to manufacture, distribute and sell the physical coin. Dealers then quote a price at which they will sell the coin and another at which they are prepared to buy it back.
The difference is the spread.
In a market where the underlying asset can move substantially, investors who focus only on the advertised purchase price can miss an important part of the economics.
A dealer offering a Krugerrand at a slightly lower purchase price is not necessarily offering the cheapest overall transaction if the price at which that dealer will later buy the coin back is materially lower.
The more useful comparison is therefore not simply the price of buying a Krugerrand. It is the cost of the full round trip.
If a coin were bought and immediately resold while the underlying gold price and rand exchange rate remained unchanged, how much of the purchase price would be recovered?
That difference is the hurdle the gold price effectively has to overcome before the investor moves into positive territory.
High gold prices make the spread more relevant, not less
This matters particularly when an asset has already experienced a powerful run.
Periods of sharply rising gold prices tend to attract greater investor attention. They also make the absolute rand amounts involved much larger.
A percentage point that may once have appeared insignificant can translate into a meaningful amount of money on a one-ounce coin.
The same applies when selling.
Investors who have held Krugerrands for several years may look at today’s gold price and assume that it closely reflects what they will receive for their coins. In reality, the amount realised will depend on the buy-back price available to them at that point.
The Krugerrand itself is highly established. First minted in 1967, it has developed a deep international market as a physical bullion coin.
That liquidity, however, should not be confused with identical pricing across dealers.
The underlying gold may be the same. The transaction costs need not be.
The real price is a two-way price
This is where pricing transparency becomes important.
At ISA Gold, the current model is based on a R1,000 spread between the buy and sell price of a 1oz Krugerrand. The actual prices on either side naturally move throughout the day as the gold price and exchange rate change.
The R1,000 itself is less important than the principle it illustrates.
An investor should be able to see both sides of the market.
Knowing what a dealer will charge to sell you a coin without knowing what that dealer is prepared to pay to buy it back provides only half of the information needed to understand the transaction.
This distinction becomes even more relevant for investors who do not necessarily intend to hold indefinitely.
Physical gold is often viewed as a long-term store of value, but ownership and trading are not mutually exclusive. Some investors will hold through different market cycles. Others may sell into strength, buy again after a decline or adjust the size of their holdings over time.
For those investors, the cost of moving in and out matters.
Look beyond the gold price
When gold is making headlines, it is tempting to reduce the investment decision to a single question: will the price go higher?
Nobody can answer that with certainty.
There is, however, another part of the equation over which investors have considerably more control: understanding what they are paying.
Two people can buy exposure to exactly the same underlying ounce of gold and experience different outcomes because of the price they paid to enter and the price available when they exited.
That is why the headline gold price is only the starting point.
For a physical-gold investor, the more revealing number may be the gap between buying and selling.
Gold tells you what the metal is worth. The spread tells you what the transaction costs you.
By Aziz Moti, Chief Operations Officer, ISA Gold
