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Gold Price is Rising: Should You Switch Out of Singapore Shares and Load Up on Gold Instead?

Sudhan P.

Just last week, gold hit close to a seven-month peak on macroeconomic fears.

What a turn of fortune it has been.

Since the hitting a one-year low of US$1,176.20/ounce in August 2018, gold has gone on rise some 10% to a high of US$1,291.80/ounce on 3 January 2018. Disappointingly, Singapore’s stock market, as represented by the Straits Times Index (SGX: ^STI), fell 6.1% during the same time frame.

With the poor performance of shares, should you switch out of them and buy gold instead?

Safe haven

Before we answer the question above, let’s look at why gold is popular during economic uncertainties.

Gold is often seen as a safe-haven asset in times of financial uncertainty as it is perceived as not being at risk of becoming worthless, unlike other assets having credit risk. Historically, gold has had a negative correlation to stocks and other financial instruments.

Also, there is a limited supply of gold, and it takes a longer time to produce new gold from mines as compared to printing money by central banks.

Fall from grace

Even though gold is touted as a safe-haven investment, the gold price over the longer term has fallen.

From a record high around US$1,889 an ounce in 2011, gold has fallen more than 30% to US$1,283 an ounce at the time of writing. The precipitous fall puts gold in a bear market.

The Straits Times Index, however, has risen around 18% during the same time frame. If you had bought shares in stable companies, you could have done better. For example, Singapore’s largest bank, DBS Group Holdings Ltd (SGX: D05), posted a share price gain of a whopping 100% during that period. I have not even counted the dividends you would have received over those years.

What does the Oracle of Omaha say?

Billionaire investor Warren Buffett hit the nail when he talked about his views on precious metals during an interview with CNBC in March 2011. He said he doesn’t know how to judge the prices of gold, but he knows how to judge to “some extent the earning power of some businesses”.

He went on to say that if one were to take all the gold in the world, it would roughly make a cube 67 feet on each side. That cube of gold would be worth about US$7 trillion at the market price then. In contrast, there were roughly a billion acres of farmland in the United States, valued at around US$2.5 trillion.

With the same US$7 trillion, one could buy all the farmland in the United States and about seven of Exxon Mobil Corporation, and still have US$1 trillion of extra cash to deploy elsewhere.

The farmland and the seven Exxon Mobils would be cash flow generating assets whereas you can’t do much with a massive cube of gold.

I agree with Warren Buffett.

By buying fractional ownership in businesses such as DBS, we can partake in the growth of the company and be rewarded through capital gains and dividends. However, for precious metals, they would be just sitting there without giving us any cash flow.

Furthermore, it is hard to value gold, just like bitcoin. The price of the metal is based on what the next buyer will pay for it. When we invest in a business, though, we can value the business by summing up their future cash flows and discounting them to the present value. This value can be compared against the market price to determine if the business is a buy.

The Foolish takeaway

Gold has been on a tear for the past few months whereas the local stock market has been in the doldrums. However, investors should not dump their shares, especially the fundamentally-strong ones, and pump their money into gold instead for the reasons discussed above.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of DBS Group Holdings Ltd. Motley Fool Singapore contributor Sudhan P doesn't own shares in any companies mentioned.