Investing in gold
If you’ve only got a minute:
- The advantages of investing in gold include it being a “risk diversifier”, a hedge against inflation and a safety asset.
- There are 3 main ways to invest in gold: physical gold, buying into ETFs and unit trusts, and through robo-advisors.
- Gold ETFs are a low-cost and liquid option for investors looking to add the precious metal into an investment portfolio.
Gold continues to stand the test of time as a sought-after commodity and a measure of wealth.
The yellow metal is an important commodity used in the production of electronics and has an extensive history of being used to back up fiat (government-regulated) currencies. Gold jewellery is often handed down from one generation to the next as a means of preserving wealth.
Gold also plays an important role in an investment portfolio, especially when financial markets face volatility. We’ve seen this at play quite a number of times in recent years.
The first half of 2020 was a turbulent period due to economic fallout from the Covid-19 outbreak. Gold glittered, gaining 9% higher while stocks, bonds and real estate investment trusts (Reits) were down.
When Russia invaded Ukraine in February 2022, gold prices surged past US$2,000 per ounce. As the precious metal has long been considered a shelter for volatility, investors and speculators were building up positions in gold to hedge against geopolitical risk.
More recently, gold’s safe-haven status meant that it performed well in March 2023 due to uncertainty in the global banking sector, triggered by Silicon Valley Bank’s insolvency issues and eventual collapse.
While there are some headwinds for gold in 2023 like positive real rates and moderating inflation, DBS Chief Investment Office (CIO) is of the view that demand for gold remains buoyant.
DBS CIO’s end-2023 gold price forecast is US$1,950. In the near term, gold might trade between US$2,000 and US$2,100 per ounce due to uncertainties in the banking crisis.
Before investing in gold, it helps to take note of some of the key factors that make it an attractive investment.
5 factors that make gold an attractive investment
1. A “risk diversifier”
Gold is often viewed as a “risk diversifier” in an investment portfolio as it generally uncorrelated with other assets in an investment portfolio. As such, it reduces risk and overall losses when stocks and bonds fall sharply, proving to be useful in portfolios as risk diversifiers.
This belief has held through in previous recessions. What’s more, gold is highly liquid, which means investors are often able to cash in on their holdings with ease.
The importance of holding gold in an investment portfolio is more obvious in the past 5 years as global markets experienced heightened volatility.
2. It is seen as a hedge against inflation
A common reason for investing in gold is the belief that it makes a good hedge against inflation. In general, gold prices tend to rise when the cost of living increases.
Moreover, investors buy or hold larger quantities of gold when high inflation is anticipated. This is driven by gold’s inherent value coupled with its finite supply. As such, it has proven to better retain its value than currencies – paper money.
This also held true during the Covid-19 outbreak where the low-interest rate environment was coupled with quantitative easing measures by central banks. The opportunity cost of holding gold in this environment is almost zero, while historical data shows average return is not compromised but gold’s downside can be smoothened.
Bloomberg economics estimates that for every US$20 increase in price of oil, US inflation will rise by 1 percentage point. In February 2022, the inflation in the US was 7.9%, and according to DBS CIO, it could easily hit 10% in future. Gold typically performs well in a hyperinflationary environment.
3. Weakness in the US dollar
Like most commodities, the price of gold has an inverse relationship with the US Dollar as it is dollar denominated.
Like most commodities which are US dollar denominated, the price of gold has an inverse relationship with the greenback.
With the US central bank - the Federal Reserve – turning to unlimited quantitative easing after lockdowns brought about by Covid-19 in 2020, the US dollar depreciated against a number of major currencies, especially the euro.
In previous periods of prolonged US dollar depreciation, investors have often turned to purchasing gold, a secure asset to preserve their purchasing power.
4. Geopolitical Landscape
Gold is viewed as a crisis commodity as its price increases in both periods of financial uncertainty and political uncertainty.
During periods where geopolitical tensions are prevalent, some investors have turned to gold as a secure holding. The yellow metal often performs better than other asset classes in this environment.
Gold functioning as an effective geopolitical hedge stems from the view that the precious metal is useful for countries when they are faced with threats of US sanctions.
5. Increasing demand meets decreasing supply
Increasing wealth in emerging economies has resulted in higher demand for gold along with more interest by investors. With mining volumes generally falling over the past decade, gold prices could stay supported.
Ways to invest in gold
There are a number of ways to purchase or invest in gold. Of which, the 3 below are the most practical options for retail investors.
These 3 options are the most common choices for retail investors while more sophisticated investors may lean to implementing investment strategies using options on gold futures.
Physical gold is usually sold to investors in the form of gold bars or coins. They can be stored at home or in a safe deposit box at the bank. Some financial institutions offer the option of a gold certificate or a gold savings account, which enables you to buy and sell gold without the hassle of physical delivery.
An alternative is investing in gold mining companies, which can act as a proxy to gold prices. Investors can benefit from share price appreciation as well as dividend payouts.
That said, investors should be cautious as share prices do not correlate directly with gold unlike ETFs and UTs. Among factors that impact the price movement of the gold mining stocks is operating performance and how well miners can generate profits. Share performance of smaller miners are also likely to be affected by their ability to discover and have productive mining operations.
Customers can gain exposures to both Gold ETFs and gold mining stocks which are available on SGX using cash, the Supplementary Retirement Scheme as well as Central Provident Fund (CPF) Ordinary Account and Special Account savings. Investments on foreign traded gold ETFs and gold miners are also available through DBS Online Equity Trading and DBS Vickers.
More sophisticated investors may consider implementing investment strategies using options on gold futures.
Picking a Gold ETF
Retail investors are best placed to purchase gold ETFs with a good balance cost and liquidity.
A couple of common options are:
1. SPDR Gold Shares ETF
This ETF is a popular choice as it trades on the SGX and purchased through all brokerages in Singapore. Moreover, it is 1 of 6 ETFs and the only Gold ETF where CPF funds can be used for investing. Expense ratio for this ETF is 0.4% per annum with a lot size of 1 unit.
2. iShares Gold Trust
iShares Gold Trust has one of the lowest expense ratios (0.25% per annum) and is the second-largest Gold ETF. This not only makes it easy for investors to enter and exit the fund but it is attractive in terms of the trade-off between size and fees too.
Investing through robo-advisors
With robo-advisors gaining popularity among retail investors in recent years, they make a viable option for those who would like to gain exposure to the yellow metal through a managed portfolio.
Basically, all you have to do is select a robo-advisor that has allocations to gold as part of its investment strategy. Many robo-advisors with a diversified, global focus, have exposures to gold through Gold ETFs and/or Gold miner ETFs.
With DBS digiPortfolio investors of the Global Portfolio at all risk profiles get exposure to gold miners through the VanEck Vectors Gold Miners ETF. This ETF tracks the NYSE Arca Gold Miners Index, which serves as benchmark for the overall performance of companies involved in the gold mining industry.
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Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability
All investments come with risks and you can lose money on your investment. Invest only if you understand and can monitor your investment. Diversify your investments and avoid investing a large portion of your money in a single product issuer.
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