Going For Gold — How to Invest in This Commodity
With the worsening of bilateral ties between China and the US, anemic tech sector growth, a looming recession casting its pall over the global economy and record-high inflation around the world, there is now a greater need to find safe-haven assets to shore up our financial portfolios.
Gold has withstood the test of time and proven itself to be a safe-haven asset. As a physical commodity, its price is usually not influenced by central banks and their decisions on interest rates.
Amid market volatility, mounting interest rates and weakening currencies against the dollar, gold remains worth investing in. This article will delve into the how and why of it.
The Rise and Fall of the Gold Standard
From the 1870s up until the early 1920s, the gold standard was the basis of the international monetary system, in which the standard economic unit of account, such as the US dollar, was determined by a fixed quantity of gold. Under this monetary system, an individual with some paper money could exchange it for a fixed amount of gold.
However, when World War I broke out, many countries temporarily suspended the gold standard so that they could pay for their military involvement in the war by printing money. This rampant printing of money caused hyperinflation, eroding the value of the various currencies.
After World War II and the ensuing depression, some countries returned to the gold standard. The Bretton Woods Agreement was established in 1944 to create a framework for all international currencies backed by gold. Since the US held most of the world’s gold reserves, the US dollar soon became the de facto currency of the world and most countries’ central banks started to peg their own currencies to the US dollar rather than gold.
Yet, despite no longer being the standard to which countries peg their currencies, gold has remained valuable all through history, from Babylon to Rome to the modern-day global economy. The demand for gold has quadrupled every year since the 1970s. Here’s why investors continue to have it in their portfolios.
Why Invest in Gold
Gold is Stable in Value
Gold as a precious metal has been around for centuries, proving to be a reliable hedge against inflation by preserving its monetary value over the years. As such, gold is known to be a safe haven asset that investors tend to fall back on in times of market volatility.
While the supply and value of paper currencies can be manipulated by actions like printing more money, that’s not the case for gold — being largely undisturbed by central bank manipulation makes its value stable.
Case in point: after the 2008 global financial crisis, many investors turned to gold as a safe-haven asset, causing the price of gold to rise by almost 24% just in 2009. This upward trajectory extended all the way into 2011.
And because of this perception that gold is a safe asset to invest in, the demand for it in turn creates a self-fulfilling prophecy.
Gold is a Tangible Asset
Gold, like property and cash, is an asset you can see and touch, which means you can possess it physically. In times of market volatility, where paper gains are flimsy and uncertainty abounds, the sense of security that gold provides makes it unlike other investment assets like stocks, cryptocurrencies, or even bonds.
Gold is Recognised Globally
Gold as a precious metal is recognised and valued globally, which means that you can sell it anywhere in the world.
Adding gold to your investment portfolio is also one way to mitigate risk. Spreading your investments across various industries and asset classes helps to diversify your portfolio so that it won’t tank completely should one industry or asset class take a hit.
Ways to Invest in Gold
Since gold is a wearable investment type, the easiest way to invest in it is by buying jewellery.
From wedding bands to earrings, necklaces and bangles, gold jewellery certainly has its visual appeal. It is also able to preserve its value over time (even if the designs become outdated in the future) as the value of gold comes from its purity and weight.
Even if you don’t intend to sell your gold jewellery in the future, you can still wear them in the meantime as accessories, or even pass them down to your children. You can easily purchase gold jewellery off the counter from any jeweller.
2. Gold Exchange Traded Funds (ETFs)
If you’re not comfortable with the idea of holding physical gold, you can invest in gold instead by buying an ETF that derives its value from physical gold. This gives you the exposure to the gold market without having to own gold.
ETFs are a popular investment tool as they provide much wider exposure than, say, a stock would, making them a good way to diversify a portfolio. Being passive investments, they replicate market performance instead of trying to outperform them.
As one of the earliest gold ETFs in the market, the SPDR Gold Shares ETF currently leads the charge. Different ETFs may track different types of gold — for instance, SPDR Gold Shares ETF tracks the gold bullion in the US market and reflects the performance of gold spot prices, while the VanEck Vectors Gold Miners ETF and iShares MSCI Global Gold Miners ETF track gold mining companies.
|Highly liquid and accessible as it can be bought and sold on the stock market||Incurs fees such as expense ratio and commissions during trading|
|Offers exposure to gold without having to physically own gold||Smaller ETFs may be illiquid and thus harder to sell|
|Minimal effort and cost required — don’t have to pick gold stocks or build a gold portfolio to invest in gold||-|
3. Gold Stocks
Other than purchasing an ETF, you can also consider picking individual stocks tied to businesses in the gold mining industry.
Investing in stocks is a way to get indirect exposure to gold via exposure to various aspects of the gold industry, from mining to production to sales. Investors can purchase stocks of companies like Barrick Gold Corporation and Newmont Corporation. The latter is the world's leading gold company with active operating mines in nine countries, and the gold producer listed on the S&P 500.
Investors who prefer to earn dividends can consider buying gold stocks instead of physical gold. Much like buying ETFs or other stocks, purchasing gold-related stocks allows you to make intraday trades.
|Highly liquid and accessible as it can be bought and sold on the stock market||Less diversified than ETFs|
|Some companies give out dividends to investors||Performance subject to market volatility|
4. Physical Gold
If you have the space and security measures in place at home, you can consider buying physical gold like gold bars and gold bullion coins.
These can be purchased in person or online from gold retailers. Under the CPF Investment Scheme (CPFIS), you can even use your CPF funds to buy gold.
However, physical gold takes up space and requires adequate and secure storage space, be it a safe deposit box at the bank or at home.
5. Gold Savings Account
We've heard of the common savings accounts like the DBS Multiplier, UOB One and OCBC 360, but there's also a savings account that lets you buy and sell gold without needing to physically purchase the gold.
UOB is the only bank in Singapore that 1) has a savings account dedicated to gold or silver, 2) allows you to purchase and sell physical gold, and 3) issues gold certificates. Under the UOB gold savings account, gold holding is recorded in grams and the minimum quantity per transaction is five grams of gold. Service charge is calculated on a monthly basis at 0.25% p.a. of the highest gold balance per month, subject to a monthly minimum charge of 0.12 grams of gold — this fee can get hefty if you only intend to purchase a small amount of gold.
|Buy and sell gold without requiring physical space||A minimum quantity per transaction of 5 grams of gold required|
|Can purchase using CPF funds||Monthly service charge of 0.25% p.a., subject to a monthly minimum charge of 0.12 grams of gold|
6. Gold Linked Notes
Gold Linked Notes (GLNs) are a type of equity-based note similar in structure to Equity Linked Notes (ELNs), except that the underlying is gold instead of stocks. They are often used by investors who are seeking higher returns on their cash holdings in savings or current accounts. It’s another way to have a finger in the gold pie without having to own gold.
Investors first agree with their banker or brokers on a certain amount of gold and the principal amount (sans discount). GLNs are bought at a strike price, which is offered at a discount to the spot (market) price. The strike price is expressed as a percentage of the spot price. So for instance, a 98% strike means that upon note maturity, the GLN issuer will deliver the gold to the investor when the gold price strikes or falls below 98% of the initial market price. The investor will then receive the initially agreed amount of gold in his account. If the gold price is above the strike level upon maturity of the note, the investor will receive his principal in full, i.e. his initial investment amount plus the yield.
GLNs are sophisticated investment products that carry significant risks. They are therefore not suitable for newbie or risk-averse investors or those who don’t fully understand the product.
7. Gold Certificate
If storing your gold is a concern, a gold certificate is another solution. Sometimes known as ‘paper gold’, these certificates have no expiry date and can be exchanged for physical gold or cash. When they are issued, the physical gold that they represent is stored somewhere else, so they provide owners with the same benefits of owning physical gold without the inconvenience and security concerns.
One thing to note, however, is that investors have to be sure that the issuing authority is well-regulated. They should honour their legal obligation to hand over physical gold or cash upon request, and not sell the rights to the same physical gold to other people. Therefore, only deal with well-regulated entities to avoid being scammed.
|Similar to purchasing a gold bar||Service charge and fees apply|
|Does not take up physical space||Must keep the gold certificate safe — a new certificate may be issued, but losing or misplacing it can be inconvenient and will incur a cost|
All investments come with risks. Before you take the plunge, be sure to assess the current market conditions, your own investment portfolio and risk appetite. Better yet, seek the advice of a qualified financial advisor, stay informed, and maintain a well-balanced portfolio.