How to invest in gold

Our Kenyan market is still in its toddler years; our beloved exchange traded fund is linked only to gold. PHOTO | FILE | NATION MEDIA GROUP

What you need to know:

  • I pray that Kenyan investors will have the purchasing confidence, sense of maturity and risk appetite to diversify their investment portfolios.
  • The price of the share is determined by international market forces and other complex algorithmic factors. The share price is usually lower than the market price of the gold.

Have you seen that movie "Molly’s Game"? I saw it on a loose afternoon last December. (I know, I know, I am late to the party.)

The movie is about a savant chick – Molly – who ran one of the world’s most exclusive high-stakes poker games.

They were underground games, and the chaps who sat around her table were the boys who own America, including Russian mobsters.

The movie is based on the true story of Molly Bloom; it was adapted as a film from her autobiography. (The bait: Idris Elba plays her benevolent lawyer, Kevin Costner her overbearing dad.)

Anyway, there is a scene where the FBI break down Molly’s door in the middle of the night. The night is as dark as their souls.

Molly springs out of bed. The feds pin her against the wall and tell her she is being arrested for running an illegal gambling operation. Boom!

LEGAL TRADE

I always imagined that this is how our Kenya police – sexy as they are – will burst through your front door when they learn you are trading in gold.

I mean, this is how it goes down on TV with those syndicates. Remember that story from the news last year about the abandoned maisonette in Kileleshwa holding a stash of fake gold bars?

That will not happen to you, though. You will not be chewing your nails at home waiting for the OCD to raid your quarters.

Good news is, you can legitimately trade gold at the Nairobi Securities Exchange. You will trade it as normal shares in regulated and taxed transactions. Nothing shady.

Here is some useful information to slip under your belt: the counter at the Nairobi Securities Exchange (NSE) that trades in gold was launched in August 2017.

It does not trade gold per-se, at least not the actual gold bars. The gold is traded under a financial instrument known as an exchange traded fund (ETF). This particular ETF is listed as ‘NewGold ETF’.

DIVERSIFY PORTFOLIO

You will see it when you score the local dailies for share prices. It sits at the bottom of the list.

In a lonely category of its own, because there are no other ETFs currently trading at the bourse. This ETF is the first of its kind in Eastern Africa.

Now that we are here, I must mention that there are various financial instruments created for investors to put their money into oil, gas, agricultural products and precious metals such as gold and diamonds. ETFs are one of such instruments.

There are also futures and options. Our stock exchange has not yet matured to this level of trading such derivatives.

The NewGold ETF is the first and only ETF at the NSE. I pray I shall see more of such complex derivatives trading in our stock exchange, during my lifetime.

I pray that Kenyan investors will have the purchasing confidence, sense of maturity and risk appetite to diversify their investment portfolios into these instruments.

ETF SHARE

How the ETFs work: an ETF is linked to an underlying asset. In our case here, the asset is physical gold bullions sitting in a vault in London.

The establishment who owns the gold creates the ETF then divides the ETF into shares. These shares are floated to potential investors to put their money in as shareholders. They trade like normal shares at the NSE.

In more advanced markets like the US, an ETF is a basket of broad assets classes – bonds, shares, foreign currency and physical commodities.

Buying a share is buying into a little bit of everything in that basket. Our Kenyan market is still in its toddler years; our beloved ETF is linked only to gold.

The price of the ETF share is not the price of the gold, though.

UNFAMILIAR GROUND

The price of the share is determined by international market forces and other complex algorithmic factors. The share price is usually lower than the market price of the gold.

Kenyan investors have been shy to dip their toes into this instrument despite the relative stability of the ETF price.

I suppose it is the unfamiliarity, plus the high initial investment. It launched on August 17, 2017 at Sh1,275. By December 11, 2018, it had dropped to Sh1,165.

It inched up to close on October 23, 2019 at Sh1,495. On November 21, 2019, it held steady to the end of the year at Sh1,470.

Bett Kinyatti is a certified accountant with ACCA and a former financial auditor