From Gareth Stokes, MoneyWeek editor, SA

Dear Money Morning reader,

While paging through the Financial Times earlier this week, we stumbled on a story with loads of laugh-out-loud potential. The headline – Machines with Midas touch swap chocolate for gold bars – would look at home on any April Fools’ front page. But it’s the middle of June! According to the report a Stuttgart-based gold investment company trading as TG-Gold-Super-Markt plans to roll out a number of gold vending machines across Germany. You can always rely on the straight-faced Germans to keep you entertained.

TG-Gold owner, Thomas Geissler says his vending machines will stock 1g gold wafers and 10g gold bars. Each item would retail at a 30% premium to the prevailing gold price. At $950 per ounce Geissler would sell the gold wafer for approximately €30 and the bar at €245. It’s a heavy premium to pay for the convenience of topping up your physical gold holdings in an airport arrivals lounge! Will this business get off the ground? We can’t see it working in a country like South Africa. But Germany is different. “German investors have always preferred to hold a lot of personal wealth in gold,” says Geissler. This preference was rooted in history as many Europeans had lost everything during the First and Second World Wars. Physical gold appeals to such investors as a store of wealth, easily accessible in times of crisis.

Investment banker Jens Wellenbockel, who stumbled upon the prototype machine during a test run, told the Financial Times it could work. “Because of the [financial] crisis there is a lot of awareness of gold,” he said, adding the wafer/bar would make a great gift for children. South Africans are also obsessed with the precious metal, but we’d recommend a different route for those who want physical exposure to it.

Until recently the only way to purchase physical gold was through investment coins like the popular Krugerrand. These coins remain a favourite among long-term investors.  But there are some disadvantages to investment coins, including the high cost of storing them and the transaction fees when converting them back to ‘paper’ currency. There’s no real market for Krugerrands and investors can only trade them at a handful of coin dealers across the country.

That’s why our gold exposure instrument of choice is the New Gold Issuer Limited (JSE: GLD) exchange traded fund (ETF). This financial instrument satisfies the desire for a physical holding in the precious metals without the burden of excessive holding costs and unnecessary transaction fees. It also eliminates the risk associated with conventional gold mining shares. An ETF is an investment vehicle that trades on the stock exchange in the same way as an ordinary share. They were introduced in the US in 1993, in the UK in 2000 and landed on our shores soon after. Each ETF typically holds assets (usually shares to benchmark an Index, but in this case gold) and trades at a price equal to the value of its underlying assets.

Fees aside, the New Gold ETF is a function of the underlying gold price. Each unit in the ETF comprises 1/100th of an ounce of gold and changes hands for 7370c (ruling price at 11h00 17 June 2009). Would we buy gold today? There’s no easy way to answer this question. Gold is probably headed higher over the long-term, but the metal is extremely volatile. From today’s $936/ounce it could just as easily plummet to $850 as climb back to $1 000. If you want a safe-as-houses stockpile of wealth in 20 years time then a gradual accumulation of gold ETFs is a sensible strategy. If you need the money in two to three years you will be better served in other asset classes.

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Turning to the markets...

The JSE all share index closed 2.96% down yesterday. The gold mining index gained 0.72%. Resources shed 4.88%. Banks and financials tumbled 1.40% and 1.37% respectively. Industrials plunged 1.51% and the platinum mining index fell 4.69%.

London’s FTSE100 closed down 1.16%. The Dow Jones shed 0.09% and the Nasdaq added 0.66%.

Tokyo’s Nikkei closed 1.75% down. Hong Kong’s Hang Seng plummeted 1.97%.

Brent crude is currently trading at $70.66 per barrel.

Spot gold’s trading at $937.90 and platinum was last quoted at $1,210.00.

And here’s how the rand is performing against the major currencies:
R/$ 8.06
R/£ 13.18
R/€ 11.23