BUSINESS/ECONOMY

A treasured coin’s lost lustre

ROSS LAVER August 19 1985
BUSINESS/ECONOMY

A treasured coin’s lost lustre

ROSS LAVER August 19 1985

A treasured coin’s lost lustre

BUSINESS/ECONOMY

When Canada’s Maple Leaf coin entered the world bullion market in 1979, it appeared as a David opposite the Goliath of South Africa’s well-established Krugerrand. But it gradually caught on with investors, and last year it accounted for a healthy 27 per cent of global sales of newly minted gold coins. Now, sales of the one-ounce Maple Leaf are increasing again because of growing concern

among investors about racial unrest in South Africa —the non-Communist world’s largest gold producer—and the possibility of a ban on imports of the Krugerrand to the United States. Said Walter Perschke, president of Numisco Rare Coins Ltd. in Chicago: “We are getting to the point where it is hard to find a buyer for Krugerrands. Our retail sales are running nine-to-one in favor of the Maple Leaf.”

To make matters worse for the Krugerrand, last week Deak-Perera, the largest money trader in the United States and the leading U.S. retailer of the South African coin, announced that it was suspending sales of the Krugerrand. The decision was “obviously in response to the political problems in South Africa,” said Lars Hansson, the

company’s West Coast regional manager. Moreover, protesters have staged sitins and demonstrations at the currency trader’s offices since last November, charging that sales of the coin supported apartheid, South Africa’s policy of racial segregation. Public pressure has also convinced several other major U.S. financial institutions to stop handling the coin in recent years.

Like the Maple Leaf coin, Canadian gold-mining stocks are also benefiting

from the most serious wave of black unrest in South Africa in 30 years. On July 22, the day after South Africa’s white rulers imposed a state of emergency in large areas of the country, the Toronto Stock Exchange gold index surged 95 points to 4,087. It later rose to nearly 4,400 points before settling at 4,235 by the end of last week as investors took profits. And although some analysts said that recent gains by the gold stocks overvalued many of them, others predicted that the speculative runup will resume if South Africa’s political violence continues. Declared senior mining analyst Thomas Komlos of Gardiner, Watson Ltd. in Toronto: “If there is a decision by a large number of investors to get out of South African gold stocks, the value of Canadian shares is

going to shoot through the roof.”

The decline in popularity of South African gold coins and mining stocks does not reflect investor objections to racial segregation. Indeed, the same investors who are now selling South African gold shares were once attracted to them partly because that country’s racial policies ensured an abundant supply of cheap labor. That led to higher profits for South African mining companies and attractive dividends for sharehold-

ers, both foreign and domestic. Now, investors are fearful that spreading racial violence and a strike threatened by black mineworkers for later this month could create disruptions in gold shipments from South Africa. Said Peter Cavelti, president of Guardian Trustco International Inc. of Toronto and adviser to BGR Precious Metals Inc., an investment fund that has recently reduced its interests in South African gold producers: “We have a mandate to make money for our clients, not to worry about social or political matters.”

For their part, owners of Krugerrand gold coins are concerned about a plan to outlaw imports of the 22-karat coins to the United States as one of a series of trade sanctions against South Africa. The proposed restrictions, which the

U.S. House of Representatives passed earlier this month and which the Senate will likely approve next month, would still allow investors to buy and sell Krugerrands that are already in the country. But investors say that a ban on the importation of new coins would threaten one of the chief attractions of Kruger-

rands—the ease with which they can be bought and sold—thus lowering the coins’ resale value.

Said Jeffrey Nichols, president of American Precious Metals Advisers: “The growing fear is that banning imports of the Krugerrand in the United States or elsewhere will severely compromise its liquidity.”

South Africa’s imposition of emergency powers on July 21 to counter the unrest has also hurt Krugerrand sales in Canada. Ernest Watson, owner of Albern Coins Ltd. in Calgary, said that a year ago his firm sold three times as many Krugerrand coins as Maple Leafs. Now, however, the numbers are reversed, even though the Krugerrand’s distributors have lowered their customary markup by $5. Normally both coins sell at a premium of between four and six per cent over the current price for gold bullion, which now involves a markup of about $17 to $26 per coin. Said Watson: “Even with the lower price people are scared to buy Krugerrands because of all the bad publicity about South Africa. Personally, I feel that gold is gold. At some point down the line this will all level out and the price will be the same.”

Still, as part of its new 12point package of trade and political restrictions against South Africa, Ottawa has pledged to discourage Canadian banks from selling South African gold coins. And last fall the Bank of Nova Scotia announced that it would no longer purchase Krugerrands from the South African Chamber of Mines. The bank said its decision was due to “absolute repugnance of racism in any form.”

Both the South African goldmining industry and the country’s financial policymakers insist that they are not alarmed by

current trends. Worldwide sales of the Krugerrand totalled only 685,228 troy ounces during the first five months of 1985, a 20-per-cent drop from the same period a year earlier. In June they dropped to 9,000 ounces, by far the worst month since production began in 1967, and Intergold, the marketing arm of South Africa’s gold producers, stopped

publishing monthly figures. But despite the Krugerrand’s poor showing, South African officials say that there is still a strong market for gold, which accounts for more than 40 per cent of the country’s total exports. Said Gerhard de Kock, governor of the South African Reserve Bank: “What matters to us is

that we sell all the gold we need to at the highest price possible. How the gold is sold, bullion or coin, is largely irrelevant.”

In fact, several South African gold producers told Maclean ’s last week that their main concern is a U.S. congressional proposal to mint Liberty gold coins by using as much as two million ounces a

year from the U.S. Treasury’s 250-million-troy-ounce stockpile of gold bullion. The South Africans said that this would lower the already depressed gold price by increasing the total supply of gold.

At the same time, Royal Canadian Mint officials in Ottawa say that they are delighted by the Maple Leaf’s sales,

which by June had caught up with those of the Krugerrand throughout North America. Jack Julien, the mint’s director of bullion and refinery sales, said that at current rates the mint will sell as many as 1.4 million ounces of gold coins this year compared to about one million ounces in 1984. Added Julien: “Coin buyers

worldwide are hedging their portfolios by buying more Maple Leafs.” Moreover, South Africa’s troubles are not the only factor contributing to improved sales, he said. Buyers are attracted by the purity of the Maple Leaf, which is .999 parts pure gold compared to .916 for the Krugerrand. (Both coins, however, contain one full troy ounce of gold, equivalent to 1.0909 imperial ounces.)

Spokesmen for both the mint and Canada’s major gold producers say they will have no difficulty filling the anticipated demand for Maple Leafs. Annual gold production in Canada is about 2.2 million ounces, and if necessary the mint can also draw on the Bank of Canada’s official reserves of about 20 million ounces. Said Henry Brehaut, president of Dome Mines Ltd. of Toronto and current president of the Ontario Mining Association: “The real test will come if there is a disruption of supply from South Africa, which should have an effect on prices.”

Indeed, the big gainers in the gold market in coming months will be those who accurately guess the outcome of the shifting political fortunes of South Africa. But clearly, no investor can accurately predict the nation’s future. Said Richard McCloskey, a Toronto-based director of the Gold Institute, an international association of about 90 gold miners, dealers, refiners and fabricators: “It may be that the situa-

tion in South Africa will deteriorate, or it may all blow over tomorrow. All I know is that racial unrest has occurred many times in the past and yet South Africa has survived. Who knows what will happen now?”

ROSS LAVER

HOWARD PREECE