Gold has long been trusted as a reliable way to protect and grow wealth, especially in uncertain times. In Singapore, it continues to serve as a powerful stabilising force, helping investors to stay grounded and confident when markets feel unpredictable.
Who should consider investing in Gold
What investor profiles stand to benefit most from its inclusion in a portfolio? For those building their wealth, gold can play these roles:
- Providing greater diversification to your investment portfolio
- Support long-term financial goals without requiring constant attention
This article breaks down how gold can support your journey toward greater financial autonomy in Singapore, whether you're seeking stability, diversification, or tactical opportunities as an affluent investor.
And, the various instruments available to investors at DBS Treasures: Whether ETFs, stocks, unit trusts, or gold-linked notes.
DBS Chief Investment Office: Focus on Gold's Fundamental Drivers1
Gold saw extreme volatility in January, driven by elevated levels of speculative flows amid persistent macro policy risk and geopolitical uncertainty. Prices rallied to a new all-time high of US$5,595/oz on 29 Jan, before dropping more than 15%1.
What factors affect gold prices
How can affluent investors interpret these forces?
Our Chief Investment Office advises clients to focus on gold’s fundamental drivers2:
- Strong demand for gold from investors, governments and central banks
- Scarcity of gold – there have been no major gold discoveries in the past two years, and rising energy costs are likely to keep mining margins in check
Given these insights into gold's outlook and its fundamental drivers, a critical question for affluent investors is: How much gold should you strategically hold in your portfolio?
The optimal allocation varies based on individual financial goals, risk tolerance, and overall portfolio composition. But understanding the CIO's perspective on gold's role can help inform these important asset allocation decisions.
The Pros: Strategic Advantages of Gold
1. When markets turn choppy, gold helps steady your portfolio
Gold historically cushions losses during periods of uncertainty, enabling investors to stay focused on their long-term plans. Its low correlation with equities and bonds helps balance portfolios and smooth overall performance.
This distinct behaviour is crucial when considering gold versus other traditional investment assets like stocks, bonds, or even alternative investments. Gold often acts as a non-correlated hedge, offering stability when other asset classes may be declining, thus enhancing overall portfolio resilience.
2. When currencies fluctuate or inflation rises, Gold helps protect purchasing power
Gold acts as a reliable store of value, especially during monetary debasement and rising inflation.
In today’s environment of expanding liquidity and geopolitical uncertainty, physical gold offers Singapore investors a way to safeguard their portfolio value against inflation’s erosive effects.
3. When cash earns nothing, Gold can preserve value
In environments with near-zero or negative interest rates, the value of holding cash diminishes. Understanding gold’s behaviour across different rate cycles helps in making more confident decisions about liquidity vs long-term preservation, even with today’s positive interest rates.
The Cons: Risks of Gold Investing
While gold offers significant portfolio advantages, it has potential drawbacks and risks.
1. Price Volatility
Despite its safe-haven reputation, gold prices can fluctuate significantly due to macroeconomic factors, geopolitical events, and shifts in investor sentiment. Short-to-medium term volatility means there's no guarantee against price depreciation.
2. Currency Risks
For Singapore investors, gold is typically denominated in US dollars. This introduces currency risk, as USD/SGD exchange rate fluctuations can impact the value of your gold holdings, even if its USD price remains stable.
3. Liquidity Concerns (for Physical Gold)
While “paper gold” instruments like ETFs and GLNs offer high liquidity, selling physical gold can be less immediate. It involves finding buyers, verifying authenticity, and incurring transaction costs.
4. Opportunity Cost
Investing directly in gold (bullion or physically-backed ETFs) means allocating capital to an asset that generally does not generate income like dividends or interest – its return relies solely on price appreciation. This can be an opportunity cost, as that capital could otherwise be deployed in income-generating assets like dividend-paying stocks or bonds.
Note: This differs from gold mining stocks or gold ETFs/unit trusts that invest in mining companies, which can offer dividends to shareholders.
Comparison: Types of Gold Investment in Singapore
For affluent individuals considering gold, it's worth noting that gold strengthens portfolios in many forms. Should beginners invest in gold? The key for beginners is choosing an approach that aligns with their comfort level, financial goals, and desired involvement.
Most investors prefer ‘paper gold’ for its logistical convenience. This refers to any asset that reflects the value of gold or has its performance linked to gold, without the investor keeping the physical gold itself.
The main types of paper gold: Gold Stocks, Gold Exchange-Traded Funds (ETFs), Gold Unit Trusts, or Gold-Linked Notes (GLNs) are straightforward investment vehicles.
1. Gold stocks
Gold stocks appeal to those comfortable with equity risks for potential dividends and growth. They blend commodity exposure with equity upside, but require due diligence on management and operations.
Before investing in gold stocks, consider:
- Operational efficiency. Lower production costs boost profitability, especially when gold prices rise.
- Profitability. Promising mine discoveries can deliver outsized returns.
- Availability of Dividends. Many established miners offer dividends, which appeals to income-focused investors.
2. Gold Exchange-Traded Funds (ETFs)
Gold exchange-traded funds (ETFs) offer a low maintenance, cost effective way to gain gold exposure, making them ideal for hands-off investors seeking liquidity and simplicity. They are suitable for tactical allocations and typically comprise:
- Shares in gold miners, refiners, or precious metal streaming companies
- Future contracts or physical gold bullion (though you won’t own the metal itself).
Why Gold ETFs?
- Diversification: Over 100 global ETFs cater to varying strategies, from pure bullion exposure to leveraged plays.
- Liquidity: Trade like stocks, with real-time pricing and no storage hassles.
- Transparency: Physically-backed ETFs track gold prices closely, minimising tracking error.
3. Gold Unit Trusts
Similar to Gold ETFs, Gold-linked funds also appeal to investors prioritising liquidity and simplicity. The key distinction is that gold-linked funds are more actively curated by professional managers, who aim for returns superior to gold ETFs.
The management fees for gold unit trusts tend to be slightly higher.
Ideally, these professionals would be able to get better returns than gold ETFs. The management fees for gold unit trusts tend to be a little higher.
Through your Wealth Management Account, you can compare these fees, and get a shortlist of positively-rated funds that are aligned with DBS CIO’s investment views.
4. Gold-Linked Notes
Gold-Linked Notes (GLNs) can be a good investment if you expect gold prices to be stable or to increase. They are relatively short-term investments and can be tailored to your risk appetite in discussion with your banker or broker.
Before investing in GLNs, consider:
- Price expectations. If you expect gold prices to rise sharply, you can consider buying spot gold, which can be bought or sold at the current market price at any point in time.
- Impact of price changes. Gold prices can move quickly. While gold is a steady, safe-haven asset, its prices can still fluctuate.
- Currency risks. As gold is typically reflected in US dollars, investors in Singapore have to consider foreign exchange fluctuations against the Singapore dollar.
Avoiding Pitfalls: Common Mistakes in Gold Investing
- Emotional Trading: Reacting to market fear or euphoria often leads to buying high and selling low. A disciplined, long-term approach, grounded in gold's strategic role, is crucial to avoid impulsive decisions.
- Ignoring Portfolio Context: Concentration risk that comes from over-allocating to gold, or viewing it in isolation. Gold should be a component within a diversified portfolio, balanced against your overall asset mix, risk tolerance, and investment horizon.
- Not Understanding Liquidity and Costs: Investors sometimes overlook the practicalities of different gold vehicles. Physical gold involves storage and insurance costs, and have lower liquidity, while "paper gold" (ETFs, GLNs) requires understanding its specific features and potential counterparty risks.
- Lack of Diversification within Gold: Relying on one type of gold instrument (e.g., only gold stocks) exposes investors to specific risks tied to that instrument. Consider a mix of gold-related assets to mitigate risks and capture broader opportunities.
- Disregarding Currency Impact: Gold investments are often denominated in USD. A rise in gold's USD price doesn't automatically mean proportional gains in SGD, and it’s vital for Singapore investors to actively consider USD/SGD movements.
Investing in Gold with Clarity
There are many ways to invest in gold without the complexities of physical ownership. By selecting the right tools (whether ETFs, stocks, unit trusts, or GLNs) you gain more control over how your wealth grows and stabilises.
Build toward financial autonomy with insights from DBS Treasures.
