Investing in Gold

IF SOME gold pundits are right, the precious metal is on its way to a dazzling US$1,000 (S$1,463) an ounce that in perspective, the price of gold was just US$254 an ounce back in 1999, a 20-year low.

So why these wild fluctuations in price?

Gold is a “safe haven” that investors turn to when the going gets rough in other investments such as shares and bonds, or when economic uncertainty abounds. Since that low point in 1999, investors have been weighed down by worries over inflation and a weak US dollar value. 

Meanwhile, investment fund managers have been snapping up assets such as gold whose values are not tied to stocks and bonds. Industry experts remain bullish on gold. They believe that low interest rates, tight gold supply and high oil prices will help to push the gold price past the US$1,000 mark.

Safe haven

In times of uncertainty, investors flock to gold to protect their savings. For example, if the US dollar is weaker, investors buy gold. This pushes the price of the metal higher. The reason is that, as the US dollar falls, commodities priced in the currency, such as gold, become cheaper to buy in other currencies. This stimulates buying. Investors also go for gold in bigger numbers when oil prices soar because oil-producing countries that earn revenue in the greenback need to hedge against the risk of a falling US dollar.

Rarity factor

Governments can print as much currency as they like debts.

Diversification advantage

Historical data shows that gold prices move in the opposite direction from stock prices, as a general rule. Gold typically soars when stocks tank. For instance, gold prices shot up from 1971 until mid-1973 as stocks struggled. Still, gold is not always a glittering investment downs too. After rising to new highs in 1974, gold prices dived, falling to about US$100 in mid-1976 from about US$200 at the start of 1975. They soared to US$850 in January 1980.

How to invest in Gold:

GOLD investing is not simply a matter of buying a piece of the metal to lock in a safe place. There are many ways to own gold and, quite often, you do not see the actual thing at all. For instance, Singaporeans can buy gold by using their Central Provident Fund Ordinary Account savings to invest in gold savings accounts, gold certificates or gold ETF. Their value mirrors any rises or falls in gold prices.

Bars and coins

ONE way to get your hands on gold is to buy products such as gold bullion coins and gold bars in various sizes and weights. These investments unlike a paper gold investment (GST) in Singapore, which means an investor will lose 7 per cent of his investment upfront. Coins are usually available in denominations of one ounce, 1/2 ounce, 1/4 ounce, 1/10 ounce and 1/20 ounce. When investors sell gold to a bank, for instance, the institution will want to make a profit on the prevailing gold price. That differential starts from about S$120 per kg. Banks that sell physical gold include United Overseas Bank (UOB) and the Canadian Bank of Nova Scotia.

Certificates

WHEN you buy a gold certificate, you do not incur GST, as you do when you buy physical gold. However, there is an annual administration fee of S$30 per kg of gold. At UOB, a gold certificate is issued in “kilobars”, which are kilogram bars of gold. In a single certificate, you can buy kilobars of 999.9 fine gold in multiples of one up to a maximum of 30. Gold is rated according to its purity prices, one kilobar costs about S$35,000.

Savings accounts

AN INVESTOR looking for the excitement of frequent trading might want to consider a gold savings account. You start with a minimum purchase of 5g of 999.9 fine gold. You can then buy or sell in 1g lots. The customer records his purchases and sales in pocket-sized passbooks as deposits and withdrawals. UOB charges an administration fee that is subject to GST.

Margin trading

CUSTOMERS can also open a margin trading account to trade London gold or gold futures over the phone on a margin basis. They can even sell short in gold with the account.

Unit trusts

ANOTHER option is to invest in unit trusts such as UOB United Gold and General, which invests in publicly listed companies that mine gold. As with other unit trusts, an investor is subject to subscription and annual management fees, said IPP Financial Advisers investment director Albert Lam.

Exchange-traded fund (ETF)

FOR retail investors, an ETF offers a convenient way to buy gold with relatively modest sums, and without the custody, storage and insurance charges that typically accompany bullion investments. An ETF is listed on a stock exchange, and is bought and sold just like shares. Already listed in New York and Mexico, this gold ETF was listed on the Singapore Exchange last year. ETFs are tracker funds that invest in the component stocks of an index. Investors need not pay a sales charge, unlike with a unit trust. They are, however, subject to a brokerage charge. Overhead costs are typically a fraction of those for unit trusts. Unlike other ETFs that hold shares or bonds, StreetTRACKS holds gold bullion as its underlying asset. Its annual management fee is 0.4 per cent. A share in the ETF is based on roughly a tenth of an ounce of gold. Buy 10 shares and you own one ounce of gold.

Mining stocks

THIS means investing directly in the shares of mining firms. However, you could be exposed to more risks. With most gold investments, you worry mainly about the price of gold. With these stocks, other factors, such as how well the firms are managed, come into play.