Gain insight on investing in gold and other 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?
Updated: May 15, 2020
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.
- 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:-
- Backed by physical gold that is fully allocated.
- 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 Investment Options||Min initial purchase||Min transaction size||Min balance||Physical Gold Withdrawal||Fees||Buy-Sell Spread Est||Shariah Compliant|
|Al Rajhi Bank||10g||10g||10g||Yes||0.5%/yr||13.29%||Yes|
|CIMB||1g||1g||1g||Yes||RM5/yr (Balance <5g)||2.56%||No|
|Public Bank||20g||5g||5g||Yes||RM10/yr (balance <10g)||4.00%||No|
|UOB||20g||5g||5g||Yes||RM2/mth (balance < 10g)||1.85%||No|
|HelloGold||RM1||RM1||RM1||Yes (Min 1g)||2.0%/yr||2.00%||Yes|
|SPDR Gold Shares (GLD)||1 lot||1 lot||1 lot||No||0.4%/yr||n/a||No|
|TradePlus Shariah Gold Tracker||100 units||100 units||100 units||Yes (Min 500,000 units)||0.56%/yr||n/a||Yes|
Gold Buying Options
- Physical gold (bar; coins; jewelry)
- Gold securities (ETFs; 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.
- 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.
Should I buy from a Gold Exchange Traded Fund (ETF)
- Buying a Gold ETF 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, subject to expense ratio and brokerage costs.
- Example: SPDR Gold Trust ETF ($GLD), TradePlus Shariah Gold Tracker ($0828EA)
What is the Difference between a Gold ETF and a Gold Miners ETF?
- Buying a Gold Miners ETF means you are investing in gold mining companies that explore. develop, and produce gold.
- Gold Miners has a high correlation to gold prices but can still diverge (for example if the stock market crashes including gold miners even though gold price goes up).
- Gold Miners may give you a higher level of return with increased volatility compared to gold.
- Gold miners also gives dividend returns unlike physical/virtual gold or gold ETFs.
- Example: VanEck Vectors Gold Miners ETF ($GDX)
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 also has the advantage of having more material and industrial applications than gold.
Other precious metal options include platinum, and palladium. Like all commodities and most alternative investments, silver and other precious metals are still highly volatile.
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