There are conflicting views regarding gold investments. According to the naysayers, physical gold is not as liquid as cash or some other forms of investment. Storing it can be expensive. Gold prices do not follow a regular pattern. It can be years before you make a return on your investment.
Despite these shortcomings, the precious metal has been regarded as one of the best ways to safeguard your wealth for millennia. Learn more about gold trading here or start here to put gold in your investment portfolio now.
Even those who hold the view that gold investments are unattractive usually concede that a certain portion of every investor’s portfolio should be in gold.
Let us understand why this is so.
1. Gold is a form of insurance
When the world economy is doing well and global trade is flourishing, gold prices will stagnate or even decline. But at the first sign of trouble, you can expect the yellow metal’s value to start moving upwards.
Why should gold prices appreciate in times of uncertainty and economic gloom? Investors flock to gold at times like this because they think that a slowdown in business activity may be the precursor of worse to come. Diverting your money to gold at this stage could help to stem your losses.
An economic recession is not the only event that leads to the rush to buy gold. Political uncertainty also drives investors towards the yellow metal. Brexit, the emergence of right-wing philosophies in Western Europe, and the polarisation of political views in the US, all hold the potential to increase the demand for gold.
Why wait for an economic downturn or political upheaval to buy gold? If you keep a small portion of your investment portfolio in the precious metal, you stand to gain regardless of future events. If the economy continues to do well, your other investments will flourish. If there is an economic crisis, gold will gain.
Note the spike in prices immediately after the 2008 great financial crisis.
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2. Long-term trends favour gold investors
Although prices can fluctuate wildly, over an extended time-frame, gold values move only in one direction – upwards.
The 20-year price chart for gold exhibits this vividly.
Why should gold prices rise in such a consistent fashion over the long term? Why can’t supply increase to meet demand?
For the last 10 years, the annual production of gold has been restricted to about 4,000 tonnes. But only two-thirds of this is from the world’s mines. The remaining portion comes from recycling the precious metal. Total gold stocks in the world are less than 200,000 tonnes.
There are severe constraints on the mining and production of gold. With continuous demand, prices are likely to continue their upward trajectory well into the future.
Trading gold futures is a common method of investing in the precious metal, and takes advantage of the commodity’s long term price trends.
Another method of investing in gold in the long term is through Phillip Future’s Gold Direct Investment (GDI), a low risk and low leverage gold contract. GDI is an alternative gold investment which tracks the Loco London Gold with a contract size of as low as 1 troy oz.
Most gold savings do not offer physical gold delivery, but GDI features an option for physical gold coin/bar delivery with a premium. E.g. Canadian maple leaf gold coin.
In addition, GDI is one of the lowest cost gold investment available in the market, with no commission charges and just a 1% admin charge per annum.
For investors that feel the cost of investing in gold is too high in regards to the amount of gold invested, an alternative is to trade the precious metal using leverage. Investors would use a smaller amount of cash deposit to trade a larger contract size, in order to fully capitalize on the price opportunities of gold. This however has a larger element of risk. To find out more, click here.
3. Gold provides diversification and protection over your investment portfolio
Historical data clearly indicate that gold prices have an inverse relationship with the prices of shares and the stock market index.
If two indices have a correlation of 1, their prices move in tandem. A rise in one will be mirrored by a rise in the index with which the first is being compared. A correlation of -1 signifies the other extreme. The indices follow an inverse relationship.
If the correlation between the world’s stock markets and the price of gold is examined, it is seen that the precious metal is not influenced by stock prices.
Source: Stansberry Research
This low level of correlation gives investors a good reason to buy gold. They can hedge their investments in the stock market by taking this step.
Need to start hedging your stock portfolio? Let Phillip Futures help you with that today.
4. Invest in gold using your CPF balance
Singaporeans are permitted by the Central Provident Board to divert a part of their balances towards gold investments subject to certain conditions. The CPF Investment Scheme (CPFIS) allows account holders to utilise 10% of their investible savings to buy Gold ETFs or other gold products like gold certificates or even physical gold.
In order to buy gold using your CPF savings, you need to have at least S$20,000 in your ordinary account. The SPDR Gold Share is an ETF that is approved under this scheme.
If you prefer to keep your CPF for other purposes, you can still invest in gold using other means. Find out more here.
5. Beware all gold investments are not the same
Some investors mistakenly believe that buying gold jewellery is similar to purchasing a gold bar or a gold coin like the US Gold Eagle or the Canadian Maple Leaf. While it is true, that the raw material used in gold jewellery is the same as in a gold bar or a gold coin, the economics of investing in jewellery works very differently.
A great deal of craftsmanship goes into the manufacture of gold jewellery. You have to bear the expense of this expertise. Additionally, you would make your purchase from a retailer who would have a significant profit margin. If you purchase gold jewellery worth S$20,000, you can safely assume that the value of the gold in it will not be more than S$12,000 to S$14,000.
Don’t think that buying gold jewellery is a form of investment. If you sell your jewellery, you will get only a fraction of the amount that you bought it for.
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How much should you invest in gold?
Every asset class that you invest in should get only a certain portion of your total portfolio. If a single asset class, say shares, dominates your investments, you are exposing yourself to great risk.
This rule applies to gold as well. For most investors, allocating about 10% of their total wealth to gold is sensible, particularly if your primary objective is to protect yourself from losses that you may face in your other investments when the economy slows or when there is political upheaval.
That being said, investors looking for higher returns can consider looking into gold trading through gold futures or spot gold. In which case, your portfolio allocation for gold would certainly exceed 10%.
Need more advice? Talk to Phillip Futures today and start investing in gold now!
(By Ravinder Kapur)