Gold, Silver & Metals

Gain insight on investing in gold, silver and precious metals. Is gold really a good hedge? What are your options of investing in gold in Malaysia? What are the risks involved? Is investing in gold Shariah compliant and do you need to pay zakat on gold?

Updated: Jan 28, 2021

What is Gold investing?

Gold is a precious metal that has some ornamental and industrial use. Historically, gold was used as a form of currency until in the 1970s when the United States followed by other countries unpegged currency from gold transitioning to a fiat currency system. Gold today is a commodity driven by supply and demand and subject to speculation.

Should You Invest in Gold?

Pros for Gold Investing

• Historically gold holds its value in times of inflation, deflation, and political or economic uncertainty
• Demand of gold driving up prices especially from India, China and investors who increasingly see gold as part of their portfolio
• Demand of gold from central banks led by Russia and China diversifying away from US Dollar.
• Gold has performed well (re: below chart)

Cons against Gold Investing

• Only a very small % of gold is used for actual industrial/decorative purposes & has little utility value. Production vastly outweighs usage.
• Gold is a commodity & you are basically placing a bet that someone will pay more for it in the future (bigger fool theory)
• One ounce of gold today & one ounce of gold 1000 years in the future will be the same one ounce. It produces neither dividends nor income.
• Gold very long term overall performance is at a low 3%.

What affects the Price of Gold?

• Gold prices are largely held to be affected by supply and demand.
• Economic uncertainty and dampened market sentiments will drive gold price upwards.
• Inverse relation with USD strength (USD up, gold down; and vice versa). For example, if US Feds cuts rates, USD declines and gold (usually) goes up.

Gold Historical Returns

• 1 year: +16.3%
• 5 years: +9.8% (Annualized: 1.9%)
• 10 years: +157.0% (Annualized: 15.7%)
• 20 years: +459.9% (Annualized: 22.9%)

Commonly Asked Question on Gold (FAQ)

Is Gold Low Risk?

No, gold actually high risk with significant volatility. Don’t be fooled by decades long gold charts where the volatility is not clearly visible.

Is Gold an Inflation Hedge?

• Gold is not a hedge against short-term inflation despite widespread believe, being that historically there is weak/little correlation.
• Gold is a hedge for long-term inflation but over a very long period of term over up to decades.
• Gold does provides a good hedge in times of major economic catastrophe and/or times of a high magnitude of fear.
• Gold has been observed in as recent as 2008 to go parabolic prior to a recession.
• In short: Maybe in long term/times of fear

Is Gold a Currency Hedge?

• Gold has been historically proven to have no correlation movement with currencies.
• Gold moves in unison versus all currencies.
• In short: No

Is Gold a Stock Market Hedge?

• Gold has been historically proven to have a positive correlation with equities.
• In short: No

Is Gold Shariah Compliant?

It depends. There is a global Shariah Standard on Gold developed by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the World Gold Council. Gold is Shariah compliant provided it is:-

1. Backed by physical gold that is fully allocated.
2. Buying and selling of physical gold completed within time allowed by the standard.

Why is physical gold prices at a premium?

Physical gold prices are at a premium supply halt caused by the global lockdown to combat Covid-19 and major mints slowed down production.

How much Gold Should be in Your Portfolio?

• “Experts” differ in viewpoint with some recommending as low as none to as high as 10% or more of your investment portfolio.
• Range of 1 to 5% of portfolio for most investors would be recommended if for viewpoint of inflation hedging or asset allocation.
• Do talk with a licensed financial planner who can advice you if gold should be part of your portfolio.

How to Buy Gold?

Gold Buying Options

• Physical gold (bar; coins; jewelry)
• Gold securities (ETFs; funds; mining companies; futures)
• Gold accounts (gold investment/savings accounts)

Gold Buying Tips

• A way around physical gold withdrawal fees (which may be cheaper) is to sell off the gold and then only purchase physical gold to save you conversion fees
• You pay a significant amount of charges (spread) when buying gold using a GIA.
• Buy (and sell) gold on weekdays as the spread is higher on weekends when the gold market is closed.
• Shariah compliant gold is often more expensive as it is backed by physical gold which then requires storage and incurs management costs.

Should I buy Physical gold?

• Pro: You hold it. Even if a financial institution collapses you are safe. Some folks have reported difficulties/red tape in withdrawing physical gold.
• Con: Less liquid.
• Note: Some gold securities and accounts allow for conversion to physical gold with a certain fee.

Should I buy from a Gold Fund

• Buying a Gold Fund gives you exposure to physical gold virtually which is held in vaults.
• Pros: Significantly cheaper costs and increased liquidity of trading gold.
• Cons: You need access to a brokerage account or platform, subject to expense ratio and brokerage costs.
• Example: SPDR Gold Trust ETF ($GLD), TradePlus Shariah Gold Tracker ($0828EA), United Golden Opportunity Fund (UNIGOMH)

What is the difference between a Gold Fund and a Gold Miners Fund?

• Buying a Gold Miners ETF means you are investing in gold (and precious metals) mining companies that explore. develop, and produce gold.
• Gold Miners has a high correlation to gold prices but can still diverge (for example if the stock market crashes including gold miners even though gold price goes up).
• Gold Miners may give you a higher level of return (or losses) with increased volatility compared to gold.
• Gold miners also gives dividend returns unlike physical/virtual gold or gold ETFs.
• Example: VanEck Vectors Gold Miners ETF ($GDX), RHB Gold and General Fund (OSKUOGG)

What is the difference between buying physical gold and a gold fund?

• Buying physical gold means you carry and store the gold on your own (which can be a pro or a con).
• Small bars and coins may be more expensive to purchase.
• Physical gold also typically has a higher buy and sell spread, which will impact your returns.

Is Gold Zakatable?

• Investment gold above nisab (minimum amount of wealth before obligatory for Muslims to pay zakat) i.e. 85g is zakatable within a haul (duration of one hijrah year).
• Gold jewelry worn within the last 1 year worn is non-zakatable (even if above 85g) but may be subject to a threshold based on uruf (the local customs of the place – e.g. anything above 150g).

Silver and Other Precious Metals

Silver is a close behind gold in mainstream appeal and demand is overall growing. In fact, silver used to be legal tender. Even the word dollar originates form ‘Thaler’ which was a coin from a German silver mine named Joachimsthal.

Silver spot prices is typically quote in troy ounces.

Silver 1kg converted to 32.15 troy ounce (oz t)

Silver vs Gold

• Silver has more material and industrial applications vs gold.
• Silver pricing is more volatile vs gold.
• Silver has a significantly lower supply annually vs gold.
• Silver is more affordable vs gold.
• Silver physically requires more storage space vs gold.
• Silver stockpiles are believed to be reducing vs gold buying purchased by central banks.

Other Precious Metals

Other precious metal options include platinum, palladium and rhodium. Like all commodities and most alternate investments, gold, silver and other precious metals are highly volatile.

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