Investing in Gold
If you don’t have time to read through the whole article, you can check out our short version below.
- 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 UTs, and options
- Gold ETFs are a low-cost and liquid option for investors looking to add the precious metal into an investment portfolio
Gold has stood the test of time as a sought-after commodity and a measure of wealth. As a means of preserving wealth, Gold jewellery are often handed down from one generation to the next. The yellow metal is also an important commodity used in the production of electronics and has an extensive history of being used to back up fiat (government-regulated) currencies.
When it comes to building up an investment portfolio, it plays an important role too, especially when financial markets face volatility. This was manifested in the first half of 2020, a turbulent period brought about by the economic fallout from the Covid-19 outbreak.
Gold glittered, trading 9% higher in the first half of 2020, outperforming other asset classes like stocks, bonds and REITs which were down during the same period. In fact, conditions remain in place for Gold prices to continue its uptrend in the near term, reaffirming the importance of investing in the metal.
If you are looking to get into 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 reduces risk and overall losses when stocks and bonds fall sharply. 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. Hedge against inflation
A common reason for investing in Gold is the belief that it makes a good hedge against inflation. Generally, 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 is also holding true during the Covid-19 outbreak where a low-interest rate environment is 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.
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.
With the US central bank - the Federal Reserve – turning to unlimited quantitative easing after lockdowns brought about by Covid-19, the US dollar appears set on a path toward depreciation against other currencies after March 2020.
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” with its price increasing 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.
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
Most investors can exercise three different avenues to purchase Gold.
- Purchasing physical Gold
- Exchange-traded funds (ETFs) and Unit Trusts (UTs) that track the price of Gold
- Futures and options in Gold
Options 1 and 2 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.
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