The metal is popular among investors as it can act as a hedge against inflation and crises.
It is also part of a well-diversified portfolio.
But, just as it performs well during crises, Gold historically does worse when the economy recovers.
There are also a myriad of costs involved.
The four main ways you can invest in Gold is through:
Gold savings accounts
Trading Gold on the stock exchange.
So… Why Gold?
Gold is one of the most recognisable of safe-haven investments.
Its main use in the world is as a financial tool because it is seen as more reliable compared to wildly fluctuating stocks and fiat money that can be devalued as and when by the governments.
Despite the fact that it cannot pay any dividends or can be usefully consumed, Gold can still be a profitable investment.
Here’re a couple of reasons why people invest in Gold:
1) Gold Is Used as a Hedge Against Inflation
When countries go through an intense period of lowering their interest rates, or when they print a lot of money, their currency will be devalued. This causes inflation.
Since Gold is another asset class of its own, it has its own intrinsic value and will not be as affected.
As such, Gold would be useful as a hedge in circumstances when people do not have faith in a country’s currency during times of hyperinflation (e.g Venezuela and Zimbabwe).
Then, the people there would choose to place their money in Gold instead because it is a safer asset.
2) Gold is Used a Hedge Against Crisis
Gold also gives you a hedge during crises (events which cause the value of paper investments like equities and bonds to decrease) or uncertain market conditions
Market uncertainties increase the attractiveness of Gold because the beta of the metal is very low.
The metal is a near-zero beta asset, which means that it is a good asset to be holding during tough market periods as it tends to perform better as compared to other assets during this period.
FYI: Beta is a measure of the systematic risk or volatility of the security i.e the tendency of a security to move with the market.
During market uncertainties, low beta stocks or assets like Gold become more appealing because they maintain their value over the long term.
Risks and Cost of Investing in Gold
However, it is important that you understand the unique costs and risks that come with holding Gold.
Risks of Investing in Gold
Firstly, there could be a major discovery of Gold, which might greatly increase the supply of the metal. This flow of new supply can depress the price of Gold.
Another thing to note is that although the price of Gold may rise during an economic crisis, it may crash when the economy recovers.
From Aug 2011 to Jan 2016, the price of spot Gold dropped 41% from US$1,852 to US$1,082 per ounce.
Also, renowned investor Warren Buffett thinks Gold is a bad investment as it does not create value for the investor.
In his 2011 letter Berkshire Hathaway investors, he grouped Gold with other investments and labelled them as
“assets that will never produce anything, but that are purchased in the buyer’s hope that someone else … will pay more for them in the future.
If you buy stock in an operating company, it can produce assets and dividends beyond the initial money you put in. If you own one ounce of gold for an eternity, you will still own one ounce at its end.”
Costs of Investing in Gold
Also, when you invest in Gold in its physical form, it incurs additional costs that arise from having to store, secure and insure it.
Unlike buying physical gold, you won’t be getting something physically.
Basically, it is like your savings account just that it is gold instead of cash.
You can buy and sell gold without physical delivery.
Looking at the table above, 1 gram of gold is currently priced at S$89.98.
The minimum quantity per transaction is 5 grams of gold (at least for UOB).
The account has a monthly service charge of 0.25% p.a. on the highest gold balance that month
(subject to a monthly minimum charge of 0.12 grams of gold.)
3. Gold ETF
Here are some of the more popular Gold ETFs with low expense ratios for reference.
1Y Annualised Returns
5Y Annualised Returns
10Y Annualised Returns
Aberdeen Standard Physical Gold Shares ETF
iShares Gold Trust ETF
SPDR Gold MiniShares Trust
GOLD ETFs seek to reflect generally, the price of gold. But, buying the ETF is more affordable than buying gold itself.
The price of Gold is currently at US$2022.45 an ounce.
Compare this with the ETF prices as shown above. You can see that there is a lower barrier of entry into a gold ETF.
However, you will still need to fork out the Expense ratio (or management expense ratio) to pay the managers for managing the fund.
When purchasing Exchange Traded Funds, always remember to read the fund factsheet to understand the fund’s holdings.
4. Trade Gold On The Stock Exchange
This is a method for more experienced investors.
Gold is more than just a metal used to make jewellery. In fact, you may have heard of the Gold Standard.
The Gold Standard was a monetary system implemented that involved the circulation of gold coins. This was before paper money was used, and the banknotes were pegged to the respective value of gold. Now, most countries have moved away from this.
It was used as a currency in the past, to store value, and as a means of transaction in ancient times.
If you’re not looking to buy gold to wear or to preserve its value to pass down to the next generation…
You can trade gold on the exchange instead because it gives you higher liquidity.
There are also gold options and futures, but these are instruments that are very risky and have steeper learning curves which will require deep understanding.
There are many ways to buy Gold. But unless you know what you are doing, it’s generally best to stick to either physical gold or gold ETFs.
Ultimately, like most investments, Gold can be a great addition to your portfolio.
But, it is important for you to know your reason for its inclusion as well as ensuring that it helps you reach your long-term financial goals.
What Are Your Thoughts on Gold as an Investment?
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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock.