Gold has traditionally been regarded as a good hedge against inflation. Investing in gold is one of the simplest and most convenient way to preserve the value of our money. So, what are some of the ways to invest in gold? What are the pros and cons?
In Singapore, you can invest in gold in a few ways:
1) Buy physical gold (coins and bars);
2) Invest in gold ETF;
3) Open a Gold Savings Account;
4) Buy gold certificates.
PHYSICAL GOLD:
The best way to invest in physical gold is to buy them from UOB bank. UOB sells readily recognisable gold bullion coins like the Gold American Eagle, Canadian Maple Leaf, Australian Kangaroo Gold Nuggets and Singapore Lion Gold Bullion coins, in weights ranging from 1/20 oz to one oz (two oz coins are sometimes available).
Investors should take note that there are two categories of gold coins, namely, gold bullion coins and numismatic coins. You will want to buy gold bullion coins, which are sold at a small mark-up to the spot price. Numismatic coins are sold at very high prices relative to spot and are meant for coin collectors. You should avoid buying numismatic coins unless you are a coin collector or numismatic coin expert.
PROS:
Owning physical gold is probably the safest way to invest.
UOB issues receipts for the gold that they sell and is committed to buy them back at a small discount to the spot price of gold at any time, as long as the receipts are presented. That means you can sell your gold back to UOB at your convenience without having to look for a buyer yourself.
CONS:
You will be charged GST (presently at 7%) when buying gold bullions in Singapore. Physical gold may not be easy to sell for a good price when you need money urgently, unless you buy them from UOB. Physical gold may also be susceptible to theft or burglary.
CONCLUSION:
Owing physical gold is one of the safest and fun way to invest. The best way is to buy them from UOB since they are committed to buy back the gold at any time. Just make sure you keep the receipts and the gold bullions in good condition. I personally think UOB is providing a very good service for investors by selling the gold at a competitive price for buyers and providing a ready buy-in market for sellers.
I would try to buy physical gold at as close to the spot price as possible (price is my number one consideration). I would also prefer to buy an internationally “recognisable” or well known legal tender coins, such as the Gold American Eagle, Canadian Maple Leaf and Australian Kangroo if they are sold at the same price as other “less known” bullion coins.
Gold American Eagle
Canadian Maple Leaf
Australian Kangaroo
GOLD SAVINGS ACCOUNT (GSA):
This is another service provided by UOB. Investors can open a Gold Savings Account from OUB just like opening a cash savings account. The difference is that your savings will be recorded in “gold grams” instead of dollars and cents.
PROS:
GSA is another convenient and liquid way to invest in gold. Investors can deposit or withdraw gold grams at their convenience in cash form. Investors can also open a GSA using part of their CPF money under the CPF Investment Scheme.
CONS:
Gold grams cannot be exchanged for physical gold for retail investors. They can only be deposited or withdrawn in cash. UOB also charges a small monthly fee for GSA. I have heard critics saying that GSA is just another form of gold derivative and is therefore not as safe as investing in physical gold. Furthermore, unlike cash deposits, GSAs are not covered under the Deposit Insurance Scheme. The risk therefore lies in the solvency of UOB. I personally would not worry too much as long as UOB remains a stable and well-managed bank. In fact I have invested part of my CPF money in a GSA account with UOB.
CONCLUSION:
GSA is a convenient and low-cost way to invest in gold (derivative). The safety of your investment is tied to the solvency of the bank (UOB).
GOLD CERTIFICATES:
UOB bank sells unallocated gold certificates in Singapore. These certificates are sold in kilobars and are redeemable for physical gold at any time (Note: I believe the redemption is on a “best effort” basis though, ie. non-guaranteed).
GOLD ETF (SPDR):
Investors can buy Gold ETF listed in the Singapore Exchange under the ticker symbol GLD 10US$, also known as SPDR (prounounced as “spider”) Gold Shares. This is a low cost fund backed by physical gold (held in custody in the US) and is traded in US dollar.
PROS:
Gold ETF is one of the most convenient ways to invest without having to take physical delivery of gold. All you need is a share trading account and you can buy or sell it at anytime, just like buying or selling shares of any other publicly listed companies. Investors have assurance that the fund is 100% backed by physical gold. Investors can also buy SPDR using part of their CPF money under the CPF Investment Scheme.
CONS:
Since it’s traded in US dollars, you will have to incur a foreign exchange fee. There are also other fees built into the fund (eg. audit and storage fees) which, in my opinion is quite negligible.
Even though the fund provides for the possibility of taking physical possession of the gold bars, it is generally unrealistic in practise, since under the fund agreement, physical gold can only be redeemed in blocks of 100,000 shares (ie. close to SGD$2 mil at today’s price). There is also a concern that it is susceptible to fraud, just like any other listed companies.
I personally think that the possibility of fraud is very slim as long as proper safety measures are in place. In the case of SPDR, the gold is held in the form of a “Trust” and the trustees are allowed to visit and inspect the gold held by the custodian, HSBC bank USA, twice a year. The Trust’s independent auditors may also audit the Gold holdings in the vault as part of their audit of the Financial Statements of the Trust.
However, US has a precedent of gold confiscation which investors may want to take into account. This happened in the year 1933 during the Great Depression.
Executive Order 6102 (Gold Confiscation Order, 5th April 1933)
