Gold is gaining demand in the country, especially from rich Kenyans amid the ongoing shilling depreciation against the dollar and global inflation, increasing returns to investors.
The metal is traded in Kenya as an exchange-traded fund (ETF) at the Nairobi Securities Exchange (NSE).
It was listed by South Africa’s Absa Bank Limited in 2017 as a stock to simplify the process of uptake, create its availability on the already existing platform and keep the costs of acquiring ETF the same as for equities.
“The advantage of ETFs is they provide diversified investment, traceability, and the investor is also protected because they are fully hedged underlying assets, and the low cost of accessing now,” said Tito Namu, senior equity sales trader at Absa Securities Limited.
An ETF is a basket of stocks or a single unit commodity such as gold, silver, or oil where the investor derives the value of that commodity or index by buying and selling, meaning it’s not traded as physical gold.
It is traded in the same manner as normal shares of companies and its price is based on the Kenya shilling equivalent of the prevailing international market price of gold in US dollars.
Since it’s listed like other stocks such as Safaricom, investors require a stockbroker and Central Depository System account.
At NSE, each NewGold security is equivalent to about 1/100th of an ounce of gold, which is held in a secure depository on behalf of investors and is backed by physical gold.
The ETF tracks the price of the metal as listed on the London Metal Exchange.
The ETF is sold in minimum lots of 100 shares (units) equivalent to one ounce of gold, and incremental of 100 units.
This means if gold is trading at $1,700, the bank does a quick conversion multiplying by the spot rate, let’s say, 122.68 to get the Kenyan price.
This is then multiplied by the minimum 100 shares.
“Gold is priced in dollars. However, due to the volatility of the metal pricing, it is a floating rate. We look at the dollar price of gold, then do a quick conversion into Kenya shilling prices in their spot rate. Therefore, an investor will be getting one for one — the same price of the metal,” he said.
“The additional costs are brokerage costs and statutory levies that are charged exchange.”
So what is the difference between buying physical gold bars and Gold ETF?
“The difference is, in Kenya for you to hold physical gold, you require a licence. That is the first hurdle. Secondly, storage and securing gold is quite an expensive affair,” says Mr Namu.
“On the ETF side, you have the advantage of a fully secured item, as the gold bars are held in a vault in London. They are insured. And you generally just avoid that entire course.”
He says physical gold is delivered on buying a certain threshold of ETF, but rarely do people ask for it due to expenses in security and insurance.
“There is a certain quantum that you must buy for you to get the physical delivery. However, that mainly happens in theory and people rarely ever ask for physical delivery, for the reasons,” says Mr Namu.
Traditionally, gold was used as a hedge against inflation and currency movements, and considered a safe asset at the time of geopolitical risks such as wars. Most individuals hold gold to about 2.5 per cent of their portfolio.
Gold ETFs were introduced in Kenya with the listing of 400,000 units. The price growth and uptake were slow, however, there has been increased buying since 2020, with high interest from high-net-worth individuals and local and offshore fund managers.
As a result, the price of ETF at NSE has increased from Sh1,470 in January 2020 to hit an all-time high of Sh2,140 on December 1.
“Moving from 2017 until early 2020, we didn’t have much movement in price or uptake and only sold 200,000 units that whole period. Then suddenly we started getting more buying from fund managers and high net worth individuals asking to buy,” says Mr Namu.
“Fund managers have been looking at fixed income securities and good deals around the equities market but into the sort of the environment we are going into, the key thing will be hedging their portfolio from shocks expected looking ahead.”
The high price, however, has seen the asset be a reserve for the rich.
“Today’s (December 1) price is Sh2,140 per unit and 100 would be your minimum amount to buy now. Obviously, this is a price that might be out of reach for most Kenyans.”
Just like other investment assets, the returns are based on buying low and selling high. Investors also gain from foreign exchange fluctuations and capital gains of the metal.
“Gold is non-yielding meaning holding in your portfolio you are holding a metal and hoping it goes up and trade on its volatility. However, there is an added advantage to buying the new gold ETF. Since the new gold ETF is pegged to the Kenya shillings if there is any price movement behind the Kenya shilling you stand to gain.’’
The currency fluctuations require investors to lock in prices within a short time to buy at the best price.
“The price is floating. Therefore, without locking the price within three minutes or so, the old price is no longer valid. We use about two minutes as the standard to give clients time to call back and lock in the price.”