I am sure all of us know about the all-so-mighty and ever-important yellow shiny metal which was used centuries ago. It’s magical lure? It is a commodity with a limited supply and growing demand (from electronics to hedging against inflation). Let’s talk about how we can acquire this precious metal into our portfolio.
- Buying physical gold
In historical context, buying gold used to be obtaining gold physically but today, what we are dealing with are mainly derivatives of the ownership of gold. Examples of these can be certificates of the amount of gold you own. Why is this so? It is because, the modern society requires a faster and more convenient way of transferring gold from one place to another. It would be much simpler to sell a proof of ownership of gold to another person as compared to physically transferring gold to the buyer. However, it is still possible to buy physical gold now and this leads us to the first way of investing in gold. You can buy them over the counter in banks and bullion shops.
Issues on dealing with physical gold is that you will need to find proper and secure storage places, as well as, finding buyers who are willing to accept physical gold if you were to sell it.
Now then, how do invest in gold in Singapore since we do not often see people carrying physical gold around? There must be easier ways to invest in gold.
- Invest in Gold ETFs (exchange-traded funds) or Trusts
These funds collates investment monies and invests them into gold either by purchasing physical gold or gold derivatives. Hence, the share price of such funds generally mimic the movements of gold. Some other advantages offered by these funds are that they allow investors to enter the gold market at a relatively low price and investors do not have to handle anything physically. This is done by splitting the costs of owning gold among many investors and using economy of scale to achieve higher cost efficiency. Some of the Gold Trusts offered in SGX are SPDR® Gold Trust and
The downside is that these funds may have (small) performance matching error relative to the gold price due to various reasons and since some of these funds are listed on the stock exchange, they do have inherent risks pertaining to owning stocks such as liquidity and counterparty risks.
- Opening a Gold bank account
Some banks offer a bank account to allow the buying and selling of gold. An example of a local bank offer such account is UOB. It offers similar advantages to a bank account such as online banking. However, there are charges in operating such accounts such as service charges and transactional fees, so do be aware.
- Getting a gold proxy by investing in a company dealing with gold
You can also invest in a company’s stock that deals with gold. An example of such is a gold mining company, CNMC Goldmine Holdings. The reason is that if gold price rises, the performance of the company will most likely improve accordingly as well. However, the risks are higher by using a stock as a gold proxy as you need to be certain of the management of the company. This is so that when the gold price really do increase, there are no other factors that will limit the company’s performance. This option is also one of the riskiest among those suggested above as there is no diversification of investment and investors are fully exposed to individual equity risks.
Read also: How do you invest in Silver?
- Gold Derivative Contracts (Futures / Contracts for Difference)
For more experienced traders, one can use gold derivative contracts such as futures or contracts for difference (CFDs). These contracts are inherently rights to owning gold and they also allow traders to leverage their positions. These contracts are traded on many exchanges and are traded on a margin basis (traders only pay a portion of the entire trade size), hence giving it the leverage functionality. This can potentially increase both profits and losses. However, it is definitely not a tool for long-term or passive investors as the large fluctuations in gold price may bounce the position out.
Deciding on the right option to use
With so many options available, you must then decide which is the most suitable for you in terms of risks and returns. Someone who is experienced and is able to take more risks can choose gold futures as his preferred investment tool but for beginners like us, a gold ETF may be sufficient to expose our portfolio to the exclusive commodity market. This is taken into account that gold is a good crisis hedge and has a low correlation with other asset types, hence offering a greater diversification.